Divorce is complicated and agreements fail the 50/50 test for many reasons. Most people don’t have the knowledge and tools needed to verify they have created a balanced settlement. And sometimes they fail to have a qualified independent person evaluate their agreement before they sign. But most often they fail because people don’t understand how taxes and unique issues in their financial life may mess up an otherwise good settlement.
These charts show how unequal a 50/50 split divorce agreement can be when not all aspects are accurately considered beforehand.
50/50 Division of Assets
50/50 Division of Assets After Taxes
There are many little known tax rules that are often ignored such as:
- The first $250,000 in equity in the family home is often tax free while a $250,000 401(k) may be taxed at 50%
- Child support is a tax free transfer while alimony is taxable to the receiving spouse
- The IRS can reclassify all alimony as child support if it ends within six months of a child’s 18th birthday
- Social security benefits can be significantly reduced if your marriage doesn’t last 10 years or more.
- There is a tax loophole allowing a divorcing spouse of any age withdrawal funds from a 401(k) they receive without penalty…but only if the paperwork is done properly.
Agreements may also fail to take into account issues unique to the divorcing couple such as:
- The lack of credit or poor credit of one spouse.
- A pension not being available for payout to a receiving spouse should the employee spouse resign or die before retirement.
- Executive compensation potentially not being available for years after the divorce agreement is signed.
- The inability of one spouse to afford the upkeep of the marital home they were awarded.
The graphs below show the impact on each individual over time of an unequal 50/50 split divorce agreement.
Net Income After 50/50 Split
After divorce, Spouse 1’s net income continues to increase over time, while Spouse 2’s net income continually decreases.
Net Worth After 50/50 Split
Spouse 1’s net worth continues to increase over time, while Spouse 2’s net worth decreases after divorce.
By asking the right questions and using sophisticated forecasting software we help you get the answers you need to build an ideal settlement.