When dividing assets in divorce most people, individuals, mediators and attorneys alike, tend to focus on the property division spreadsheet. Current values of assets are listed along with outstanding debt balances that are deemed to be marital. Typically, above all else, the focus and end goal is to split property 50-50. With so much emphasis on this spreadsheet that dictates the remainder of your financial future, is there anything missing that could dramatically skew the end results?
Ignoring the financial components of a divorce settlement and the effect on your future is similar to playing slot machines in Vegas - hope to win, but there is a chance you will leave with a lot less than you came with and anticipated losing. In the first part of this series, retirement account valuation blunders were addressed when utilizing a 50-50 division approach. Here, we will examine non-retirement investments and what factors can alter the outcome down the road. Home equity and rental property will be outlined in upcoming posts.
Part 2: Non-Retirement Investments
Investments outside of the retirement category vary widely from checking accounts, certificates of deposits (CD), brokerage or mutual fund accounts, land, rental property, commodities such as gold, fine art, antique car collections, business ownership, etc. Are they all created equal? Or are they apples and oranges? Each asset previously listed is unique. The growth potential and place in an overall investment strategy differs drastically. Although these investments are not tax sheltered like retirement accounts, they are still subject to taxes in a different manner.
When utilizing a 50-50 division of property approach during settlement, is awarding a $100,000 CD to Anna and $100,000 worth of Amazon stock to John realistic to rely upon for post-divorce results? Shortly after finalization, John sold the Amazon stock and used the proceeds to purchase a new home. The following April, he had an additional $12,000 tax bill because the stock was purchased 10 years prior for $20,000, so he realized a $80,000 capital gain that created a $12,000 tax bill. Anna was able to use her $100,000 for tuition to go back to school and help her parents with medical expenses over the following two years while only incurring $100 in additional taxes – a big difference!
However, if Anna and John didn’t have current cash needs the end results would look very different in 10 years. Anna was never involved with the finances and making those types decisions made her nervous. During the next 10 years she left the $100,000 in a CD that ended up being worth $101,004 (based on today’s interest rates). John had a brother who worked at Amazon who encouraged John to keep the Amazon stock. Without purchasing additional Amazon stock, after 10 years it was worth nearly $260,000 because it grew an average 10% per year – more than a 150% difference!