Know the Liquidity of Assets in Your Divorce
Often in a divorce settlement, one spouse receives mostly illiquid assets, such as the home, while the other spouse gets liquid assets, such as retirement plans and brokerage accounts.
Liquidity is the ease of access to the cash value of an asset. For example, a bank savings account is highly liquid because it can be withdrawn from the bank; an antique automobile, however, is nearly illiquid because it is very difficult to quickly sell this asset to access the actual cash value. Illiquid assets are also barren; that is, they pay nothing until they are sold.
In a divorce settlement, the dollar amounts may be equal and seem equitable, but the potential problem with this type of settlement is that of cash flow. The most common example of this division going awry is the woman who gets the house and then cannot afford to maintain it and pay the taxes.
She can borrow against the equity of the home, but that's costly (closing costs, interest), and it takes time. In worst-case scenarios, the home must be sold, a smaller home is purchased and the remaining equity is utilized for living expenses. Unless there is a good reason, settlements should always provide for liquidity, with enough cash flow throughout the years to handle living expenses (particularly if these living expenses happen in the so called Golden Years).
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REDUCED CIRCUMSTANCES – During negotiations, spouses must remember that the income that supported one household will now support two. This means hard times.
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Basic Principles of Law for Construing Separation Agreements
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