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 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 get 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.
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