Divorce and the The Family Home
Unless you or your spouse is sincerely interested in keeping the family home, don’t waste your money appraising it. Its fair market value will be set when it’s sold. If one of you keeps the family home, however, it must be appraised.
A realtor can often help you to make a preliminary decision whether to pursue keeping the family home yourself when you are unsure of the present market value. Your realtor may do a comparative market analysis, giving you an informal appraisal of the value of your home. Based on the prospect that your home will be sold, the realtor typically will do this analysis in the hope of getting the listing.
A realtor’s estimate of fair market value is normally a bit high. At the other extreme, don’t agree to use an appraisal from a bank that your spouse may be using for refinancing to buy your interest; the bank appraiser is more conservative, and the value for loan purposes is less than market value. Employ a professional appraiser to find the true fair market value.
Your professional real property appraiser determines fair market value by using several methods. The most important begins with an examination of recent sales of similar properties in your community. Adjustments are made to selling prices to reflect differences, such as another bedroom, between the comparable property and yours.
Remember that there must be enough marital community property left after the equity in the home is placed in one spouse’s "column" to balance it out in the other spouse’s column. For example, if the equity in your home is approximately the value of your spouse’s business, each of you could take the entire asset you want. Adjustments can be made with bank accounts or other assets so the division of property is equal or equitable, overall, when you get to the bottom line; occasionally, borrowed funds are needed to equalize.
Ask your attorney about the effect of the sale of your interest on your cash flow, and that of your spouse. In other words, plan ahead. Assume that you receive cash for your half of the home from your spouse who got the money by refinancing the home. You’ll have interest income from the cash, and your spouse will have higher monthly housing payments. This shift in cash flow might cause you to pay more, or get less, spousal support. Your response is that you are entitled to use the cash you receive from the sale of your interest in your former home to buy a new one. Your ex-spouse has a home, and you are entitled to one also. Neither of you should be “charged” with hypothetical investment income attributable to the value of your half-interest in the home when you each continue the marital standard of living you established by now owning a residence suitable to your new station in life.
Never finalize a deal without exploring and understanding the tax consequences warned of in Chapter Thirteen. You’ll have to pay income tax if you make money on your half of the house but don’t buy and live in a new residence within twenty-four months. The tax will be on the gain, that is, the amount by which the money you get for your one-half exceeds what you paid for it, plus certain improvements and costs. “Look before you leap” so that you know in advance how you will handle tax situations later.
The Internal Revenue Service provides a basic written explanation about the tax consequences of selling your residence at a profit in Publication 523. Publications 530 and 551 may also be of help to you. Of course, looking through a pamphlet is no substitute for competent tax advice, but you can familiarize yourself with the terminology and basic concepts on your own time at no charge.
Don’t agree with your spouse on a fixed price for your interest in the home, then let months pass in a rapidly rising real estate market. You will give your spouse the benefit of all the appreciation if you do. If you sell now, get your money now; if you sell later, update the appraisal to the current value.
What about continuing to own the former family home as tenants in common after the divorce? It’s not a good idea, whatever the goal. One of you will be able to live in the house and enjoy the full use of 100% of the equity, while the other will have to wait to get any benefit of his or her equity. Some well-intentioned people want to try this in order to prevent further disruption in their children’s lives. For example, if your children are within two years of completing high school, deferring the sale until the youngest reaches the age to graduate from high school might be workable. However, beware of solving straightforward issues with complicated solutions that delay the final division for years and raise the possibility of additional legal fees to enforce the agreement. Your prime objective at this time is to pick up the pieces and get on with the next part of your life. In general, avoid unnecessary post-separation dependencies.
For long-time homeowners, I cannot overemphasize the need to consider taxes before you agree to any arrangement regarding the former family home. By meeting relaxed IRS ownership and use tests, both spouses can exclude a total of $500,000 of gain on a sale of the home. That’s up to $250,000 each, tax-free! The current test for exclusion requires only that you own and use the home for two of the last five years. Plan carefully, and review Chapter Thirteen, if you both want to use this opportunity to save money.
§ 7.08 Introduction To Retirement Plans
You must locate and identify all your spouse’s retirement and pension plans to make sure that you get your fair share. Your attorney will probably want to use written interrogatories and document productions to uncover every employment and every entity that might provide a benefit. Obtain your spouse’s answers or representation regarding these extraordinarily important marital community assets under oath!
Scrutinize every employment benefit-related and retirement account document for additional benefits. The employment contract may provide for termination pay. This is often a marital community asset if the right to receive it is complete and arose out of services during the marriage. On the other hand, two weeks severance pay is compensation for loss of future earnings and thus is usually considered separate property if severance from work occurs after separation.
Special early retirement incentives offered to long-term, relatively high paid employees to retire early may be separate or marital community property. Don’t quit looking just because you identify one plan at your spouse’s employer—you might overlook an additional benefit at the same employer, such as a voluntary savings plan.
Now you have the name and address of the administrator for each pension or retirement plan involved. Your attorney should write to each plan administrator to obtain a full description of the plan, using a signed release from your spouse. Your formal notice of claim to a portion of the benefits, discussed at the beginning of the next chapter, can be sent at this time.
“Join” your spouse’s pension plan as a party to your divorce action if you might want to keep your share of the marital community interest in it. This relatively inexpensive legal step term will give the court the power to protect your interest by issuing orders to the plan administrator. The administrator usually accepts service by mail and agrees on behalf of the plan that: it has received notice of your divorce action; the plan is a party, subject to the jurisdiction of your local court; and that the plan will be bound by orders in the future that comply with the procedural requirements.
The many changes in retirement plan law over the last two decades do much to protect the interest of the “non-member” spouse—the husband or wife of the employee. For example, the court may be able to order the administrator of your spouse’s plan to pay you directly when your spouse retires. You’ll feel a lot more comfortable knowing you won’t have to deal with your ex-spouse every month. You will have a retirement account of your own, so to speak, which may be especially desirable to you.
Should you appraise the pension plan(s)? Yes, if there is any marital community interest in a retirement or pension plan. Pension plans are often the major assets. In traditional defined benefit plans, which pay the retiree a monthly amount based on years of service, rate of pay and age, the employer funds the entire benefit. Make sure that you get all descriptions of the plan and all statements of account as soon as possible. When having a plan appraised, require at a minimum a statement of all payments anticipated, how they are calculated, the present worth of the marital community interest in the plan and exactly how (what interest rate(s) are used) the present worth is calculated.
A common approach in settling a divorce case in which there is a large marital community interest in a plan is to order now that future payments will be divided between the two ex-spouses as they are made. Frankly, there are not many viable alternatives if there’s not enough community property to offset the retirement plan. Individually, and from society’s point of view, this is a healthy resolution providing each former spouse with private retirement income. Typically, each of you is entitled to half the payment from the plan resulting from membership in the plan while married, prior to separation. The plan member may receive a larger total payment if he or she continues to work and thus earn retirement credits after the marital separation.
Carefully examine the retirement or pension plan description with your attorney. Consider the options available to you. Discuss the risk that you will carry if you elect to maintain your half of the marital community interest in the plan. The plan may pay little or nothing if your spouse dies or changes jobs and fails to get the required number of years in the plan.
You may choose to assign all benefits in your spouse’s plan to your spouse even though there is a marital community interest in the plan. This is similar to agreeing that one of you will take the home and the other will take property of an overall equal present value. If you wish to “sell” your interest in your spouse’s plan, carefully examine the plan description and appraisal. The manner in which the present worth is calculated is very important: when market interest rates are low, for example, the present worth of a future series of monthly retirement plan benefits is much higher.
On the other hand, do you want to let your spouse buy out your interest in you’re his or her pension plan? For example, you may prefer to have assets or cash now instead of waiting. Keep in mind that if your spouse’s plan gives more weight to the last five years’ earnings, as many of them do, you might be selling out for less than what you would get if you waited. Of course, you need an appraisal of your interest in the plan that addresses these issues before you can make a decision.
There is another "retirement" plan most of us have: Social Security. Include these benefits in your determination whether there should be a buy-out or a division of any private, employer-paid pension plan. Use the Social Security form to obtain a statement of your earnings covered by Social Security and an estimate of your future benefits. This statement of future benefits is a must for realistic retirement planning. As always, you can plan a lot more accurately if you have all the information.
Please note that you have a very important objective if you have not been the primary wage earner and you have been married eight to nine years: you become entitled to “derivative” Social Security benefits based on your spouse’s Social Security earnings record when you have been married ten years. Thus, if you are divorced after at least ten years of marriage and, in general, if you do not remarry, you will be entitled to the higher of the benefits based on your own or your former spouse’s earning record. You will not receive both. In any event, consider delaying the proceeding, have your spouse agree to postpone the divorce or get the court to help so that your divorce doesn’t occur until the day after your tenth anniversary.