During divorce proceedings, couples and courts divide assets and liabilities with a presumption of equality. That doesn’t always mean things are exactly equal, though. To foster equality, an equalization payment is sometimes necessary.
What is asset division in divorce?
When a couple gets divorced, their assets and debts must be split. This often occurs as couples negotiate with each other about their divorce settlement. Amicable couples can usually handle this process by themselves … or with a little professional guidance. Even in amicable divorces, however, an equalization payment may be necessary to alleviate a large discrepancy in asset division.
To properly discuss this, we first must clarify the two types of state laws regarding marital property distribution. There are “community property” states, and there are “equitable distribution” states.
- In community property states like California, there’s a presumption that all marital property will be split 50/50.
- In equitable distribution states, the division of property should be equitable, but that doesn’t necessarily mean it’ll be exactly equal.
Marital property is any property acquired during the marriage. This could include retirement accounts, vehicles, homes, savings accounts, art, jewelry, and anything else you or your spouse purchased during your marriage.
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What Should You Do With Your Marital Home in Divorce? Explore Your Options.
What is separate property in divorce?
Separate property is another important term to understand for this discussion. Separate property is any property you own that’s not subject to distribution in divorce. In most cases, any property you acquire during your marriage is marital property and will be divided according to your state laws. However, some assets could fall outside that realm and be separate property.
Separate property could include an inheritance you received and never used in the marriage, inheritance funds you always kept separate from marital funds, or other property you brought to the marriage and never commingled with marital property. Don’t assume that something you think should be separate property actually is separate property, though. This is a legal determination that may require some assistance or support to help you calculate whether your property is actually separate and distinct from marital property. Misclassifying property, even unintentionally, could result in a court seeing your actions as intentional and adjusting the 50/50 distribution accordingly.
What is an equalization payment?
Equalization payments most often occur in community property states. Remember, these are the states where assets are to be split 50/50. While the payments can occur in equitable distribution states, it’s much more common in community property states, like California.
Example: An equalization payment to offset ownership of the marital home
Let’s say you and your spouse live in California and have been married for 10 years. In your third year of marriage, you purchased a marital home together with funds earned through your jobs. In divorce, you want to keep the house, which is worth $700,000. The rest of your marital assets total $300,000.
In this instance, an equalization payment would be required to offset the unequal distribution of assets. The total value of your marital assets is $1,000,000, but if you get the house and your spouse gets everything else, it’s not a 50/50 split. To make it equal, you’d have to make an equalization payment to your spouse of $200,000. If you made a $200,000 payment to your spouse, you’d both receive $500,000 in marital assets.
Example: An equalization payment to offset a retirement account discrepancy
Here’s another example with retirement accounts. Your spouse worked for the entirety of your marriage and contributed to a retirement account the whole time. Let’s say the value of the retirement account upon your date of separation is $200,000. The rest of your marital assets are valued at $400,000, making your total marital property worth $600,000.
If your spouse wanted to keep the full value of the retirement account but nothing else, you’d actually owe them $100,000. Because you’d be getting the $400,000 of assets and your spouse would only be getting the $200,000 retirement account, you’d owe them the difference to make the distribution 50/50.
Getting help with your divorce
Understanding property division in divorce is vital to getting what you’re entitled to. Luckily, you don’t have to go through this alone.
Hello Divorce offers many supportive services throughout the divorce process, including free worksheets you can use to calculate the value of your marital property and to determine whether you’re getting a fair amount. We also offer a free downloadable Divorce & Your Home workbook that walks you through our three-step home solution.
Need help understanding your home-related options?
Download Divorce & Your Home, our free three-step home solution with tips and worksheets to help you understand and make the most of your home's equity.
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FAQs
What does equalization mean in divorce?
Equalization is the process of balancing property division when one spouse receives more assets than the other. The spouse with more may pay the other money or transfer property to achieve fairness.
When is equalization required?
It’s typically required when dividing marital property under state law so that each spouse receives an equitable or equal share, depending on the state’s rules.
How is an equalization payment calculated?
The value of each spouse’s awarded property is compared. If one receives more, the difference is equalized with a payment or asset transfer until both shares are balanced.
Does equalization always mean a 50/50 split?
Not always. Some states require equal division, while others require equitable distribution based on fairness, which may not be exactly half.
What types of property are included in equalization?
Marital assets such as the family home, retirement accounts, vehicles, and investments are included. Separate property, like inheritances, is usually excluded.
How are equalization payments made?
Payments can be made as a lump sum, installments, or by transferring property or assets to the other spouse.
How to Handle Equalization in Divorce
List all marital assets and debts
Create a detailed inventory of property, accounts, and obligations to establish the marital estate.
Assign values to each asset
Use appraisals, account balances, or expert opinions to establish accurate values for division.
Determine each spouse’s share
Apply state law or your agreement to divide assets equitably or equally.
Calculate any imbalance
Compare the total value each spouse receives. If one receives more, calculate the difference that must be equalized.
Decide on method of equalization
Agree whether the imbalance will be corrected by a cash payment, installment plan, or transfer of property.
Finalize in settlement agreement
Include the equalization payment details in your divorce decree or settlement to make it enforceable.
