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You are here: Home / Blog / What is an equitable divorce settlement?

What is an equitable divorce settlement?

January 28, 2019 By Patricia Barrett


I am often asked to help divorcing individuals and couples determine how to equitably divide their marital estate. This may seem to be cut-and-dry, but it rarely is. For one, many people believe that the court will automatically divide a couple’s assets 50/50 in a divorce. This a myth.

The Texas Family Code (the laws on divorce) uses the words “just and right” when dividing community assets and debts of the spouses.  This does not mean evenly divided down the middle.

Each divorce situation and couple is unique. And all marital assets are not created equal when it comes to divorce settlements. Some assets may have a more positive effect on one’s financial future, while others could have a long-term negative impact. Some individuals may require immediate cash in order to help him or her start a life without the other. These kinds of issues should be examined and evaluated early on.

Know what is separate property and what is marital property. Texas state law applies here, but generally, anything you owned before you married (including your engagement ring) is typically considered separate property. Inheritances, gifts from family, friends or even your husband, along with “pain and suffering” awards from lawsuits are all considered separate property. That means that separate assets are taken out of the settlement equation. Anything acquired during the marriage is usually considered marital property, no matter which spouse “owns” it or how it’s titled

Know what you own. You should have a working knowledge of all your marital assets, debts and annual income. Don’t forget pensions, deferred compensation, retirement investments, stock options, life insurance, annuities, and even country club memberships, accrued vacation time, bonuses and other executive perks. All these things have value and should not be overlooked when it comes time to negotiate a divorce settlement. Now is also a good time to outline your household budget.

Know the difference between asset value and asset worth. Getting to keep a paid-off house worth $750,000 may seem like a terrific deal, but don’t forget that the worth of the asset is lessened by the costs of maintaining it. Even without a mortgage, you’ll have to pay real estate taxes, maintenance and utility costs for that house. In addition, you may be hit with a capital gains tax bill when you sell it, if the sales price is substantially more than what you paid for it — minus a $250,000 exclusion on the sale of your primary residence that will lessen, or possibly eliminate, your final capital gains tax bill, if applicable.

Find out what you’re likely entitled to. Texas is a Community Property State so whatever you earn or acquire during the marriage is considered community property. “Half of everything” is a common refrain, but in my experience is not typical. Higher wage earners may end up with less of the marital assets. Also, if you’re a 60-year-old homemaker with no professional work experience, you could be entitled to even more.

Think long term. In the middle of a contentious divorce settlement negotiation, it can be very tempting to avoid conflict, resolve issues and move on. You may be thinking there are more important things than money, or the who-gets-what of all the “stuff” you’ve accumulated in your marriage. Beware of this state of mind. It is very risky, financially. You can avoid some major pitfalls if you:

Evaluate how your settlement may affect your future financial security. Remember, you get one shot at this, and there are many angles to consider. Work with a Certified Divorce Financial Analyst such as myself to analyze all the financial implications, including income and tax consequences, of various settlement scenarios. You will also benefit from my experience working with other couples and individuals. What seems like a great deal now may spell disaster 10 – 20 years down the road. Do the assessment work ahead of time to help you form your settlement strategy. 

The divorce process is challenging, so focus on thinking financially and not emotionally. To achieve the best possible outcome for you and your children, if applicable, approach the financial aspects of your divorce as dispassionately as possible. When you’re emotionally exhausted, you could be inclined to make compromises that aren’t in your best interest. In divorce, there are no do-overs on the settlement agreement, and you could be stuck with the consequences of a bad decision. Instead, set your emotions aside, and keep your eye on what really matters: a secure, financial future.

Filed Under: Articles, Blog, Divorce Planning, Divorce Planning, Financial Planning, Financial Planning Articles

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