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7 Ways to Make Asset and Debt Division as Fair as Possible

Who gets what, and how do you decide what's fair? Divorce is difficult for everyone involved, especially when it comes to property and debt division. Of course, you want to make it fair – and many factors must be considered to achieve this.

Do we have to split assets and debts 50/50?

Divorcing couples often ask if they must split their assets evenly down the middle. The answer to this question is, “It depends.” The 50/50 approach may seem simpler and less contentious on the surface, but it could leave one partner feeling like they were shortchanged.

Key considerations that may influence the division of debt and personal property include the length of the marriage, each spouse's contributions to earning or managing marital debts or assets, and each person's financial situation and future needs.

Here are some tips for keeping asset and debt division as fair as possible.

1. Look at individual circumstances

To promote fairness in asset and debt division after separation, take each spouse's personal circumstances into account. For example, if one person contributed significantly more time, effort, or money toward a particular asset or debt during the marriage, they may deserve a larger share of that asset or debt than their ex-spouse.

Similarly, if one person has unique financial needs (such as significant medical expenses), they may be entitled to more assets in order to help meet those needs.

2. Take an inventory of assets and debts

One way to promote fairness in asset and debt division is to create an inventory of the couple's assets and debts. This includes everything from real estate, vehicles, investments, and bank accounts to credit card debt, student loans, and other financial obligations. When you have a clear understanding of each person’s financial situation, it’s easier (and often more obvious) to see how the division of assets and debts should go.

Download our Property Division Spreadsheet.

3. Distinguish between separate and community property (marital property)

Your assets may be classified as separate property or community property, also known as marital property.

Separate property includes assets acquired before the marriage and inheritances or gifts from a third party, such as a family member or friend. These assets typically belong exclusively to one spouse and are considered personal property rather than marital or community property.

Determine the worth of your ring and other gifts or mementos from your marriage should you want to sell them.

Marital property includes assets acquired during the marriage. Marital property belongs equally to both spouses and may include things like real estate, vehicles, savings accounts, and investments.

There are many approaches to the division of property and debt. A common approach is equitable distribution, where the couple's property is divided fairly but not necessarily equally. Another option is dividing assets based on each party's earning potential or future income needs. Notably, this may result in one partner receiving a larger share of the marital assets due to their greater financial need after separation.

As you can see, a key factor in determining whether an asset is separate property or marital property is when it was acquired. But other factors can affect that classification as well. For example, let’s say one spouse inherited money during the marriage. That money was kept in a separate account and not used for marital expenses. Thus, it remains separate property.

However, if that same money were used as a down payment on a piece of real estate or immediately transferred into a joint bank account and used to make mortgage payments, it would likely be considered a marital asset and subject to division.

4. Equitable division states vs. community property states

A further distinction is needed here. While the majority of U.S. states are equitable division states, meaning property and debt must be divided in a “fair” manner in divorce, nine states – including California – are community property states. In these states, all property acquired during the marriage is considered community property unless it can be proven otherwise. So in a California divorce, all property must be divided 50/50. This can get tricky, and unless you and your spouse can work together to come to an amicable agreement, you might find it necessary to speak with a divorce attorney.

Suggested reading: Who Pays Credit Card Debt in Divorce?

5. Strategize your retirement accounts

A key issue in marital asset division is what to do with retirement accounts. Often, one or both spouses have a retirement account that they built up during the marriage, and it's difficult to figure out how to fairly divide this up.

One option is to use a qualified domestic relations order, or QDRO. This allows retirement funds to be split between divorcing spouses in accordance with certain pre-defined rules.

Another important factor in deciding how to divide a retirement account is whether it is part of a defined benefit plan or a defined contribution plan. A defined benefit plan, such as a pension plan, typically guarantees payments over a specific period of time. Payments are based on calculations that account for accumulated contributions, salary history, and years worked.

A defined contribution plan like a 401k, on the other hand, often only guarantees the contributions made to the plan. It has no bearing on what the recipient receives in retirement.

The manner in which these assets are divided depends on many factors, including tax implications. For instance, it may make sense for each person to keep their own retirement accounts intact to avoid tax burdens, even if that means an unequal distribution. That inequality could be made up in other ways (like an equalization payment; see below).

6. Consider an equalization payment

An equalization payment is financial compensation one ex-spouse gives to the other to “even the score.” This can be done when a standard “division of property” does not make sense in terms of fairness.

Equalization payments are typically only made when significant differences between each spouse's assets or liabilities exist. Equalization payments typically involve calculating each spouse's net worth and subtracting any debts to determine how much equity each person has in total.

Examples of equalization payments

Let’s say one spouse has a substantial sum in their 401(k), and the entire account is considered marital property. That person may need to sell an asset to provide their ex-spouse with an equalization payment to make up the difference.

In theory, if one person has $500,000 in their 401(k) and the entire account is marital property, the ex-spouse is entitled to $250,000. But it may not make sense to transfer part of the retirement account to the other spouse. In that case, the spouse holding the 401(k) may need to come up with a different way to make a $250,000 payment to the other spouse. For example, they might consent to the other person keeping or selling the family home (worth roughly $250,000) to make things even.

7. Meet with a CDFA

If you’re overwhelmed by this and would like help from another human being, you can get it from a certified divorce financial analyst, or CDFA. This professional is skilled at helping couples divide marital debts and assets fairly during the divorce process. As an expert in financial matters, they can assess the current value of a couple’s assets and debts and make expert recommendations as to how those assets and debts should be divided.

A major benefit of working with a CDFA is that they can help to take some of the guesswork out of the process of dividing community property and distinguishing separate property. They can weigh all aspects of a couple's finances, including income streams, property ownership, investments, and retirement accounts. With this information in hand, they can then work with both spouses to find the fairest and equitable solution for dividing shared assets and liabilities.

If you’re struggling with the division of community debt or property, Hello Divorce has professionals you can hire for flat-rate segments of time to figure it out. If you and your soon-to-be ex-spouse can work together with one of our mediators or CDFAs, you can get the legal advice and support you need without spending hefty amounts of money on a divorce lawyer.