The illiquid marital estate: navigating the division of marital residences and retirement accounts.

• Author: Hutchison, Elizabeth

While many people enter into marriage with the intent of upholding the vow "till death do us part," the reality is that divorce often occurs for a variety of reasons.

While most couples do not have significant liquid assets, it is common for a majority of couples to own a home and have one or multiple retirement plans. Usually, these two assets make up the bulk of the assets that the couple must divide. Even though there may be equity in the family home, additional savings, and other liquid assets, the cost of a divorce often erodes these assets.

The topics and ideas discussed in this item provide a starting point as a practitioner begins to consider each client's unique financial situation. It focuses on common pitfalls and potential opportunities to consider in the illiquid marital estate arena.

Pitfall: Becoming House Poor

Decisions regarding the family home tend to be one of the most sensitive topics in a divorce. Emotional attachment to a home can be particularly difficult to deal with. Often one spouse wants to keep the home indefinitely; however, if the divorcing couple do not handle the home properly, it may be lost. For example, if the home is too expensive, it may fall into foreclosure, or the recipient of the home might exhaust his or her assets to keep it, causing long-term financial problems for the parties.

The following options are the most common to consider when a home is part of the marital estate:

1. Sell the home;

2. Continue joint ownership; or

3. Refinance the home.

To determine which option is best in their situation, a divorcing couple should consider each spouse's financial needs.

First Option: Sell the Home

If the couple have to sell, they should be mindful of the timing. Despite the parties' wants and desires to remain in the home, the reality is that home equity may be the only asset, or there is no way to fairly balance the marital division if one spouse keeps it. Besides the potential financial benefits of finding a more affordable living situation, selling the home may be the most valuable option. A couple should strongly consider this strategy if it is possible to sell the home and remain in the lowest income tax bracket.

For example, in a year that the couple are still considered married or post-divorce (assuming they are considered to mutually own the home), they could each qualify for a Sec. 121 exclusion. Married couples who meet the two-out-of-five-years test, in addition to the use tests, can qualify for...