Divorce is hardly ever an emotional experience alone. It’s a massive financial reorganization, and the choices taken during the division of assets ofttimes persist over the years for both individuals. Doing it correctly requires pushing aside the desire to “come out on top” and concentrating on what each individual truly receives after taxes, loans, and ongoing expenditures are considered.
Family Property vs. Exempt Property
The first step to take is to determine what is eligible for division. Common assets obtained during the marriage such as the marital home, shared savings, and investments established over time are commonly eligible for equal division as per the family property law. However, pre-marital assets, inheritances, and settlements from personal injury cases may not be eligible. The issue is mixing these with joint assets or using them for family expenditures or the home.
For instance, if an inheritance gets deposited into a joint account and used for family expenses or home improvements, it may lose its exclusion from division. The same applies to pre-marital property that significantly increases in value while paying the mortgage or maintaining it together as a couple. The more clear and traceable your paper trail, the better. Be prepared to show where and how every dollar was spent or invested. This may involve hiring a forensic accountant to track sources of funds.
Full Financial Disclosure Isn’t Optional
Both spouses must reveal every asset and every debt. For example, your investment account, shares in your company, money you will get in the future like a bonus or an inheritance, or even cryptocurrency. As well, you need to list your liabilities such as bank loans, lines of credit, or tax debt.
This is not just a rule, though it is that. It’s also an ethical responsibility, because the foundation of a separation agreement is honesty. And it’s also in your self-interest. A deal based on incomplete information is likely to unravel later on. If one spouse later discovers hidden assets, the entire agreement can be set aside and renegotiated, often at significant legal cost. Consulting a divorce lawyer calgary early on can help make sure disclosure is thorough and the agreement holds up.
The Real Cost of Keeping the Marital Home
The family home tends to be the most emotionally and financially significant asset. But many people having to decide who gets it don’t realize that despite the obvious emotional toll, it can be a financial disaster to keep it.
First, there are the emotional or familial ties often driving the desire to hold on. Sometimes a custodial parent will sacrifice other assets just to provide continuity and stability for the kids. And in other cases, there’s a strong reluctance to give their ex-spouse the satisfaction of walking away with that particular piece of the pie.
Then, there are all the rational financial arguments that sound persuasive but mask hidden costs when taking over a mortgage or buying out a partner. These are the legal costs, transfer taxes, realtor’s fee (when you eventually sell) and lost investment returns/foregone tax shelter.
Pensions and Retirement Accounts Aren’t Simple to Split
This is where many DIY separation agreements get derailed. A 50/50 split of a pension or registered account may seem simple enough, but it isn’t.
Registered accounts can have tax triggers upon transfer. If the wrong mechanism is used or there is no mechanism in place to transfer according to the court order, it can be treated as a withdrawal and become immediately taxable. This means you’re giving up a percentage of the money.
Pensions must be valued by an actuary to determine the commuted value (the amount transferred to a locked-in account). This math takes into account the number of years worked and contributed, the benefit earned, and the future payout at retirement. Your pension administrator may have a specific form or method of transfer and may need more than a simple percentage in your agreement to divide your pension legally. Skipping this process just delays the inevitable consequences and costs more in clean-up later.
How Joint Debt Actually Works
The separation agreement can say that one spouse is responsible for a joint line of credit. That’s all well and good between the two parties, but the creditor wasn’t a party to that agreement. If the responsible spouse defaults, the lender can and will come after the other. Credit scores, collection calls, potential legal action, it’s all on the hook for someone who thought they’d severed the tie.
The only clean way to do it is to remove a party from a joint debt at the time of separation, either through refinance, pay-out, or transfer. Agreements that merely assign responsibility but do not restructure the debt leave both people open.
When Litigation Destroys the Asset Pool
Litigations in court are costly affairs. The more you fight over your piece of the pie, the smaller that piece becomes. A drawn-out property dispute has the potential to destroy the equity that both of you had worked so hard to protect. Getting legal help at an early stage, when positions are not well and truly entrenched, allows for the possibility of mediation or collaborative law where each party negotiates with the assistance of his/her lawyer but without recourse to the courts. This usually results in a higher total asset pool being available (since the costs are generally far less) and a settlement that both you and your ex-partner had a say in.
Spousal Support and Asset Division Are Connected
The way assets that generate income get split up impacts if spousal support even needs to happen, and if so, how much. A spouse getting the rental property gets ongoing monthly income. A spouse who gets a lump sum from an RRSP gets a whole different financial position. These aren’t separate decisions, they interact with each other. Any deal worth striking has to consider the whole puzzle: what each person has, what each person makes, and what each person needs ongoing after the ink is dry.
Proper income/asset division isn’t about who walked away with what, it’s about whether it makes sense long-term. That all starts with treating it like the convoluted financial transaction it is.
