First of all, what is an equalization amount?
An equalization amount is the amount of property that needs to be shifted from one party to the other in order to achieve a 50/50 split. (It could be another split, but it is typically 50/50. It is whatever movement in property from one party to the other that is needed in order to achieve the desired division of property.)
For example, if one party currently has $60,000 of property assigned to them and the other party currently has $40,000 of property assigned to them, then the equalization amount is $10,000. If $10,000 is shifted from one party to the other comment then both parties will have $50,000, and we will have achieved a 50/50 split.
(For what it is worth, you can calculate the equalization amount by taking the difference between the two current amounts and dividing by two. In this case, the difference was $60,000 – $40,000 = $20,000. Dividing $20,000 by 2 gives us our $10,000 equalization amount.)
All right, so why is there not an equalization amount on the after-tax property page?
The reason is that there actually is no single equalization amount for the after tax property page.
Consider the following example.
Suppose there are three assets:
- A pension with a pre-tax value of $200,000 and an after tax value of $120,000 to Party A and $150,000 to Party B.
- An investment account with a pre tax value of $200,000 and and after tax value of $160,000 to Party A and $180,000 to Party B.
- A checking account with $50,000 in it, which is worth $50,000 on an after-tax basis to both parties.
And suppose that, so far, Party A has all of the pension, Party B has all of the investment account, and the checking account is split 50/50.
On a pretax basis, the property is divided 50/50, with each party having $225,000 of assets.
But on an after tax basis, the property is divided $120,000+$25,000 vs $180,000+$25,000, or $145,000 vs $205,000 which far from equal.
So how do we equalize?
If we use the checking account, we move $30,000 from Party B to Party A, and both parties then have $175,000 after tax. So if we use the checking account to equalize, the equalization amount is $30,000.
That was easy!
But what if we use the investment account to equalize? Then it is a bit more complicated.
If we use the investment account to equalize, the after-tax values are equalized when we move $35,290 of the investment asset from Party B to Party A (*). So the equalization amount would be $35,290, not $30,000.
And if we were to have used the pension to equalize, we would have had a different equalization amount still.
From this example, you can see that there is not one equalization amount, because it depends on which assets are used to effect the after-tax equalization.
Now you might say, “well, just show me the after-tax Equalization amount.” We could do it, but it is not a helpful number.
In this case, the after-tax equalization amount is $30,000.
But unless that amount is available in a checking account — which does not often happen — knowing the after tax equalization amount is not helpful, Because it does not tell me how much assets need to be shifted in order to equalize assets on an after-tax basis.
So, for now, this is a guess-and-check process, where you shift assets from one party to the other and check the outcome, until you reach your desired target.
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(*) To check the calculation of the equalization amount:
For the investment account, Party A is paying 20% in tax and Party B is paying 10% in tax.
- After the transfer, but prior to tax, with regard to the investment asset, Party A has $35,290 and Party B has $164,710.
- After tax, with regard to the investment asset, Party A has ($35,290 * 0.8) = $28,232, and Party B has ($164,710 * 0.9) = $148,239.
- Now, on an after-tax basis, Party A has the $120,000 pension + $28,232 investment asset + $25,000 cash = $173,232.
- And, on an after-tax basis, Party B has $148,239 of the investment asset and $25,000 cash = $173,239, effectively the same as Party A.
- So $35,290 was our equalization amount.