Asset division and planning

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Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Asset division and planning

Post by casaver »

I have asked on this board when I thought we had an agreement between us then my husband hired a litigator and dragged out the fight. He accepted all my original offer after fruitless fights and threats. But during the fight, I am less sure if my original offer is a good idea.I know it is more a legal decision and I am working with a lawyer. Buy I'd like to run the ideas here to see if it is wise financially.

Both of us are 50 with two minor children (11 and 13). Living in VHCOL area. We have hectic schedules and hire help for years.

Husband's income: 220k
My income: 220k

margin tax bracket (35% for fed, 9%for state, 3.9% for medicare investment surtax)

We agree kids will live with me with hired help as before. I have valid concern he will go back to his original country which never cooperates with US. So I am asking for a lump sum advance payment. Since the majority of our assets are in either real estate or tax advantaged accounts, we cannot set up a secure account where I can withdraw monthly. I just simply ask for more assets on the division. Child support is set by California standard with add-ons split even and calculated to the year they finish high school, at 350k. I am wondering what is the best approach here.

Current real estate assets:
Primary house:
valued at 1.65M with 500k mortgage, 30-year fixed rate term, monthly $4000 including principle, interest, property tax, insurance, HOA, maintenance and repairs. Capital gain 800k. property tax basis is 800k.

Secondary house:
valued at 900k, paid off. rental income would be 1400 after property tax, insurance and management, vacancy, maintenance repairs and income tax. Capital gain 500k. Property tax basis is 400k.

Current retirement assets:
401k:
Husband: 450k
Wife: 700k

Roth IRA:
Husband: 70k
Wife: 130k

529 fully funded for 4-year in-state costs for both kids.

Taxable accounts:
150k with minimal capital gain

I'd like to keep the primary house until a kid goes to college. Renting a livable 3-bed in comparable school districts would cost at least $5000 at minimum.I calculated my cost keeping the house this way: If I sell the house, I will get only 900k after transaction and taxes. If I invest the proceed in a conservative way, I will get 2.5% after tax. This is my opportunity cost. For the $4000 I am paying monthly, 1300 goes to principle, and I get 1000 tax saving. So my true cost is 4500.

Secondary house is not as a clear cut as primary. The rental income is meager. But it is a starter home in a high-growth area. So far our return is more from appreciation than rental income. It was meant to be our retirement house. I am giving this house to my husband. It will be up to him to decide.

Since we don't have much assets in taxable account and moving assets in retirement account is cumbersome, I plan to keep retirement accounts as is. My future assets will be:

Primary house:
valued at 1.65M with 500k mortgage, 30-year fixed rate term, monthly $4000 including principle, interest, property tax, insurance, HOA, maintenance and repairs. Capital gain 800k. property tax basis is 800k.

401k:700k

Roth IRA: 200k

529 fully funded for 4-year in-state costs for both kids.

Taxable accounts: 250k with minimal capital gain

My monthly take-home income is 12000 and my monthly expenses will be 12000 too. My only annual saving would be full pre-tax contribution to 401k and 15000 towards house equity. I may contribute to backdoor ROTH too. I am a little bit concerned about job security, my own health and kids' need. Fortunately, dad agreed to cover future health costs for kids. I am planning to retire in 10 years. Currently AA is 70/30 across all retirement accounts.

Any suggestion if I need to ask for different assets or better setup of emergency fund? I will have to refinance anyway. maybe I can borrow more or setup a HELOC.

Another concern is whether I will have 401k assets out of proportion and get hit by tax or RMD down the road. I will still contribute fully due to high tax bracket and employer match $8000 per year. Maybe we should split all retirement savings 50/50 and sell the secondary house to raise money for advancement of child support.

Any comments will be appreciated.
Last edited by casaver on Mon Apr 01, 2019 2:25 pm, edited 1 time in total.
bloom2708
Posts: 9859
Joined: Wed Apr 02, 2014 2:08 pm

Re: Asset division and planning

Post by bloom2708 »

Sorry for the situation you are in.

The numbers don't look great.

I would likely sell both properties and reset. I don't think you can live in a $1.7 million home on $220k income for an extended period of time.

Can you sell property 2 and pay off the mortgage on property 1? No mortgage would certainly help.

That would give you some wiggle room in your monthly budget. I can't imagine you would want to maintain a big house and the costs associated for the long term. But, depending on the area, it might not even be a big house. Just a very expensive house.

I guess go slow and see what happens. Running a monthly deficit an be maintained for the short-term. Hopefully the picture clears up with time.
HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: Asset division and planning

Post by HomeStretch »

+1.

Take a really good look at your housing plan again to see if it is the most cost-effective plan. With $3.5 million in net assets (including the houses’ equity), it seems like most of your share of the assets will be tied up in the primary house.

As primary care-giver and concerned about ex-spouse leaving country:
1. I would be named custodian on the 529 accounts.
2. Require each parent to carry enough life insurance to support children through college
3. Carry adequate disability insurance on myself
4. Depending on whether I had sole or shared legal custody, I would want physical possession of children’s passports and restrict travel out of country, if possible.

Best of luck.
Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Re: Asset division and planning

Post by casaver »

Thanks to HomeStretch. I am doing all 1 through 3. We don't fight for kids though. My husband refuses to provide housing for kids. So I have to ask for prepayment in the form of asset division.

My husband will take the second house(900k) and 450k in 401k. I will end up with the primary house (1.1M) and 1.6M in investable assets.

To both of the replies:
Yes, I am giving the primary house a hard look to see if it is wise to keep it. It is just a starter to average house in the area. Maintenance is minimal because 70% of the value is on the land. Property tax is low too with a low basis and reasonable rate. Rent is very high and I cannot afford buying another starter house or town house in the area because of 40% capital gain tax and property tax basis reset. It is costly to support two households in the area and therefore so-called live-in divorce. I will rent nearby once older kid leaves home and younger kid secures a spot at the public high school.

I am also giving my lifestyle a hard look too. I think I can cut spending. I can also refi the mortgage to restart the term and reduce the monthly cost by 500.

My reasoning is, since I am getting more share of the asset, I can limit ongoing saving to only 401k contribution and building equity in the house. But I am a bit concerned that I will end up too much of stake locked in house and 401k. They all illiquid and carry hefty costs when I cash them. Should I take the hit now or in the future?
Last edited by casaver on Mon Apr 01, 2019 2:29 pm, edited 2 times in total.
HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: Asset division and planning

Post by HomeStretch »

casaver wrote: Mon Apr 01, 2019 1:26 pm I will end up with the primary house (1.1M) and 1.6M in investable assets.
I am not clear on the $ in your post. You say you will receive:
$700k 401k
$200k Roth IRA
$250k taxable account
= $1.15 million.
What are the other investable assets of $450k that get you to $1.6 million of investable assets? Are the 529 account balances $450k?
Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Re: Asset division and planning

Post by casaver »

300k in 529.

The total investable asset is 1.45M. Sorry I have been back and forth on negotiation and lost track sometimes.
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Asset division and planning

Post by megabad »

Sorry for what you and your family are going through. I think your legal counsel would be the best advisor for determining the allocation of assets during divorce so I don't think I can offer much there. I would of course remind you that any additional disagreement and delays generally cost both parties significantly in legal fees so weigh that against any additional requests.

That said, I think you may be ok. It seems that refinancing the mortgage will decrease your monthly outflow by a bit giving you a small cushion. You also indicate that you can still max a 401k. I am assuming much of your monthly expenses are due to the children, so if you can dramatically lower expenses once they leave for college and move to a LCOL area, you may have enough to retire early. If you cannot lower expenses, you could simply work a little longer until reaching a more typical retirement age.

Though I am sure this has been a stressful process, rest assured that you clearly have a successful career, a great salary, and a large retirement portfolio that will allow you to be far more comfortable than most. As such, I would feel very proud of where you stand if I were you.
Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Re: Asset division and planning

Post by casaver »

Yes. The expenses are mainly for the kids.
$4000 on housing. I can rent a 2 bed at $3500 with one kid and thenshare it with another professional when I stay by myself.
$1500 on hired help for kids.
$2000 on afterschool/summer care/ extracurricular activities.
$1500 on food and utilities
$3000 on car expenses, clothes, household, vacation and entertainment.

Essentially I just estimated $8000 a month on kids and parents split 50/50. I am getting $4000 a month, all prepaid, from house equity, retirement accounts, and taxable investment.

I can still max 401k with $8000 employer match.

Thank you for encouraging words. I might not get paid as much if I leave the area. But I can cut expenses by half once kids leave. Then I retire elsewhere.
Last edited by casaver on Mon Apr 01, 2019 3:00 pm, edited 1 time in total.
HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: Asset division and planning

Post by HomeStretch »

You understandably have a liquidity concern about your share of assets as only the $250k taxable account and your contributions to the $200k Roth IRA Account are readily accessible.

You say that:
- your monthly income after tax withholding and 401 max contributions equals your net monthly expenses of $12k
- you might be able to lower $12k monthly expenses to ????
- staying in the same house @ $4k per month (with a $500k mortgage) is cheaper than renting for $5k
- you are willing to sell house and rent in about 5 years when 13-yr old leaves home and 11-yr old enters HS.

Ideally I would want to have liquidity to cover 5-6 years of expenses in the event I became unemployed tomorrow and solely responsible for supporting my kids until I sold my house in 5-6 years and freed up additional funds.

So if you looked at your situation in the same way...
If unemployed, your monthly expenses would be less than $12k/month as you wouldn’t keep outside help. If your annual expenses while unemployed were, for example, $100k/yr, you would need $500-$600k in liquid funds invested in fixed income ideally.

You have at most $450k versus $500-$600k target. If you wanted to you could:
- take out a higher mortgage
- take out a 401k loan if needed
- rejigger divorce settlement to sell 2nd house and take more in taxable account and less in retirement accounts
- have a HELOC available if needed
- etc.

This is just one way of looking at it. It may or may not work for you. Hopefully other posters will have suggestions too. Ultimately you have a good paying job and a decent amount of assets to start the next phase of your/your kids lives. Good luck. :)
Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Re: Asset division and planning

Post by casaver »

The expenses I mentioned are running averages during the past year. I can reduce to 10500 at most I think. If i lose job I can cut another $2000 on hired help and childcare.

I have a HELOC of 400k right now. I will redo it after refinancing. My Roth account contribution is about 140k. So I can access 390k existing fund and 400k more if I need to borrow.

Thank you for running the numbers and examining my plan.
Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Re: Asset division and planning

Post by casaver »

After going over this a few more times, I decided to cash out 200k when I refi my mortgage(I have to). The effective rate would be 2% after tax.I get 2.4% for VCADX and 1.4% for California muni MM. So It will be more or less a wash.This will give me additional cushion on liquidity. If I lose job and tax rate is low, I can use the opportunity to do Roth conversion.

But anyway, I think I may be fine. I will wait a bit when things clear up.
Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Re: Asset division and planning

Post by casaver »

Phew. I was looking up some info and found this thread I started more than 2 years ago. Reporting back as a thank you note to people who provided support.

We divided the assets intact. I refinanced my house to reduce the monthly payment by 600 and planned to get a HELOC. A job loss in Jan 2020 got me rushing for HELOC before termination, anxious of covid-related hiring freezes. But with conservative AA(overall 60/40 including prepaid child support in the form of asset division, 75/25 excluding it.), I did have three years of full living costs from taxable and Roth IRA combined. During the market crash, I kind of stayed the course because I started with conservative AA and even rebalanced according to my IPA, although a bit too early. But I sold all my VBR(17% AA) for VT deciding it was too risky for my tolerance and would never look back.

I took the first offer and only offer at the bottom of market without much negotiations, quite desperately. Financially it paid back with the stock coming back strongly. During the last 12 months, I made the total family income before divorce, cash flew all expenses, caught up on full contribution to all tax-advantaged accounts including mega back door, back door Roth and HSA for 2020 and 2021 and increased my taxable accounts. All assets appreciated as everyone else with current overall AA at 70/30 by stock growth and stocks from new job. I also simplified my life during the lock down by focusing on priorities such as health and family relationship and getting kids sharing responsibilities.

I am on track to retire or semi retire when kids leave for college by moving to more affordable area. There will be fewer job opportunities and I will need to take a pay cut but being FI would afford me a better life or better put, the life I want.

Looking back, I have turned around the corner of very difficult time. I am on a much better footing on finance at this point. I want to thank everyone who shared encouraging and well thought advice, in particular to megabad and homestretch but also to the board.
Last edited by casaver on Sun Sep 26, 2021 5:36 pm, edited 1 time in total.
HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: Asset division and planning

Post by HomeStretch »

Thank you for the update. I am glad for you and your family that you are doing well both financially and personally. And weathered a pandemic as well. :sharebeer
Topic Author
casaver
Posts: 51
Joined: Mon Sep 10, 2018 1:56 am

Re: Asset division and planning

Post by casaver »

Thank you.

Yes, weathering a (although minor)crash with job loss as the sole provider of a family was difficult mentally. It helped me understand better about my risk tolerance.
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