Divorce is probably one of the most traumatic experiences anyone can endure. This is only compounded by the uncertainty around money and investment considerations in a divorce. In most cases, one spouse is disadvantaged in both knowledge and information, since the more informed spouse usually handles all the family’s business. This leaves the other spouse dealing with a lot more uncertainty and vulnerability. We often find ourselves being brought in as an advocate for the underdog.
Several misconceptions seem to surface often:
“Half is half”
Half is not always half. The top half of a cow is worth a whole lot more than the bottom half. Similarly, the net of tax value in assets is often overlooked. EXAMPLE: Two assets are both priced at $50,000. One is a partnership for which you paid $25,000. The other is company stock for which you paid $100,000. The company stock is more valuable than $50,000 because it could also provide a tax deduction if sold. The partnership is worth less than $50,000 because it is likely illiquid and poses a tax gain issue if sold, likely reducing its value by $6,000 or more.
“Those company stock options are worthless”
In the case of Enron, yes. In the case of Bank of America dropping 60% and those old options are underwater….not so fast. What if the stock jumped $20? Those options could be worth thousands.
“You take the IRA and I will take the house”
Houses have a unique advantage in that the first $250,000(filing singly) of taxable gain in a sale is tax exempt if it’s your primary residence. Compare that to an IRA that may face ordinary income tax (currently up to 43.8%). A house of similar value to an IRA might actually be worth twice as much after tax.
“Let’s split the IRA, then it’s surely equal”
Not exactly. What if one spouse is 58 and the other is 45? One will wait longer for access at age 59 ½. What if the wife is a tech entrepreneur with a company going public in five years, and the husband is a school teacher? Her half of his Teacher Retirement might get hit with higher income taxes. And what about her “non public” shares? And what about the step up in cost basis she would get in the event a new spouse might die? IRAs don’t get that special treatment. Her big IPO payday may also give her estate planning problems that an IRA would only compound.
These four examples are just a snippet of all the considerations. I am not making the point that equal can be achieved. I am saying that having a grasp of the various implications makes for more sound negotiating. And let’s hope you never need an advocate.
- Gil Baumgarten
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