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In a Divorce, 50 Percent Isn’t the Same as Half

Even under the best of circumstances, it is difficult to make everyone happy.

By Janet C. Arrowood

Dividing property and assets to satisfy state laws and both spouses is not an easy task under the best of circumstances. In this column, I will consider the “simple” case of a 50-50 split of all assets. This is not intended to be tax advice, or to take the place of competent legal counsel or the services of a CPA or tax advisor. As financial advisors, we can do our clients a great service, and develop valuable contacts with CPAs, attorneys, arbitrators and mediators, if we take the time to familiarize ourselves with this simple example.

Consider the case of John and Mary Black, a divorcing couple in their late 40s. For simplicity’s sake, I will make the following assumptions:

  • John and Mary married young and had no individual assets at that time.
  • They did not receive any gifts or inheritances during their marriage.
  • All their assets are owned jointly.
  • John earns $70,000 per year and Mary earns $30,000 per year.
  • John has $500,000 in his 401(k) and they own, jointly, a comparable dollar value of mutual funds and stocks.
  • They own a house that will generate $300,000 of capital gains if sold.
Working with divorce and family attorneys can be a way to provide valuable financial assistance to clients, as well as a good way to gain new clients.

At first glance, splitting all the assets 50-50 and refinancing the house to give one spouse half the capital gain seems like a simple, equitable solution. If the only details given are the ones above (and these are probably the only ones the attorneys/arbitrators will ask for), Mary may find she is not getting a fair deal.

However, it’s important to consider the following relevant information: Each person is already dating someone else. John’s new love makes $20,000 per year, and Mary’s makes $150,000 per year. Both expect to marry their new loves in the near future. Also, Mary’s new fellow is 10 years younger, while John’s new lady is about his own age, which means Mary can reasonably expect to retire well before her future (new) spouse, and John and his future spouse will both retire at about the same time. What this means is that there are a lot more factors to take into consideration when doing financial planning for this divorce.

If John buys Mary’s share of the house (and refinances or takes a second mortgage), he gets an increased tax deduction, and future tax-free growth (on the next $100,000 of gain). The tax deduction for the house would be worth far more (near- and long-term) to Mary and her new spouse considering their tax bracket. The tax-free additional gain would be worth even more to them. If Mary were to get half of John’s 401(k) in the divorce, she will ultimately pay 31 percent to 36 percent in tax (plus state taxes) on the full amount, because of the increase in tax bracket due to her wealthier (and younger) future spouse, yet when she and John deferred the money, they probably only deferred 28 percent in taxes.

In the case of John and Mary’s $500,000 portfolio of mutual funds and stocks, a significant portion of the investment is basis and reinvested capital gains and dividends. These portions of the assets have already been taxed. The remaining growth (undeclared and future gains, and some dividends) is being taxed at 20 percent for the gains and marginal income rates for the dividends. Assuming the dividends are not significant, the tax consequences at first appear to be similar for both new couples. However, Mary and her new fellow may be subject to the Alternative Minimum Tax (AMT), increasing their tax rate from 20 percent to 25 percent on these assets. It is possible, but less likely, that John and his new lady may also be subject to AMT.

While this example is simplistic, it is intended to give you an idea about why there are more questions to ask than just the basic, dry statistical ones. In addition, Mary has the potential to have a significant amount of money to invest (under either scenario) and will probably not want to keep it invested the way her former spouse chose.

Working with divorce and family attorneys can be a way to provide valuable financial assistance to clients, as well as a good way to gain new clients. Working with arbitrators and mediators may be an even better way to gain and help divorcing clients, since these people have demonstrated at least some willingness to listen to reason.

Janet Arrowood is managing director of Investment Decisions, Inc., in Denver, a provider of advanced business and estate planning for business and individuals. She is a registered representative and has written for various business and legal media. She can be reached by phone at 303-567-0996 or by email at


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