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socrateaser
socrateaser, Lawyer
Category: Family Law
Satisfied Customers: 33506
Experience:  Retired (mostly)
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We are going through divorce, and we have to list all our assets.

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We are going through divorce, and we have to list all our assets. We have real estate, cars, 401k, IRAs, and stock (unvested).

Our question is how to value all these things, and how to treat the tax implications. For example, we can get appraisals for the real estate. Is that the appropriate way? What if we are to sell one of our properties but not the other one? Do we value the one being sold at the sales price but the one we are keeping with the appraisal?

Another one, what about 401k? How do we account for the taxes on those?

Finally, what about unvested stock options?

I know, this is a hard question :)

Thanks
Submitted: 1 year ago.
Category: Family Law
Expert:  socrateaser replied 1 year ago.
Hello,

Your question boils down to how to value and what are the tax implications of the division of community property under California and federal law.

1. 401(k). All federally-qualified retirement plans are valued using the "time rule," created by California appellate case law. In its most basic form the number of months of contributions by the employee/participant-spouse during marriage and before permanent separation, are divided by the number of total months during which the participant-spouse contributed to the plan, before and during marriage and after permanent separation, before final judgment of dissolution. The ratio result is multiplied by the value of the plan at the date of distribution by the employer, and divided by 2, in order to account for the fact that community property is owned 50/50 by the spouses. That amount is what is awarded to the nonparticipant spouse.

There are no taxes associated with the division of a 401(k) incident to a dissolution of marriage. The transfer is not taxable (though the proceeds of the division are taxable income). However, in order to effect the division, the court must issue a Qualified Domestic Relations Order (QDRO). The best way to prepare a QDRO is to ask the employer's plan administrator to provide its "form QDRO." Most large plans have such a form, so that they don't have to deal with all sorts of different QDROs issued by different courts.

There are numerous ways to write a division, because different 401(k) plans have different means of distribution (annuity, lump sum, etc.). Most family law attorneys have QDROs prepared by an attorney who does nothing other than QDROs, because of the complexities of tax law that sometimes interferes. You may want to consider doing similarly -- but, of course, that's entirely your choice.

As you can see, this really is a very difficult question. I would appreciate it if we could deal with it one issue at a time. Given that you are a subscriber, you can rate my answer, and then I can continue -- that way I will receive appropriate compensation for the entire answer.

Please let me know if I can be of further assistance.
Customer: replied 1 year ago.

Socrateaser, Thanks for the prompt reply. I will rate your answer and we can continue in parts.


 


As for the 401k and all the retirement funds, I fully understand the QDRO situation etc.


 


My question is more basic. When one sits down to list all the assets, so later on one can divide by 2 and say "ok, we each get X dollars", let's see how we come up with these X dollars via you keeping A, I keeping B, and potentially some equalization payments...


 


What is the way of valuing each thing? For example: how do you value a car? Using Kelley's Blue Book? How do you value a house? An appraisal? Zillow? Same thing for 401k (for simplicity, assume the entire 401k is community property).


 


And then, once you have valued it, how do you address for taxes?


 


Example: You can get the 401k and say, "ok, this minus 22% is roughly the after tax value of this asset" (assuming you transfer it to your wife so she can claim the exception from the 10% early withdrawal penalty). .... But how do you do it with say a house, which you have not sold?


 


Do you compare all things pre-tax, after-tax?


 


We want to be fair, that's why I ask.


 


Thanks


 

Expert:  socrateaser replied 1 year ago.
Okay, let's start with what the court will do if you cannot reach a settlement. In general, the court will divide each and every community property asset in kind -- 50/50. The point being that absent an asset which cannot be divided without destroying its value, you may be making this more difficult than necessary, because you are trying to deal with the liquidated value of all of the assets, rather than simply dividing each in half.

That said, if you want to try to value each asset, then:

1. For a 401(k), not considering the 10% additional tax, and Social Security tax, which is already paid, the net value of the account is the total of the federal and state tax that will be owed at the date of distribution. Unfortunately, there is no way in advance to know what that net value will be, since it depends on Congress, and the state law in effect where the ex-spouse resides at the date of distribution. For example, if you are living in Florida at distribution, then there won't be any state tax on the 401(k) distribution, because California is prohibited from taxing the retirement under federal law, and Florida has no state income tax.

BotXXXXX XXXXXne, there is no reasonable means of precisely calculating the net value of a 401(k), other than to use its actual value on the date that you sign your settlement agreement. After that, it's up to each of you to deal with the tax liability that comes along with the account. Which is why the court will divide the asset in kind -- because that way, the tax liability doesn't have to be considered against the value of other assets which are not subject to any tax (e.g., real estate, savings, stock, etc.).

The same result applies to an IRA, because it is also tax-deferred at the date of divorce. Easier to divide it in kind, than to try to calculate its net value.

Hope this helps.
socrateaser, Lawyer
Category: Family Law
Satisfied Customers: 33506
Experience: Retired (mostly)
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