Separate Finances? Guess Again.

A few of the attorneys from our office were out to lunch the other day when our conversations turned to the different types of relationships we see come through our office. The one that we ended up talking about the most is what I like to refer to as the “roommate marriage.” In this type of marriage the couple maintains separate finances as if they were roommates. They keep separate bank accounts and divide responsibility for the bills. One of the attorneys recalled a couple in a “roommate marriage” that she divorced where the husband was so meticulous about making sure everything was “even.” He even kept a chart on the refrigerator to account for everything down to who paid for ice cream cones when they were out.

Needless to say, I am never surprised when “roommate” marriages end in divorce. Frankly, I wonder why the couple even got married in the first place. One of the fundamental principles of marriage is that it’s a partnership. Each spouse is supposed to contribute to the greater good of the marriage. If you are just going to operate independently, why bother? The surprise for spouses in “roommate” marriages comes when they get to my office.

That’s when they learn that all of the dividing of bills and maintenance of separate finances doesn’t matter one bit when it comes time to divorce.

“His money” and “her money” are just seen by the law as joint marital assets to be divided equitably. All that time they spent accounting for who paid for what? Totally wasted.

In one divorce I had where I represented the husband, the parties had maintained their “roommate” marriage for around thirty years. For whatever reason, during the marriage the wife had accumulated more money in her retirement accounts than the husband. She was shocked to discovery he was going to receive a good portion of her retirement accounts in the divorce. She simply couldn’t get over the fact that he was going to get some of “her” retirement money.

Bottom line? If you want to keep your finances separate, don’t get married or get a good prenuptial agreement before you do.


How is Marital Property Divided in Pennsylvania?

One of the most common questions that people going through a divorce ask is, “how is marital property divided in a Pennsylvania divorce?”

Marital property is divided in a Pennsylvania divorce through a process called “equitable distribution.”

Unlike in community property states such as California, where marital property is divide equally (i.e. 50% – 50%), in Pennsylvania marital property is divided “equitably.” This type of division is fairly based on the circumstances of the parties.

In deciding what is “equitable” or “fair,” the court is supposed to take into consideration a list of factors set forth Pennsylvania statutes. That list of factors, includes, among other things, (i) the relative earnings or earning abilities of the parties, (ii) the contribution of each party to the marital property, (iii) each party’s separate property, and (iv) custody of any children. To many of our clients’ surprise, marital misconduct, such as adultery, is not a factor considered by the court in equitable distribution. That is in keeping with the general direction of Pennsylvania law in removing fault or blame from the divorce process

The process of equitable distribution can be broken down into three steps: (1) identifying of the martial and non-marital assets, (2) valuing the assets and (3) dividing the marital assets.

1. Step One: Identify the Marital and Non-Marital Property 

The first step in equitable distribution is identifying the martial assets and non-marital assets. Not all property owned by a married couple is necessarily “marital property.” Marital property, in general, is property acquired during the marriage. Non-marital property, in general, is property acquired before the marriage, after the date of separation, or by gift or bequest. Non-martial property is not subject to equitable distribution.

To determine whether an asset is marital or non-marital, several factors must be considered, such as (i) when the asset was acquired, (ii) how the asset was acquired (e.g. by purchase, gift, inheritance, etc.), and (iii) how the asset is titled. Some assets, such as retirement accounts, may have both marital and non-marital components.

2. Step Two: Value the Assets

Once the marital and non-marital assets have been identified, the second step is to value those assets. Normally the assets are valued as of the date of equitable distribution. However, in some circumstances assets need to be valued as of a different date. For example, non-marital assets will often need to be valued as of the date of marriage and as of the date of separation, because the increase in value of a non-marital asset during the marriage is marital property.

The value of assets can be determined in a variety of ways. In the case of real estate, often a professional real estate appraiser is necessary. Similarly, for defined benefit pensions a professional pension valuation is often necessary. The value of assets such as bank accounts, brokerage accounts and non-pension retirement accounts can usually be determined from the account statements. The parties must be sure to establish value of each account as of the date of marriage, the date of separation and the current value, and to back out pre- and post-marital contributions to the accounts.

Dissipation of marital assets must also be considered in valuing marital assets. Dissipation occurs when one party spends money from a marital account post-separation or where a party in control of a marital asset, such as a home, fails to maintain the asset.

3. Step Three: Divide the Marital Property 

The third and final step in equitable distribution is to divide the marital assets. Martial assets are divided according to the list of factors set forth in Pennsylvania statute 23 Pa. C.S. § 3502. Normally, the court first determines what percentage of the marital assets each party will receive (e.g. a 60% – 40% split). Once the percentage distribution is determined, then a scheme for distributing the martial assets is formulated. Each party does not necessarily receive their percentage of every asset.

Rather, the goal is to have the overall distribution of marital assets reflect the percentage distribution. Some assets may be divided between the parties (e.g. bank accounts) and some assets may be distributed in their entirety to one party or the other (e.g. real estate). In distributing individual assets, the court will take into consideration the nature and liquidity of each asset, the tax consequences associated with the asset, and each party’s desires to retain all or part of the assets.

After the distribution scheme is determined, the assets are divided accordingly. Some assets may simply be divided or distributed, such as bank accounts. Real estate often needs to be liquidated or to have title transferred. Qualified retirement accounts are divided through qualified domestic relations orders (QDROs) to avoid taxes and penalties.

The attorneys at Cooley & Handy have extensive experience representing clients in divorce, support, child custody and family law matters. If you believe you need legal advice concerning your divorce or family law matter, we encourage you to contact our office to schedule a consultation. We can help you understand the process and know your options.

Disclaimer: The information contained in this article is for general informational purposes only and should not be construed as legal advice. If you are seeking legal advice concerning a divorce or any other matter, please contact us by telephone or e-mail to schedule a consultation.


What To Do If Your Spouse Is Taking All The Money In A Divorce

What to do? My wife just emptied out the checking account! My husband just withdrew $50,000 from our joint investment account! What can I do to stop my spouse from taking all the money and protect the marital assets? The important thing to know is that you can stop it.

You can stop your spouse from taking all the money by filing a Petition for Special Relief to Freeze Marital Assets.

By filing this petition, you are requesting that the court enter an order preventing either party from depleting marital assets.   This petition can apply to all marital assets or certain marital assets. It can also be done on an emergency basis. If your spouse has already started emptying accounts, you need to file an Emergency Petition for Special Relief so that your assets can be protected as soon as possible.

Even if your spouse hasn’t withdrawn any marital assets, it may be necessary to file this petition. If you are at all worried that there may be no marital assets by the time equitable distribution rolls around, you should file this petition. You could be worried that your spouse will start moving marital money to different accounts, will use assets for his/her business, will use it for expensive trips, to pay off debt, etc. There are a variety of reasons why you might be worried, so it makes sense to protect yourself. Filing this petition protects your assets and provides a guarantee that, when you reach equitable distribution, there will be assets left to divide.

If you do need to access marital assets while you’re going through the divorce process, you need either an order of court or an agreement signed by the parties releasing certain assets.

To get a court order, you need to file another Petition for Special Relief explaining to the court what you need and why you need it. Examples of reasons to request this relief are that you need money to pay for repairs to the marital residence, that you need money to help you stay afloat financially, or that you need money because an emergency of some sort has arisen. If the court believes that you have a legitimate request, the judge will likely order the release of a certain amount of money.

What happens if my spouse ignores the order freezing the assets and starts taking money from one of the frozen accounts? Since you have a court order, you can drag your spouse back into court for contempt of the order. You can request that the court order him to pay back whatever funds he took, that he be required to pay you half of the amount he took, that he be required to pay your attorneys fees and for the court to order additional sanctions against him.

The assets will start to thaw as you continue through the divorce process and, once you complete equitable distribution, the assets will be back to room temperature and available for the taking.

And, since you did freeze the marital assets, you know that none of the accounts have been liquidated or that any of the assets have been sold. You will be able to leave the marriage with a portion of the assets in your pocket.

If you have even the slightest worry that your husband, wife or spouse will start emptying accounts, you need to file a Petition for Special Relief to Freeze Marital Assets. It is the only way to truly protect yourself and, in the end, it is always better to be safe than sorry.


You May Be Able To Withdraw Money From A Qualified Retirement Account Penalty-Free In Connection With Your Divorce

Spouses involved in divorces frequently have an immediate need for cash at the time their divorce is finalized. Parties may need money to pay bills, make a down payment on a residence, or for other reasons. Unfortunately, they often lack any significant non-retirement assets from which they can obtain such funds. This is where a penalty free withdraw from retirement accounts during the divorce process comes into play.

Often, the only significant assets of parties at the conclusion of a divorce are funds in employer-sponsored qualified retirement plans.

These include accounts such as 401(k)s or other defined contribution plans. In these instances, the 401(k)s or other qualified retirement accounts will be divided between the parties. The party receiving funds from his or her spouse’s retirement account is known at the “alternate payee.” There are no tax consequences or penalties at the time of the transfer so long as the parties obtain a Qualified Domestic Relations Order (“QDRO”) from the court and the funds are rolled into an Individual Retirement Account (“IRA”) in the name of the alternate payee.

The transfer of funds pursuant to a QDRO also presents a one-time opportunity for the alternate payee spouse to withdraw money from the qualified retirement account penalty-free.

Generally, the owner of a qualified retirement account or IRA must wait until he or she reaches the age 59½ to receive distributions. If a person withdraws money from one of these accounts prior to that date, he or she faces a 10% penalty on the withdrawal, in addition to the federal and state taxes owed.

In divorce cases, however, the Internal Revenue Code carves out an exception to the 10% penalty rule and permits an alternate payee only to request a partial or total cash distribution of their share of the qualified retirement account, provided that the request is made prior to rolling the funds into the IRA. The alternate payee is still required to pay taxes on the distribution, but he or she will not incur the 10% penalty. It is important to note that each financial institution drafts its own rules and regulations governing its retirement accounts and, therefore, this option might not be available with every retirement plan.

The attorneys at Cooley & Handy can help you investigate this and other options to help secure your financial future following your divorce.


Social Security Retirement Benefits and Divorce – What are YOU entitled to?

If you are in the midst of a divorce, Social Security retirement benefits may not be on your mind. This is especially true if you are relatively young and far from retirement. However, the potential affect of divorce on Social Security retirement benefits is an important consideration in negotiating the terms of a marital settlement agreement. The Bucks County divorce lawyers at Cooley & Handy often encounter questions about how divorce effects entitlement to Social Security retirement benefits in the future.

Social Security benefits are not considered part of your marital property to be divided in divorce. However, your divorce may impact both your right to claim benefits under your ex-spouse’s work history and the amount of benefits you or your ex-spouse are eligible to receive upon retirement. Therefore, it is important to consider this impact in financial planning for life after divorce.

Specifically, if you make less money than your ex-spouse, you may be able to collect benefits under his or her work history. This may allow you to receive a higher benefit than what you would be entitled to under your own work history. This increase may have a substantial effect on the lifestyle you are able to enjoy upon retirement.

Rights of a Divorced Spouse to an Ex-Spouse’s Social Security Retirement Benefits

If you are divorced, you can receive Social Security retirement benefits based on your ex-spouse’s work history if the following requirements are met:

  1. The marriage lasted 10 years or longer;
  2. You are currently unmarried;
  3. You are age 62 or older;
  4. Your ex-spouse is entitled to Social Security retirement benefits (i.e., he or she is 62 or older and has a long enough work history to receive benefits); AND
  5. The benefit you are entitled to receive based on your own work history is less than the benefit you would receive based on your ex’s work history. In other words, your benefit must not exceed half of your ex-spouse’s benefit.

Even if your ex-spouse is not retired, you may be able to collect under his or her work history if you have been divorced for over two years and all of the above requirements are met.

One very important consideration in divorce is Social Security’s 10-year rule (that your marriage must have lasted 10 years or more to collect under your spouse’s work history). If you are divorcing and the marriage has lasted close to ten years, it may be beneficial to intentionally delay the final divorce decree until the marriage has lasted ten years to qualify both spouse’s to potentially collect under the work history of the other.

Remarriage, Death, and Second Divorces

If you remarry, you will be unable to collect benefits on your ex-spouse’s work record UNLESS your later marriage ends by death, divorce or annulment. If your second marriage ends by death, divorce or annulment, you may be able to collect the larger of (1) the benefit based on your own work history, (2) the benefit based on your first spouse’s work record and (3) the benefit based on your second spouse’s work record, assuming that all of the above requirements are met.

It is important to note that if an ex-spouse is eligible to collect under your work history, it will have no effect on the amount of benefits you or your current spouse will receive.

Prior to agreeing to any divorce settlement, you should have a competent attorney analyze your financial situation, including your potential Social Security retirement benefits. The Bucks County divorce attorneys at Cooley & Handy can provide this advice.

© 4/11/11 Cooley & Handy


How The Vanishing Credit Works In Bucks County PA Divorces

A frequent issue that arises in Pennsylvania divorce cases is how to handle premarital assets.

The question is how is a premarital asset contributed to the marriage is handled in equitable distribution. In response, the Bucks County Masters Office employs a “vanishing credit” theory. However, it is first important to understand what is classified as a pre-marital asset. Additionally, how these assets are typically handled by most courts?

A premarital asset is one that a party possessed before the marriage. Such an asset is “contributed to the marriage” when it is put into joint names or used to purchase a joint marital asset. A classic example of this is when one party uses premarital funds as a down payment toward the purchase of the marital residence, which is deeded in both parties’ names.

In equitable distribution, the party contributing the premarital asset almost invariably seeks to have the full value of the  asset returned to them as separate property. This spouse argues the asset should not be included in the marital estate for equitable distribution purposes. Of course, the non-contributing spouse argues that the entire value of the premarital asset should be deemed a martial asset subject to equitable distribution. This spouse often argues the asset was contributed or “gifted” to the marriage. Thus, the dilemma is how to fairly or equitably handle this issue.

Under Pennsylvania law, once a premarital asset is contributed to the marriage it becomes a marital asset.

This asset is then subject to equitable distribution. Therefore, in this regard, the non-contributing spouse is correct in asserting that non-marital assets contributed to the marriage are marital property. They are thus subject to equitable distribution. However, Pennsylvania law also requires that the court consider a spouse’s contributions to the marriage as a factor to be considered in equitably dividing marital property. Therefore, the contributing spouse has a strong argument that some or all of his or her contribution should be returned in equitable distribution.

While not the official law of Pennsylvania, the Bucks County Divorce Master’s Office most often applies a very fair formula for equitably distributing premarital assets contributed to the marriage.

This is known as the “vanishing credit.”

The formula is named as such because the contributing spouse’s credit essentially “vanishes” over a twenty-year period. In short, the Bucks County Divorce Master’s office considers 5% of a premarital asset converted to a joint marital asset per year and subject to equitable distribution. The remaining percentage will be deemed a separate asset and returned to the contributing spouse in full.

For example, suppose a spouse contributes $100,000.00 of premarital funds to purchase a jointly owned marital residence. Further, assume that the marriage is a ten-year marriage. The parties purchased the marital residence two years into the marriage. The premarital funds were contributed at that time. To calculate the marital component of the contributed funds, the Bucks County Divorce Master’s Office will multiply the number of years elapsed between the contribution of the funds and the date of separation. In this example 8 years, by 5%, which equals 40%. Therefore, The Bucks County Divorce Master’s office will recommend that 40% of the $100,000.00 be considered as martial property subject to equitable distribution. The Bucks County Divorce Master’s Office will further recommend that the remaining 60% of the $100,000.00 be returned to the contributing spouse as separate property.

Of course, if one (or both parties) does not accept the master’s recommendation, they can take the issue of equitable distribution to trial before a judge. However, a judge will likely not apply the vanishing credit, since that is not the official law of Pennsylvania. However, the ultimate decision on equitable distribution by the judge may practically be very similar in result.