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When it comes to property division in divorce, there is no one-size-fits-all answer that is going to work in every case. That said, our Brooklyn divorce attorneys believe there is often a right and a wrong answer in each individual case, depending on the assets in question and the people involved.

It’s our goal to ensure each eligible asset is included and carefully considered prior to any sort of division or liquidation efforts. The key is to have someone with experience on your side. Often, there can be unintended consequences with certain types of account divisions and liquidation that could end in an unfair penalty or burden on one party or the other if your counsel isn’t careful.

To understand our approach, it’s first important to get a sense of how the state views asset division in a divorce. New York follows the equitable distribution model. This is a method that aims to divide a couple’s marital belongings fairly. To be clear, “equitable” does not mean “equal.”

It’s not uncommon for a spouse who worked for years as a stay-at-home parent to receive the lion’s share of the divorce settlement, after the judge weighs each spouse’s income, age, health, marriage duration, nest egg and probable future financial circumstances.

That scenario, however, is becoming less common as it is more likely that both spouses have maintained careers outside the home.

Spouse’s may agree on all the surface issues – one gets the car, the other gets the house, one pays the credit card, the other pays the mortgage, etc.

Where it can start to get tricky is when we examine how some of these decisions impact your taxes and other long-term financial health.

For example, if the spouses agree to liquidate the 401(k), that’s likely going to mean a huge tax bill the following year on which you likely weren’t counting and probably won’t have the capital on hand to cover. That can be the start of a downward financial spiral.

Another potentially costly mistake some couples make is choosing to hold onto the family home. For many people, we find this is a purely emotional decision. Unfortunately, the cost of keeping a family home on one income simply isn’t sustainable for most people, and it can result in more debt for both parties than it’s worth. A prime example is a wife who is forced to refinance the mortgage in order to take the husband off the loan, only to find out that he doesn’t qualify to take on the new mortgage solo.

Typically, however, the most mistakes occur because there is a failure to fully consider the tax implications of asset division.

Let’s say the husband decides to keep a home with $500,000 equity. Meanwhile, the wife cashes out the 401(k) valued at the same dollar amount. The reality is that up to one-third of that account could go to taxes. On the surface, it may all look even, but the facts will ultimately bear out otherwise.

In most situations, your Brooklyn divorce lawyer will look to liquidation of assets as a last resort. The reason is that this action in itself is taxable. Meanwhile, a transfer of assets between spouses is not something on which the government can issue a tax.

Assets should always be assessed on an after-tax basis. It’s important to make sure the cost basis of investable assets are fully understood. If you own a business, you’ll want to make sure there is a good business valuation on any real estate, equipment, customer bases, etc. All collectibles should be appraised. Additionally, we generally advise it’s a bad idea to liquidate a 401(k) (if it’s at all avoidable), and warn against selling any asset without first getting a fair price. This protects both parties.

Tax considerations are especially important when weighing the division of stock, options and deferred compensation rights.

If you are contemplating a divorce in Brooklyn, call our offices at (718) 864-2011.

Additional Resources:

Not always a rose: avoiding thorny asset liquidation issues in divorce, June 14, 2014, By Deborah Nason, CNBC

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Requests for New York Child Custody Modifications Must be Convincing, June 15, 2014, Brooklyn Divorce Lawyer Blog