Divorce doesn’t have to end in a fire sale of your assets. There are ways to split up that preserve the value of your holdings and leave at least one part of the relationship unscathed.
Dividing your marital property because of a divorce doesn’t have to mean hosting a fire sale and then splitting the meager proceeds afterward. There are strategies that preserve the value of property and leave a lot more money in the pockets of the former couple. Yes, it takes civility and cooperation, but most people are willing to participate when they realize the effect on the bottom line.
1. Don’t sell if it’s a depressed market. There’s no need to dump property in a bad market just to finalize the settlement. Make arrangements to store and insure tangibles such as art, furniture and even an extra auto. Even real estate, time-shares and apartments can be "kept in the family" until the time is right to sell. A property manager can be a neutral party while the house is rented. A partnership agreement that dictates how disputes, over such things as whether or not to accept a price or when to place the item on the market, should be incorporated into the settlement and become part of the divorce decree. That makes it enforceable before the same judge that granted the divorce, without the need to sue for breach of contract.
2. What to do when it’s hard to know ‘fair value.’ Couples often own property that could appreciate, but is of little current value. It could be a work by a new artist, a fledgling company or an invention. The solution is to keep the fledgling property and agree to an evaluation every year or so. After a chance for appreciation, the property can be sold and the proceeds split. If one party gets impatient or believes that the other is holding onto the property in order to hold onto the relationship, a mediation clause can force a sale.
3. Use your insurance to protect your rights. An often-overlooked aspect of holding property after a divorce is proper insurance coverage. Insurance is a contract, and both parties should own the policy. If the policy lapses, both should be notified and either have the right to pay the premium or sue for reimbursement. The company doesn’t care about the relationship of the parties to each other. It will only issue the policy in the name of the legal owners. By applying jointly, the parties have agreed that both have a legal interest in the item.
4. Offer installment buyouts. If one party offers to buy the other out, the terms should be similar to those of an arm’s-length transaction between strangers. All the usual safeguards, such as continued ownership until final payment, or a security agreement, mortgage or other recorded lien must be executed.
5. Create family limited partnerships. FLIPs are a practical and, in my opinion, underused form of ownership in divorce situations. Under the Uniform Family Limited Partnership Act, adopted in most states and recognized under the Internal Revenue Code, one former spouse can be named the general partner with all the rights to control the asset. Both former spouses are named as limited partners with beneficial ownership of the asset. Tax consequences flow onto their individual returns. The FLIP can provide for a salary or stipend to the general partner for his or her management efforts.
The title to the asset is in the name of the FLIP, and neither can dispose of the asset without the other’s consent. The document can provide for distribution of the proceeds, can give a termination date and can even state what happens to the property if one person dies. In this way, probate is avoided and no will is necessary.
6. Set up a divorce trust. A similar result can be achieved by transferring the property to a trust, but the tax consequences are different. A trust is a separate tax unit with its own tax bracket. The trustee is often an outsider, such as a lawyer, if tax benefits are to be reaped. The disadvantage, compared with a FLIP, is that the trustee typically charges a fee. The advantage is realized when the parties want more of an arm’s-length transaction, in which neither spouse has more control. The trustee is the fiduciary of both parties and can be held accountable if one is favored above the other.
7. Create non-voting shares in your family-related business. A quick sale is not the only thing that can devalue good property. Uncle Sam can take a bite, too. The transfer of property under a divorce decree is not a taxable event. Business property poses a problem if shares are sold to a stranger or other family member to buy out the non-active spouse. A better idea may be to allow the former spouse to keep shares in the company, but make them non-voting. The active ex-spouse runs the business and is an officer and director. The inactive ex-spouse keeps his or her rights intact with non-voting shares equal to the percentage specified in the settlement.
8. Substitute one asset for another. Occasionally, it’s necessary to give up non-marital property to make the division fair and equitable. For example, if a stock is down in price and one person wants to keep more than half of the shares, then that person will need to offer a substitute asset. It’s appropriate to offer other property, such as inheritances, gifts or property, to make the deal.
9. Create an objective index. One of the biggest stumbling blocks to the orderly preservation of wealth is the fear of the supported spouse that he or she will need the cash that’s tied up in the property. Another problem arises when one party (or both) distrusts the other to actually sell the property at the right time. Enter the objective index.
The parties can agree to liquidate if the cost-of-living index as defined in the agreement reaches a certain level, or if one loses a job or suffers a salary decrease. Or they can agree that stocks or other securities will be sold when the stock reaches a certain price or if a market index, such as the S&P 500, reaches a certain level.
10. Transfer assets to your children. I’ll never forget the day that a New York Superior Court judge awarded custody of a house in a divorce settlement to the litigant’s 8-year-old son. It created quite a stir. The boy stayed put while the parents were shunted from one home to another. It worked to save the house, the boy’s lifestyle and forced two feuding adults to put the child first.
The point: You can choose to transfer specific assets to your children as a means to ensure the property is distributed fairly and your dependents are cared for properly. Or, you could wait and let the judge do it for you.
SOURCE: MSN Money