Assets & Debts FAQS
This website contains only general information and readers should not take any actions without first consulting a qualified attorney about their specific situation.
The first thing to remember is that if the parties agree on the division of assets and debts, the judge doesn’t have to decide it. If the parties can’t agree, the judge will decide at trial. Hawaii follows the “partnership model” for dividing the marital estate. The marital estate consists of all assets presently owned by either party or both and all debts owed by either party or both. It does not include “separate property.” Separate property is very rare, although it may exist if the parties entered into a premarital agreement or in certain other, limited circumstances. In allocating the net value of the marital estate, each spouse will get “off the top” their net worth on the date of marriage, and the value of any gifts or inheritances received during marriage (and not gifted over by the recipient spouse to the two of them). The remaining value will be divided equally. Most cases do not involve separate property, net worth on date of marriage, or gifts and inheritances. In these cases, the net value of the marital estate will usually be divided 50/50, although the judge can vary from an equal split if there is a valid reason for doing so.
Yes and No. Title does not matter in deciding how much of the marital estate each party is entitled to receive. Title does matter when there is a claim by one spouse that certain property never became part of the marital estate, or if there is a claim that property owned by one spouse at marriage or acquired later by gift or inheritance was not, in turn, gifted by that spouse to the both of them. Title also matters in terms of efficiently dividing the marital estate. For example, if there are two automobiles with the same net value, the one titled in husband’s name will likely be awarded to husband and the one in wife’s name will be awarded to wife. If both cars are jointly owned, one will probably go to husband and one will go to wife. If husband’s car is worth $5,000 more than wife’s, he may get the car in his name but be ordered to pay her $2,500.
Houses, land and condos present unique issues. In most cases, the preferred approach is to either sell the property or for one party to buy out the other’s marital interest. The latter scenario usually requires an appraisal. When both parties are obligated on the mortgage, a buy out will usually require a refinance, as well. It is not illegal, but it is usually not a very good idea to continue to co-own real property post divorce, or to try to convey it to children
In most cases it is a better plan to try to trade off assets and debts in such a way that it does not become necessary to divide a retirement plan. Sometimes, it just can’t be avoided. Broadly speaking, there are two types of retirement plans. The first are fixed dollar retirement savings accounts, such as IRA, 401K, TSP, deferred compensation, and profit sharing plans. These accounts have a specific dollar value, but because of the tax liability associated with early withdrawal, retirement dollars are not worth the same as real dollars. The account owner may withdraw and pay over to the other spouse without incurring tax penalties by obtaining a Qualified Domestic Relations Order (QDRO). Unless the receiving spouse can roll over the funds into a qualified retirement account, there will probably be tax liability associated with the receipt of these funds. The second type of retirement plan is the defined benefit plan, a traditional pension. Military, state and federal civil service, and some private employers’ pension funds are examples of such a plan. Typically, the retiree will receive a monthly amount based upon length of service, final salary, age at retirement or other factors defined by a formula. This amount will continue for a defined period, or the life of the retiree. It may or may not offer a survivor benefit. In divorce, the non-member’s share is a fraction of what the retiree will receive if, as and when it is received. Typically, the fraction is computed by length of marriage overlapping membership in the plan, divided by total length of membership in the plan, divided by two. The non-member may or may not be able to get direct payment of a share of the member’s monthly retirement check directly from the plan administrator, but if so, a QDRO will be required.
A business will almost always be awarded to the proprietor, but the other spouse is entitled to be paid for the non-owner’s marital share. In rare cases, a business can be sold or divided in-kind, but this is a tricky proposition. In divorce, the value of the business is usually a difficult issue. Where a business is highly dependent on the personal drawing power of the owner, the value is often not very high, even though the business is generating a high amount of income. A professional business appraiser is often required to resolve these cases.
The interplay of bankruptcy and divorce is a complex subject, and if either party to a divorce is contemplating bankruptcy both spouses should consult a qualified bankruptcy attorney. Often, divorcing couples will choose to file a joint bankruptcy first. After discharge, there probably will not be much in the way of assets or debts to fight over. A more troublesome problem is when one spouse is obligated in a divorce decree to pay a joint debt, but gets a discharge in bankruptcy post divorce. In that case, the creditor can still look to the non bankrupt former spouse for payment. Generally, child support and alimony obligations are not dischargeable in bankruptcy.
I am not a tax lawyer or CPA. In cases where there is a possibility of complex tax implications, I always advise clients to consult with a qualified tax professional before signing a divorce decree. With that caveat, the following are some simple tax issues in divorce. Property awarded to a spouse in a divorce decree is not income, however, the property may come with other tax implications such as capital gains liability for property which has appreciated during marriage, or income tax liability when one attempts to draw on retirement accounts. Alimony, used to be tax deductible to the payor, but not anymore. Child support is not tax deductible to the payor, and is not taxable income to the recipient. The tax dependency exemption automatically follows the parent awarded physical custody, unless the divorce decree specifies otherwise. Spouses are usually jointly liable for any tax liabilities resulting from a previously filed joint return, although the IRS does offer possible relief under the “innocent spouse rule.” To file a joint tax return, the spouses must have been married to each other for the entire calendar year.