For the sake of this question I'll call myself William. I have a 401k that I began 10 years before I got married. It had about $75,000 in it before Tammy and I got married. We've been married for the past 13 years and my 401k is up to about $285,000. I'm concerned about being able to pay my attorney's fees. I'm also concerned because I want to keep the house my wife and I live in. The house has been in our family for generations. I don't think I can get a loan to buy out my wife's interest in the house because my credit isn't so good. We have about $140,000 in equity in the house. What can I do to save my house? One attorney has told me that Tammy will get 1/2 of my 401k and that I can't touch my 401k monies while the divorce is pending. This doesn't seem fair. It looks like I'm going to lose 1/2 of everything I built. I know Tammy is entitled to part of everything but it seems like I'm being left with no options but to lose the house and 1/2 of my 401k. Is there anything I can do here?
- William (Coventry, RI)
William, I can tell you that you have more options than you may think. Ultimately, your 401k plan is the key to resolving your difficulties. A 401k if much more versatile than a pension, annuity, IRA or any other investment vehicle.
First, Check with your 401k Plan Administrator. Ask whether you are allowed to take a loan up to a certain percentage of your vested 401k balance. Then confirm the amount of your vested balance and the allowable loan that you could take from your vested balance. Loans on 401k plans are typical and are usually limited to 50% of your vested balance.
For the sake of example let's assume this is a typical 401k plan and you can take a loan of up to 50% of your vested balance. Based upon the numbers you have provided, I would be willing to venture a guess that you may be told that the entire $285,000 is vested and that your maximum allowed loan at 50% would be limited to $142,500. You should also find out how much interest will be charged on whatever loan you take out and the maximum repayment period. Of course you will be repaying yourself the interest so this is a considerable benefit to you. Plus, you can check with your accountant to see if any of the 401k interest is potentially deductible because it is used as a buyout of your wife's interest in the real estate and adds to your adjusted basis in the property.
Now William, there are a few things to take into consideration but careful planning will eliminate difficulty. If you are already in the midst of a divorce then your are bound by the Automatic Orders of the Court. These Orders prevent you from spending, hiding or doing anything out of the ordinary with any assets without the written consent of your spouse. You may not unreasonably incur any debt that is not in the normal course of your home or running your business except for paying your attorney's fees.
At the outset this looks like it poses a massive hurdle but your case is a bit different.
The Rhode Island Family Court has the power of equitable distribution over the marital estate. This means the marital assets and debts of the parties. This does not include pre-marital assets. You have already disclosed that your 401k had a value of $75,000 before you got married. This $75,000 is a premarital asset. These funds are yours. Additionally, any appreciation relating solely to those $75,000 is also a non-marital asset because they are funds generated purely by virtue of a the pre-marital asset without further contribution from the parties. Thus if over the 13 years if your 401k averaged 7% per annum return then your $75,000 has roughly appreciated to $180,738.38 making the marital portion of your 401k $285,000 minus $180,738.38 which equals $104,261.62. The $104,261.62 should roughly be the true marital portion for distribution by the Rhode Island Family court. It is certainly viable for you and your attorney take the position that this should be undisputed and that $180,738.38 is truly a premarital asset to which your wife is not entitled.
If you are allowed a 50% loan to vested monies then you have in excess of $90,000 that you can take as a loan for both your attorneys' fees and to buy out your wife's interest in the house. If your wife's share of the house equity is agreed to be $70,000 then even with poor credit you should be able to secure an equity line of credit or a refinance of the house even if you take out a loan of $40,000 and put $35,000 toward the house and rely upon $35,000 of the house equity to balance out the loan. This also leaves you with an additional $5,000 for attorneys' fees.
If you take out a loan of $35,000 as suggested, then you still have $145,738.38 that should remain a pre-marital asset that you are entitled to claim as a pre-marital asset.
Keep in mind that this is an arguable position. Technically, it is a judge's role to determine whether an asset is marital, non-marital, premarital or otherwise exempt from the court's equitable distribution power. However, when the issue is as clear cut as this in accordance with the statutes, most judges will not penalize an individual for following the advice of his attorney in order to settle a matter on the judge's calendar.
If the judge disapproves of the manner in which you proceed and finds the circumstances to require the court's authority, the most likely conclusion is that the Judge will consider any disproportionate amount as an offset to your spouse against the marital estate. However, pursuant to the Rhode Island General Laws this is an arguable position that you should be able to take and use without the written permission of the other party or an order of the court, especially if it is used in an effort to settle the case.
However, if the funds are used for purposes other than settling the case, be prepared for the court to take more appropriate actions to punish you as an abusing party even if you are within your legal rights.
Christopher A. Pearsall
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West Warwick, RI 02893
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