To obtain an Uncontested Divorce, there must be no property issues that require determination by the judge. This can happen in one of two ways. First, the parties may have no property that still needs to be divided. They could have never acquired any property during the marriage, or they could have already divided their personal property and other assets, refinanced whatever loans may have been in the other parties name, transferred legal title of property and real estate and there is no property that has not been divided between them.
The second way the parties can resolve their property issues is by signing a written Property Settlement Agreement (“PSA”) that resolves all of their property issues. A PSA is binding on the parties and on the judge, meaning no judge can make any order that is not in agreement with the provisions of the property settlement agreement. It is like they are written in stone, so it is important that the parties understand the contents of the agreement before it is signed, because once it is signed there is no way to change it without another written agreement signed by both parties. Exceptions to this rule are issues of child custody, visitation and support, which are never permanent and are not necessarily controlled by agreement of the parties.
A PSA is a powerful tool that resolves all of the issues of the divorce. Issues that can and should be addressed (if they exist) in a PSA are as follows:
1. Scope of PSA and property division in divorce.
a. Marital v. Separate Property. The PSA must address all the marital property, or that property that was acquired through the efforts of either party after the marriage date and before the date of the final separation of the parties. Any property acquired outside of that period of time is separate property, and is not subject to division by the judge in a divorce;
b. Separation of Finances. When married parties separate, their finances become separate also. Any debts or assets acquired after separation is separate property (not marital) and a party’s financial status after separation is only considered when considering support issues;
c. Date of Valuation. When parties enter into a PSA, they can dictate which date is used for the valuation of assets, and can determine the value of assets in their agreement. These values and dates will be binding on the judge in the divorce and on the parties. If the parties do not agree, the Virginia State Code provides valuation dates as follows:
i. Debts are valued as of the date of separation;
ii. Pensions and retirement benefits are valued as of the date of separation, but IRA/401K and other deferred compensation plans may be valued as of the date of the divorce trial;
iii. All other property is valued as of the date of the divorce trial.
2. Real Estate. If there is a marital home or several homes or land owned by the parties, it must be divided somehow. One party or the other can take possession of the property and pay the other party their portion of any equity that might exist in the home. The home could be sold and the proceeds divided between the parties. The parties could agree to keep a home titled in both names and sell it later or rent the home and share the rental income;
a. An important consideration about real estate is that the resolution of ownership must include provisions that cause the deed and the note to be in the name of the person who is going to own the home and be responsible for paying for it. This can be accomplished by a tax free transfer of property interest (quitclaim deed) and by refinancing or paying off the original mortgage(s);
3. Personal Property. All marital personal property must be divided between he parties. Examples of types of personal property and typical division methods are as follows:
a. Automobiles. Usually it is clear which care belongs to which person, and the division of vehicles is rarely a major issue. The parties must include in their agreement that the title will be transferred to the owning party so that it is in his or her name alone. The party receiving ownership of the vehicle should be required to refinance the loan for the car (if any) into their own name and be required to pay all the costs of the car, including taxes, insurance, upkeep and registration;
b. Household Goods and Furnishings. There are several ways to divide personal property of the household including:
i. The parties divide it among themselves and take possession of the property that they are going to keep;
ii. The parties make a list of the assets and indicate who is to own what property, and divide the property at a later time that is convenient for them;
4. Investment and Bank Accounts. These accounts can be divided by the parties by agreement or by a special court order, and the assets transferred to new accounts or used to pay marital debts or other obligations.
a. Bank Accounts. These accounts are very straightforward to divide, as the funds in those accounts are easy to determine and the parties can decide on how they are to be divided.
b. Investment Accounts. Stocks, bonds, mutual fund ands other investments that were acquired during the marriage by the efforts (i.e. income or work performed) of either party must be divided in some way. Parties can also agree to keep an asset jointly titled, but the ultimate division of that asset, and the percentage of the asset that will be owned by each party must be determined before that property issue is resolved;
5. Retirement Benefits.
a. Deferred Compensation Investments. An important consideration in dividing investment accounts is that the division does not incur an unnecessary tax liability on the either party. This is especially true in the area of deferred compensation accounts such as 401k, IRA or Thrift Savings. To divide these types of assets a Qualified Domestic Relations Order is used to transfer funds from deferred compensation account of one party to an account of similar nature of the other party without incurring tax liability. It is also common for parties to valuate these retirement accounts and to determine how they will be divided between them by moving the least amount of assets possible;
b. Pensions. Pensions can be divided in a few ways. They can be kept solely by the person who owned it and the value of the pension to the other party given to that party in the form of some other asset, also known as an asset swap. The pension can also be divided and expressed as a specific amount per month, to begin on a certain date, usually the date pension benefits will begin to be paid;
i. Pension Calculation Formula. If the parties can not agree on a fixed amount or choose not to, they can express the division of a pension asset using a formula such as this:
1. (X/Y) times a percentage that reflects the non-pensioner’s share of the pension. Where X equals the number of months that the parties were married until the date of separation (or any other date the parties choose to valuate the marital portion of the pension), and Y equals the total number of months the pensioner works and receives credit toward his or her pension. That fraction establishes the percentage of the pension that is marital property. That marital portion is then divided between the parties in some manner, usually equally (50% to each) or expressed in some other fraction (i.e. 60% to husband, 40% to wife). The resulting number is a percentage of the total pension benefit that is to become the property of the non-pensioner. This formula is useful when the party that has the pension is still working, and it will also take into account cost of living adjustments and other changes in the pension benefits;
2. An example of the pension calculation formula. In this example the Wife has a pension benefit and the parties were married for a little over 5 years, or 62 months, from the date of marriage to the date of separation. The parties have agreed to split the marital portion equally, so each gets 50%. In their PSA the Husband’s portion of the pension would be expressed as (62 months/Number of months Wife has to her credit for pension purposes when she retires) X 50% = Husband’s portion of the Wife’s pension. Let’s say that when the Wife retires she has 25 years of service, or 300 months. When the pension benefits begin to be paid to Wife, the Husband’s portion, expressed as a percentage, would be (62 months of marriage before separation/ 300 months of qualified service) X 50%, or (.207) multiplied by 50%, which equals 10.3% of the total pension which would the be the husbands portion. If the wife’s pension was $5,000 per month then husband would receive 10.3% or $517.50 per month;
6. Spousal Support. The parties can agree to an amount of spousal support in the PSA, or the parties can waive support, or they can reserve the right to ask for support from the court in the future. If a reservation is chosen it should include a time limit for which the reservation can be exercised, otherwise the time period would be half the length of the marriage before final separation of the parties. If the parties waive spousal support, that waiver is final and the issue can never be addressed again;
a. Finality of Spousal Support in PSA. It is important for the parties to remember that if the parties agree in writing to spousal support, then they are absolutely bound by that agreement, and the court can not order any support other than under the terms of that agreement. The agreement can only be changed by another written agreement signed by both parties. This is important because if a judge determines spousal support, then that support obligation would terminate or be changed by the Court according to Virginia Code 20-109 (upon death of either party, remarriage of the party receiving support or living with someone in a relationship analogous to marriage for more than 12 months, or upon a material change of circumstances). If the parties agree to spousal support, then it can only be changed according to the terms of their agreement. If there are no provisions in the PSA to terminate or change the support, then the support lasts until the paying party dies, and can never be changed unless the parties agree in writing. It is important for parties to realize this and when they are agreeing on support to make sure that their agreement reflects their true and complete agreement, including how spousal support payments can be terminated or changed;
b. Permanent v. Limited Spousal Support. Spousal support can be permanent, and never change even if the receiving party remarries. It can be limited in time to a specific number of months or years, or it can end on the occurrence of a specific even, such as the youngest child of the parties reaching the age of 19 years old. If a limited or temporary amount of support is chosen, the PSA should specifically state how the support obligation would end;
7. Custody, Visitation, Child Support. This is discussed in more detail in the Divorce with Children section. The parties can incorporate their agreements of custody, visitation and child support into their PSA. Other issues that the parties might want to consider are division of the child tax credits for income tax purposes, and the division of other tax credits such as medical costs and child care costs. The parties should address who is going to provide medical insurance for the children, and the manner of which any non-reimbursed (not covered by insurance) medical expenses will be shared by the parents. Other issues that can be addressed are payment of college expenses and extracurricular activities, and provisions for the parents to hold life insurance policies for the benefit of the children until they are adults or until they reach a specific age;
8. Other Provisions. The parties can address almost any issue that they see fit in the PSA that relates to the division of marital property or custody and support. Parties can use the PSA to craft a solution for the division of assets and debts that suits their unique situation. Other considerations for the PSA would include:
a. That the parties’ obligations are not dischargeable in bankruptcy;
b. That the parties will execute any documents necessary to give effect to their agreement;
c. That the parties will or will not file jointly or separate until the divorce is final;
d. Whether or not one party will continue to carry the other on their health insurance policy;
e. To determine which party shall live in the marital home until it is sold, if that is the case, and who will pay the mortgage, utilities and other costs of the home until it is sold, and what credit, if any would be given to the paying spouse upon the sale of the home, such as credit for the reduction in principal prior to the sale;
f. To determine who is going to pay which liabilities of the parties pending the final divorce decree;
g. To specifically state deadlines for refinancing properties, transferring assets and taking delivery of property.