Divorce results not only in severing a personal relationship, but also terminates an economic one. The division of marital property, or “equitable distribution,” is part of the divorce process in Pennsylvania and results in the distribution of all marital property acquired by one or both parties during the marriage. It is often at that time that a party is first faced with the dilemma of establishing a priority of assets, because they must determine which they wish to take away from the marriage. The economic realities then set in. The future may be wide open, but the party must close the door on tough economic decisions, such as: “Should I try to keep the marital residence, or do I want the pension? Do I want the 401K, or is the vacation home better?” Of course, both spouses may want the same assets and that competition may have to be resolved in a courtroom, but consideration of sound economics before entering that fray is clearly needed.
The dramatic climb in property values over recent years often made it an appealing option to trade the liquid accounts and assets for the investment, both monetary and emotional, represented by the family home. That, however, may now be changing drastically, and the decision may be much tougher than before.
The November 2007 issue of Fortune magazine reflects that home prices in most markets will “fall by double digits over the next five years.” That is a new development in America that may not have been seen since the Great Depression. That decline in value is daunting, especially when compared to the slow, but steady, growth achievable in a conservatively invested and tax-advantaged 401K or IRA.
A party must now give even more careful thought to short and long-term goals and objectives. Examples may include:
- Is the desire to keep the home based on (i) personal shelter, comfort, and pleasure, (ii) immediate rental income, or (iii) long-term investment potential?
- What is the availability and price of alternative housing?
- Will there be capital gains and taxes, and what impact will the basis have?
- If there are minor children, what effect does the home location have on the custody scheme?
- How does the cost of remaining in a prime school district compare to private school options?
- Is the cost to maintain the home offset sufficiently by the tax benefits, especially when compared with renting a comparable property?
- Is a comparable property still needed?
- Is cash immediately required to cover liabilities and, if so, would refinancing be more effective than withdrawal penalties or interest associated with getting money out of a tax-advantaged retirement vehicle or from life insurance cash values.
- What is the effect of the new, post-divorce tax status going to be on the whole decision-making process, and will the divorce, support, and custody determinations create an entirely new cash flow situation than existed before?
Identifying and addressing all of these issues and finding the answers to these questions as they apply to a given person’s circumstances will lead to wise choices for asset allocation. Planning and realistic appraisal of the economic and legal issues will lead to the best possible outcome from a financial point of view.