By: Melissa L. Exline, Esq.
Dealing with divorce is tough no matter the circumstance. But, being prepared, and taking the time to learn a few things about your finances before the process begins can help make dealing with the stress a bit easier. Nevada is a community property state, so it is important to know how this will impact your specific financial situation. Knowing what types of things will be considered is key to making good decisions and not being blindsided by learning, after-the-fact, that certain things are ripe for division in divorce.
1. Generally, Everything Earned During Marriage is Community Property
When you bring home a paycheck during marriage, that is typically a community property asset. This is the case even if only one person works. The fact that the income is given to one person does not mean that legally it belongs only to that person. Rather, it belongs to the community (which belongs to both spouses equally). If you used that paycheck to pay bills, the assets you acquire by paying off debts and increasing assets will be considered community property. For example, increasing such things like equity in homes, cars, and retirement or savings accounts means these assets will normally be considered community property. In Nevada, absent a clear reason not to, these community property assets will be divided down the middle. Yes, they are 50/50 to each spouse!
2. Divorce Divides Businesses
So, expanding on the above discussion about community property – if a there is a business that was started during the marriage, that will clearly be considered community property. In fact, if that business was started BEFORE marriage, but grew or prospered during the marriage, the portion of the increase in value of the business is likely to be considered community property. The surprise for some people is the business will likely be subject to equal division even when one spouse has little or no role in creating or growing business.
If both spouses work for the company, it is not so simple to ask one to leave. In fact, if one spouse pushes the other out, this creates another issue – i.e. alimony might be owed to support the spouse that is now jobless. Another thing to consider is the significance of the spouse’s contribution and capability in running the company can be an additional reason why the court would give him or her the ownership of the company, especially when the other is unable to run it. However, the other spouse will be entitled to his or her one-half share if the business is taken by the other spouse. That share can be off-set with other assets, or paid for in a lump sum or over time in what is often referred to as an “equalization payment.”
The bottom line here – divorce will divide all community property assets, which will included your businesses absent a clearly enforceable premarital agreement.
3. Pre-marital Assets, Gifts and Inheritances are Separate Property
Nevada law states: All property of a spouse owned by him or her before marriage, and that was acquired by him or her afterwards by gift, bequest, devise, descent or by an award for personal injury damages, with the rents, issues and profits thereof, is his or her separate property. NRS 123.130.
One issue that comes up regularly in this area is the ring. The giver may believe it is “fair” or “right” to get the ring back. In most cases, that big diamond ring offered as a gift when the happy-couple were in the proposal phase, is going to be considered the separate property of the receiving party. The gifting party does not have a right to demand the return of the ring.
While the issue of the ring is clear cut (usually), most married couples engage in taking their gifts or inheritances and “mix” or “comingle” their separate property into the community property. When this happens, it has a mixed character between community and separate property. So, if a spouse gets an inheritance and immediately deposits it into a joint bank account, there is a chance it is going to be considered a community property asset unless it can clearly be traced back to show its separate property nature. More often than not, assets become so hopelessly comingled, a Court and the lawyers cannot hope to untangle the mess and will find the entire asset that was separate property has become community property.
If divorce is on the horizon, it is wise to be careful with gifts, inheritances and monetary award from personal injury. If the asset is kept separate in name/title, it will make all the difference in whether this asset is considered separate property. An example is an inherited retirement account – if that account is inherited by Wife, and stays in her name only, then Husband will not have a claim to that retirement account for division during divorce.
4. The Divorce Judge Gets to Know About All Assets and Debts
Not everyone realizes that everything you own and everything you owe must be disclosed to the Court and the other party. In fact, Nevada law mandates this clear disclosure at the outset of the case. You cannot play “hide the ball” and you must inform the other side about all asset – this includes separate and community property.
Why, you might ask, does the Court get to learn about separate property if it is not subject to division? Well, the Court must consider all assets at the disposal of each side in order to make fair determinations regarding each spouse’s resources. For example, if one spouse is the recipient of money from a trust as an inheritance, and that wealth is significant, it might not make sense to have that spouse receive alimony or other financial support. The flip side to this is the Court might feel more confident in mandating a spouse with considerable separate property wealth to pay support to the other spouse (alimony factors and how that is dealt with is a topic for another blog post – so stay tuned).
5. Not All Assets are Created Equal
Experience counts in hiring a divorce lawyer and this shows the most in complicated high net-worth cases. This is because not all assets (or debts for that matter) are created equal. Cash is king and has the most liquidity. Compare this to a house or real estate which could take a long time to sell, and once sold, might trigger tax consequence. Even when both assets are under the retirement umbrella, a true pension (direct benefit plan) is very different than a 401(k) plan (direct contribution plan). Your own goals and needs will impact which assets are better for you.
An example is taking a ROTH IRA, which is funded with post-tax dollars and, when the party that takes this asset begins pulling the money at retirement (hopefully they wait that long), he or she takes the withdrawal without having to pay additional taxes. In a traditional IRA or other pre-tax retirement account, when the party takes a withdrawal, income taxes will be due. These could both be valued at $100,000 on a piece of paper or balance sheet for the lawyers’ negotiation during the divorce. But, you must understand, there are complicated tax issues and liquidity issues a good family lawyer will be thinking about. Better yet, you understand them too and can bring your own experience to the table when discussing what makes sense and what is fair for division.
Being prepared, and spending time learning about what you have, can be a large part of making a divorce proceed more smoothly. When everything is subject to disclosure, you need to be able to have a meaningful conversation about your retirement, business, life insurance, college education accounts, bank accounts, tax obligations, etc.
The more you understand and are prepared translates into a better working relationship with your divorce attorney, and less cost by way of that lawyer’s bill (Does anyone want higher lawyer fees?). It is without a doubt the parties in the divorce have a direct ability to lower their own costs by taking control, getting documents together, and taking the time to learn about what is at stake in the divorce.