Making the decision to divorce can be accompanied by a number of difficult financial decisions. Should you sell the family home? How will you divide retirement accounts? Who should cover your children's health insurance costs? One of the most complicated financial hurdles is deciding which assets should be liquidated. The treatment of assets can have significant personal, financial, and tax consequences so it is best to have a comprehensive understanding of asset liquidation before entering a divorce settlement.
Assets generally refer to the property that you own, including your home, vehicles, vacation homes, and other personal items of value. Your assets may also include some accounts, including a 401(k) which will have a different value once liquidated. While liquidation gives you an immediate cash benefit, both parties could be losing if mistakes are made. Our divorce lawyers in Birmingham are experienced in complex property division. We will take the time to review your assets, debts, and income, identify your priorities, and work to establish a comprehensive financial plan so that you can protect your long-term financial security.
According to a recent article published by CNBC, some financial decisions are more costly than parties realize. For example liquidating a 401(k) could have significant tax consequences, while holding on to a family home could be a mistake. Understandably, many financial decisions made at the time of divorce are more emotional than rational. You may want to hold onto your home, without realizing the huge responsibility that comes with refinancing, as well as the additional costs of negotiations.
One of the biggest risks of asset liquidation involves tax implications. Some assets have a gain exclusion (like a family home), while other assets will have a tax liability (such as a 401(k)). When filing for divorce, you must have a clear understanding of your rights and obligations with regard to taxes. In most cases, liquidation will result in a taxable event, while transferring property to a spouse at the time of a divorce is non-taxable. Ultimately, working through the trade of property and assets through negotiations will save you and your spouse money.
When liquidating assets it is important to have a clear understanding of the actual cash value of your assets. You should also know the purchase price of your real estate and have an appraiser quantify all improvements so that you have an accurate valuation of the property at the time of divorce. If you own a family business, a business valuation must give you an accurate assessment of equipment, property, customer lists, and other items of value. You should also have an appraiser go through any collectibles or personal items.
Having a clear understanding of the cash value of your assets can help you avoid unnecessary liabilities and minimize losses in your divorce. You should never liquidate a 401(k), unless you must, and always be aware of the potential tax liabilities with other property liquidation. Some couples want to get rid of everything just to make it easy, but don't liquidate any assets unless you get a fair price.
Contact Birmingham divorce and family law attorney Steven Eversole at (866) 831-5292.