What is an Equalization Payment in Divorce?
An equalization payment is paid when one spouse receives more than the other. For example, Adam and Eve divorce. The community has $1,000,000 in community assets (house equity of $600,000, retirement accounts value of $400,000). Let’s say Adam keeps the retirement accounts worth $400,000 and Eve keeps the house with an equity of $600,000.
In this case, Eve would owe Adam $100,000 in equalization payments because she received $200,000 more than he did.
After Eve pays Adam $100,000, both would receive $500,000 = an equal division. Hence, “equalization payment”.
How is an Equalization Payment paid?
In the example above, if Eve has no other assets from where we would derive the equalization, she could probably do a cash-out refinance against house to pay Adam the $100,000.
Now, let’s say the retirement accounts were $600,000, and house equity $400,000. Then Adam would owe Eve $100,000. In this case, Adam can just give Eve $100,000 from the retirement accounts.
What if No Cash Is Available for Equalization?
In the first example, where house equity is $600,000 and retirements are $400,000, if Eve does not qualify for a cash out refinance, and cannot pay Adam the $100,000, here are their options:
- Sell the house, she keeps the cash from house, and pays $100,000 equalization to Adam from proceeds.
- Adam and Eve sell house, divide the proceeds, AND divide retirement accounts equally.
- Adam waives the receipt of equalization altogether (giving Eve more).
Why Would Someone Waive Equalization Payment?
Why would Adam waive $100,000 and take an “unequal” division of assets? Several reasons:
- Adam is being generous.
- Adam wants to move on.
- Adam understands he will pay his lawyers and Eve’s lawyers MORE than $100,000 in attorneys’ fees to keep fighting.
Be Wary of Double-Dipping
Whether Adam should take the retirements or the house depends on a lot of factors. Also, counsel for both should advise as to any “double-dipping” issues.
So It’s OK if the Settlement is Unfair to Me?
Fair is the “F” word in divorce. It is subjective and the problem is when you are divorcing someone, RARELY will you agree on what is fair.
Also, in my experience, family law in general is unfair.
Money is poor a substitute for love, stability and trust. Nobody benefits from long drawn-out divorces. If you don’t believe me, ask anyone who has been through a long, drawn-out divorce.