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Sep 29 2022

Can I use marital money to hire a law firm to start my divorce?

In almost all circumstances, the answer is going to be yes, you can.

First, once you’re married, everything that you and your spouse own is part of your marital estate. Hence you can draw from your marital estate to hire an attorney. Indeed, most people that have ever hired divorce attorneys would not have been able to do so if they were prohibited from drawing on their marital estate. The reason for this, at a minimum (other than the fact that it’s your own money and therefore you should be able to use it and spend it), is the fact that from a public policy standpoint the courts and legislature know that people act more civilly and society works better when people have sound legal advice to draw from, and therefore they want to make sure that it is available.

Technically everything you own is part of your marital estate, and it is not until you demonstrate by reasonable tracing that money was owned before the marriage (i.e. an IRA), it was inherited during the marriage, or it was a gift (to just you — not you and your spouse). Nonetheless, drawing from these funds, that would otherwise be your nonmarital cut-out, is totally permissible.

Sometimes there are tax ramifications, such as if you are not yet 59.5 years of age when you are cashing out an IRA. In that case, there is likely to be a tax consequence, and you might not get the total amount. Some plan administrators will automatically withhold 20% of whatever you’re looking to cash out, and thus, if you were taking out $10K, you’re only going to end up with $8K while the administrator redirects the remaining $2K to the U. S. Treasury. Nonetheless, that doesn’t change whether you’re allowed to do it because, once again, that public policy wants you to have legal advice.

Further, if you’ve either already initiated the divorce on your own behalf (such as you’ve served you opposing well your soon-to-be ex-spouse with a summons and petition for divorce, or you have been served a summons and petition for divorce), you can still spend either liquid marital equity or convert an asset such as an IRA to liquid equity to hire an attorney. You’ll note on the first page of the summons that it explicitly bars you from spending any money save for four options: 1) by written agreement of you and your spouse; 2) for the necessities of life as you have to purchase groceries, buy gas and pay your mortgage; 3) for the continuation of a business if you are self-employed, and 4) to hire an attorney. Thus, you have a specific permission there.

While you’re able to do this at the beginning or before the divorce, there may be some ramifications later upon the resolution of the divorce. One is that if you are divorced by December 31st, you and your ex-spouse will be filing separate tax returns. Your administrator will issue a 1099 that states you took out $10K and $2K was withheld; if your tax liability on that $10K is more than $2K, you will be on the hook for that solely.

Further, I’ve also seen a portion of a litigant’s attorney’s fees that were paid from the marital estate mathematically put on the asset balance sheet and considered a pre-distribution of the marital estate. When we do this for money spent it is as if you just took that portion of your estate early and then chose to spend it before the division. This however is usually for large total sums of attorney’s fees and not just the funds used to start the divorce.

The caveat I gave you at the beginning in saying that its “almost” always acceptable relies upon two primary exceptions:

  1. In hiring an attorney, did you just spend all the money for paying that month’s childcare, groceries, and the mortgage? If so, that decision is not going to turn out well, and you will likely find yourself in a place where the money goes back to pay for those expenses, you are without an attorney, and you still owe the attorney for whatever work the attorney did.
  2. If your spouse is self-employed and you still have access to business accounts, if you draft from those accounts (reasoning that everything you and your spouse own is part of the marital estate) in an unreasonable fashion such that it compromises the ability of the company to continue, that decision is also going to backfire badly. Even worse, perhaps your spouse is not self-employed by themselves but co-owns the business with partners or shareholders — that business is a separate legal entity and now that decision is criminal theft, regardless of the fact that it’s owned in part by your spouse (even if your spouse owns a majority share). So that’s very impermissible.

 

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