Simple Equation Causes Concerning Errors in Equalization
Individuals undergoing divorce proceedings and selling a significant asset, such as a house, frequently make a basic math error when calculating their equalization payment, which can result in an overpayment to their spouse.
The mistake occurs when they agree to take the equalization payment out of the house sale or bank proceeds and then split the remainder. The parties should instead first split the proceeds and make the equalization payment second.
This scenario demonstrates how the mistake happens:
Adam has a 401(k) through his employer with $20,000 in it. The 401k is community property. He and Bethany have also sold their marital home and received $100,000 in equity.
They agree that Adam will keep his 401(k), and Bethany will take the $10,000 she would have received from the 401(k) from the house proceeds, and they will split the remaining proceeds of $90,000.
At first blush, that sounds like it makes sense, but look at how this works out:
| Adam | Bethany | |
| 401(k) | $20,000 | $0.00 |
| Equalization | $0.00 | $10,000 |
| House | $45,000 | $45,000 |
| Total Received | $65,000 | $55,000 |
Adam owed Bethany $10,000, but by taking it off the top, Adam actually pays nothing. It’s just less money the parties split. So, realistically, each of the parties contributed $5,000 of the house proceeds to the $10,000 equalization payment.
The way to solve this is to first divide the house proceeds first and then have Bethany take her equalization payment from Adam’s share.
| Adam | Bethany | |
| 401(k) | $20,000 | $0.00 |
| House | $50,000 | $50,000 |
| Equalization | ($10,000) | $10,000 |
| Total Received | $60,000 | $60,000 |
One other point. As more and more assets get divided, this gets more complicated. It’s important to keep a running tally of the values of items and how they have been divided and make sure they equal out.
Resources and Related Posts
Divorce in Arizona – State 48 Law Firm
Larchick v. Pollock – Community Property Must Be Divided in Divorce – State 48 Law Firm
The Drahos Calculation and the Hidden Danger of Disclaimer Deeds During Marriage – State 48 Law Firm
