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Avoiding Common Property Division Mistakes in Minnesota

On Behalf of | Aug 16, 2022 | Property Division |

When a married couple divorces, one of the most important things they need to do is divide their property. This can be a very complicated process, and if it’s not done correctly, it can have major consequences.

Failing to properly value assets

When assets are not properly valued, it can lead to one person getting significantly more or less in the divorce than they should have received. While there are certainly practical reasons for approximating the value of an asset, which is a well-accepted practice, there are also times when approximating values could cost a party significantly more than the expenses of having a professional properly value the asset at the time of the litigation. It is important to talk to an attorney about when it really matters to bring in a professional appraiser.

Another error occurs when a party or inexperienced attorney fails to recognize that a portion of the value of an asset is non-marital. Non-marital assets, or the portion of the value of an asset that is both marital and non-marital, must be excluded from the division of marital property to arrive at an equitable division of the marital asset.

One of the most common valuation errors that parties and inexperienced attorneys make relates to valuation of defined benefit pension plans. Account statements for defined benefit pension plans rarely reflect the true value of the pension benefit. Statements may reflect contributions made into the plan along with accrued interest, but that is not the real value of the pension. The value of the pension is calculated using complicated formulas that follow the rules of the pension plan for that particular retirement account. Often the total contributions are thousands or tens of thousands of dollars lower than the actual value of the asset. If you are divorcing and you or your spouse has a defined benefit pension, it is critical that you consult with an attorney to obtain advice about the asset. In cases where there is the potential for significant value in the pension, an actuary is hired to prepare the present value calculation for the asset.

Failing to consider the long-term impact of property and debt allocations

Divorce is a stressful process, and failure to consider more than the emotional aspects of the division of property and debt can lead to regrets later. Deciding whether to keep the family home may regrettably be made based upon emotions, rather than on practical considerations. Sometimes parents believe that keeping the marital homestead will offer the children stability. As a result, they make emotional decisions, such as keeping the home even when they can’t afford the expenses, or foregoing retirement assets in the divorce so they can be awarded the property. While it can be true that keeping the home offers stability for the children, if that parent must work a second job to afford the mortgage and taxes on the property, the children are losing the stability of having their parent present.

Walking away from all the retirement assets to keep another asset can have significant negative impact on a party later in their life. While in a divorce process, it may be challenging to have to think about retirement. After all, it can be overwhelming to just think about the immediate situation at the present time. But failing to think about long-term events, like retirement, could result in significant financial hardship later in life.

Taking on credit card debt may look good on paper, as the debt offsets assets in a divorce. However, if a party is not able to pay off the debt assumed in the dissolution, that debt will continue to grow with the addition of interest charges. That party may end up paying a great deal more than bargained.

Similarly, allowing one party to be allocated joint debt or debt held in the other’s name may be a huge mistake if the party taking the responsibility fails to pay the debt to the creditor. While a party may believe the debt is no longer his or her responsibility since his or her spouse was ordered to take the debt in the divorce, the reality is that the creditor is not bound by any divorce agreement or order. The creditor can still come after the party who walked away from the debt in the divorce and collect on that debt if it was held in the party’s name or was held jointly.

Another potential mistake arises when parties decide to keep a vehicle with a large, burdensome loan payment because it is “under water.” Financially, it may be better to sell the vehicle for less than the outstanding loan and bring money to the table to do satisfy the balance of the loan. In some instances, this loss could be negotiated to be a shared cost between the parties of the marriage. The larger impact of such a decision, however, is that the party can free up cashflow by purchasing a less expensive vehicle with smaller payments, which in turn can help the party more quickly get back on his or her feet. While this is a practical solution, it may not be the best decision in all cases. It is important to speak with an experienced attorney to understand how decisions in one area of the divorce might impact another area of the case, such as how reducing a car payment might impact a spousal maintenance claim.

Failing to appreciate the tax implications of certain assets

Some assets, such as retirement accounts, investment accounts, or rental properties, can have significant tax implications. A common mistake is made when one party is allocated the retirement assets using the pre-tax value without applying any tax adjustment for the anticipated taxes the party will have to pay when they withdraw the funds for their use.

Several options exist to overcome the potential inequities in awarding the parties pre-tax assets, or assets that otherwise will result in taxes such as capital gains taxes on investments and on the sale of real property. For example, with respect to pre-tax retirement assets, a tax adjustment may be made to the asset to essentially lower the value of the asset by considering the after-tax value. This is sometimes called “tax-affecting” the asset. In other cases, the parties may equally divide all of the pre-tax assets so they have the same number of dollars of pre-tax assets allocated between them, thereby allowing the remaining assets to be equitably divided under an “apples to apples” balancing of property to each. In more complex cases, you will want to work with an experienced attorney so the property financial expert may be brought in to prepare accurate financial and tax calculations. When estates are large, a small mistake can be substantial dollars.

Making mistakes when dividing property can have serious consequences, including financial ones. It’s important to make sure you understand the process, take the time to do it right, and work with an experienced attorney who understands the complexities of dividing assets and debts.