Dividing assets in a divorce usually begins by sorting what is marital from what is separate, which depends on your state. It may then help to list every asset and debt and compare each on an after-tax, like-for-like basis before you agree to anything. Your attorney handles the legal rules. The numbers work sits underneath them.
Most of this guide is about the second half of that sentence, because it is the part that tends to get skipped. A settlement can look even on paper and still leave one person with considerably more usable money than the other, and the difference is rarely visible until the numbers are put side by side.
Marital and separate property, and why your state matters
Every state has to answer the same first question: which things are shared, and which belong to one person alone. The answer is set by state law, and it differs.
In general terms, states follow one of two frameworks:
- Equitable distribution. Most states use some version of this. Marital property is divided in a way the court considers fair under that state's rules, which is not always an equal split.
- Community property. A smaller group of states generally treats property acquired during the marriage as belonging to both spouses, with its own exceptions and its own rules for what counts. IRS Publication 504 lists the states it treats as community property states for federal tax purposes.
Within either framework, a rough pattern often applies. Things acquired during the marriage tend to be treated as marital. Things owned before the marriage, or received as a gift or inheritance, tend to be treated as separate. The words tend to are doing real work there. Separate property that was mixed with marital money, such as an inheritance deposited into a joint account, may stop being separate, and the rules for when that happens vary.
How any particular asset is classified in your state, and what a court may do with it, is a legal question for your attorney. What you can do is be ready to answer the factual questions: when was it acquired, how was it paid for, whose name is on it, and has marital money ever gone into it?
Build the full list first
You cannot compare what you have not listed. Before anyone discusses who takes what, it helps to have one page that shows everything, including the things that are easy to forget:
- Bank, brokerage and money market accounts
- Retirement accounts from every employer, including plans from jobs someone left years ago
- Pensions and other deferred pay
- The home, any other real estate, and the mortgage on each
- Vehicles and their loans
- A business interest or professional practice
- Stock compensation: options, restricted stock and anything not yet vested
- Life insurance with cash value
- Health savings and education savings accounts
- Every debt, including credit cards, lines of credit and anything either of you guaranteed
The paperwork behind each line is covered in The documents you need before you file. If you handled little of the money during the marriage, When your spouse handled all the money may be a better place to start.
A simple worksheet is enough. For each line, record the following:
| What it is | Whose name | Value, and the date of that value | Pre-tax, after-tax or tax-free | How easily it turns into cash |
|---|---|---|---|---|
| Checking and savings | Joint, or one name | Statement balance | After-tax | Immediately |
| Traditional 401(k) or IRA | Account holder | Statement balance | Pre-tax | Taxed when withdrawn |
| Roth account | Account holder | Statement balance | Tax-free, if the rules are met | Depends on the account |
| Home | Deed | Recent valuation, less the mortgage | Depends on the sale | Slowly, and at a cost |
| Business interest | Owner | Needs a professional valuation | Depends on the structure | Often not at all |
The last two columns are the ones people leave out, and they are the ones that matter most for the next step.
Compare assets on an after-tax, like-for-like basis
Two assets with the same number on the statement are not necessarily worth the same. A pre-tax retirement dollar is not a cash dollar, because income tax may be owed when the money comes out. A dollar in a Roth account may be worth more than a pre-tax dollar of the same size. A dollar of home equity cannot be spent without selling or borrowing against the house.
Putting everything on the same footing means asking, for each asset:
- What would this be worth to me after tax, if I turned it into spendable money? The answer depends on the type of account, your income when you use it, and your situation.
- What does it cost to keep? A house has a mortgage, property tax, insurance and upkeep. A rental property has its own costs. A bank account has none.
- How quickly can I reach it? Money you cannot get to is not much help with this year's bills.
- Does it carry a tax cost that arrives later? This is where it is worth being careful, as described below.
On the last point, the IRS explains that, generally, no gain or loss is recognized on a transfer of property between spouses, or to a former spouse if the transfer is incident to the divorce, and that the person receiving the property generally takes over the other person's tax basis. In plain terms, a transfer may not be taxed on the day it happens, but a tax cost may follow the asset and arrive when it is later sold. The details are in the Property Settlements section of IRS Publication 504. How this applies to you is a question for a tax professional.
For retirement money specifically, the way an account is divided, and whether a court order is involved, affects whether taxes and penalties apply. That is covered in How to split retirement accounts in a divorce.
The house and other assets that are hard to value
Some assets resist a simple number.
The home. It is often the largest asset and the one people feel most strongly about. The figures worth having are its current value, what is owed on it, and what it may cost each year to carry on one income. Should you keep the house in a divorce? walks through that comparison.
A business or professional practice. The value of a business is an estimate, not a fact, and different methods can produce different answers. A professional valuation is usually worth having before anyone agrees to a figure. How a business is valued in a divorce explains the general approaches and what to ask. If you are the spouse who was not involved in running it, ask what the valuation assumed and who prepared it.
Stock compensation. Options and restricted stock may have vesting dates, restrictions and tax treatment of their own. Whether unvested awards are treated as marital property is a question for your attorney. What you can do is gather the grant agreements and vesting schedules so the position is clear.
Pensions. A pension has no balance. It has a promise to pay a monthly amount in the future. Comparing it with cash or an account balance usually requires converting it into a present value, which is a calculation worth getting done properly.
Common mistakes
Most of the expensive mistakes in dividing assets are the same one in different forms: deciding before the numbers existed. A few that come up often:
- Splitting everything down the middle on paper. Equal statement balances can be unequal after tax.
- Trading cash for pre-tax money at face value. Taking a larger retirement balance in exchange for giving up cash may leave you with less spendable money than the headline numbers suggest.
- Leaving an account off the list. Old employer plans and small accounts are easy to forget and still count.
- Agreeing to keep the house without running the cost. The mortgage payment is only part of what a home costs.
- Assuming the settlement agreement moves the money. Some accounts only move once a separate order or transfer is completed.
Seven financial mistakes to avoid in a divorce settlement goes through these and others in more detail.
What to bring to your attorney, and what the numbers work covers
It helps to be clear about who does what.
Your attorney advises you on the law: how property is classified in your state, what you may be entitled to, how to negotiate, and how the agreement is written and filed. I am not an attorney and I do not give legal advice.
The numbers work covers the arithmetic underneath those decisions: the complete list, the after-tax comparison, what each option may cost to hold, and what your finances may look like in the years after the agreement is signed.
Questions worth taking to your attorney include:
- How does my state classify each of the assets on my list?
- Is any asset I think of as separate at risk of being treated as marital, or the reverse?
- Which accounts need a separate court order or transfer, and who prepares it?
- How are unvested stock awards, a pension or a business interest handled here?
- What deadlines apply, and what happens to the figures if the agreement takes months to finalize?
Questions worth taking to a tax professional include how a transfer of property affects your tax basis, and how withdrawals from different types of account would be taxed in your situation.
Ask before you agree
Before you sign anything that divides property, it may help to be able to answer yes to each of these:
- Do I have a complete list of assets and debts, with a value and a date for each?
- Have I compared the assets after tax rather than at face value?
- Do I know what each asset costs to keep, and how quickly I can reach it?
- Has an attorney confirmed how my state classifies each item?
- Have I asked a tax professional about the tax effect of what I am agreeing to take?
- Do I understand which accounts need a further order or transfer before the money actually moves?
If any answer is no, that is a question to ask before the agreement is final, not after.
Frequently asked questions
How are assets divided in a divorce?
It depends on your state. Some states use equitable distribution, which generally means marital property is divided in a way considered fair under that state's rules, and others use community property rules. Many agreements are reached by negotiation rather than decided by a court. Your attorney can explain how your state treats each asset.
What is the difference between marital property and separate property?
Marital property is generally what was acquired during the marriage, and separate property is generally what was owned before it or received as a gift or inheritance. Separate property that is mixed with marital money may change character. The rules vary by state, so ask your attorney how they apply to you.
What are the financial consequences of divorce?
They may include moving from two incomes to one, carrying the cost of a home or a new place to live, changes to retirement savings, and tax effects from how assets are divided and what support is paid. Working out what your life may cost on one income before you agree to a settlement can make these easier to see.
What is a common financial mistake during a divorce?
One of the most common is comparing assets at face value. A pre-tax retirement balance, a house and a bank account of the same size are not worth the same spendable amount. Comparing them after tax, and considering what each costs to keep, may help you avoid trading something valuable for something that looks equal.
Do I need a divorce financial consultant to divide assets?
No. You are not required to have one. Some people find it useful to have someone prepare the list, compare the assets after tax and model the options while their attorney handles the legal side. The first conversation with me is complimentary and confidential, and you are under no obligation.
What to do with this
Start with the list. Gather the statements, note when and how each asset was acquired, and mark which are pre-tax, after-tax or tax-free. Then take the list to your attorney with the questions above.
If you would like the arithmetic done alongside that, this is the work I do, and the first conversation is complimentary.
This is general education, not advice about your situation. It is not legal, tax or investment advice. Property rules and tax rules vary by state and by circumstance, so check yours with your attorney and a tax professional.
