What is a property equalization?

When couples divorce they must divide their property.  Because of Arizona’s community property scheme, this is a relatively simple undertaking: each spouse receives 50% of the community property and everyone walks away happy.  Unfortunately, this model property division hypothetical is the exception to the normal divorce property division.  Instead, even the division of property is typically affected with the spouses’ emotional entrenchment (“that throw pillow should be mine because I went out and bought all of the decorative things in the house and he has no style or appreciation for beautiful things! He put his beers on it when he watched football!” or “the giant TV should be mine because 90% of its use was for football games and she hates football! She’ll probably just watch interior decorating shows!”). So, what do we do if the parties want certain things? We equalize!

I’ll use a simple example of an equalization chart to explain how this all works. First, let’s look at the personal property each spouse wants from the divorce:

Description Value To Husband To Wife
Truck $20,000 $20,000 $0
Truck loan ($10,000) ($10,000) $0
Car $10,000 $0 $10,000
Car loan ($5,000) $0 ($5,000)
600 in. TV $1,000 $1,000 $0
Decorative elements $300 $0 $300
TOTAL $16,300 $11,000 $5,300

As you can see, Husband received $11,000 worth of community property and Wife received $5,300 worth of community property.  Based on this math, there is a $5,700 difference in property award, favoring Husband:

11000husbands-property-award-3

If this was all the spouses had to divide, Husband would owe Wife a $2,850 equalization payment, or one half of the difference in community property:

11000husbands-property-award-5

So, how does Husband pay this equalization payment? Check? Cash? The preference is to try and use the community property to complete the equalization. To illustrate, let’s add the following property:

Description Value
Checking account 1 $6,000
Savings account 1 $20,000

With accounts like this involved, we can adjust the individual award of the assets to deal with the equalization rather than having to pay Wife cash:

Description Value To Husband To Wife
Checking 1 $6,000 $150 $5,850
Savings 1 $20,000 $10,000 $10,000

As you can see, we adjusted Husband’s 50% interest in “Checking 1” by taking the $2,850 equalization payment due to Wife out of his share ($3,000), leaving him with $150.  This final tweak in asset division results in the following:

Description Value To Husband To Wife
Truck $20,000 $20,000 $0
Truck loan ($10,000) ($10,000) $0
Car $10,000 $0 $10,000
Car loan ($5,000) $0 ($5,000)
600 in. TV $1,000 $1,000 $0
Decorative elements $300 $0 $300
Checking 1 $6,000 $150 $5,850
Savings 1 $20,000 $10,000 $10,000
TOTAL $42,300 $21,150 $21,150

Now, both Husband and Wife walk away with equal amounts of community property, we don’t have to exchange money, and everyone is a little happier (maybe). There are a number of ways to accomplish the above equalization. Obviously, this example is very simple, but the general idea applies to most cases.

If you have questions regarding the division of community property or equalizations, feel free to contact me.

 

 

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