Asset and Wealth Identification & Valuation
Asset and Wealth Identification & Valuation
Often times, high net worth clients ask divorce lawyers how quickly they can get divorced. I explain to them the overall process, the steps necessary in order to complete the divorce and generally how long it’s going to take. Sometimes a high net worth client will tell me that he is “keeping what I have” and she is “keeping what she has.” I tell the client that if the other spouse will agree to those terms then a divorce decree simply has to be drawn up, reviewed, signed by both parties and submitted to the Court. The client inevitably responds ‘great, draw one up.’
This is where asset and wealth identification and valuation come in. It’s a fundamental part of any divorce and simply cannot be skipped. Ever. Here’s why.
The Importance of Asset and Wealth Identification & Valuation
When divorce lawyers draft the divorce decree, and the lawyers don’t know what the parties own, then those assets not known will not be included in the divorce decree. If any asset is not listed in a divorce decree then it is not divided and neither the client nor the spouse owns it. It’s treated as an undivided asset and subject to later division. Basically the divorce isn’t final.
Steps to Asset and Wealth Identification & Valuation
The first step in asset and wealth identification and valuation begins with the client filling out a list of the property and debts that exist. This list is typically called an Inventory and Appraisement. It’s simply a listing of each asset and debt along with basic information for that asset or debt.
Typical items in an Inventory and Appraisement are:
- account numbers;
- house value (fair market value minus mortgage(s);
- current amounts owed on credit cards;
- current amount in a particular bank account or investment account;
- share(s) of stock;
- and/or values of cars.
After the client puts in some work, these details are usually pretty easy for a client to ascertain enter on the list and complete. Typically the client then returns the Inventory back to the divorce lawyer, the divorce lawyer and client review and edit it together and then the divorce lawyer and the client can start talking about settlement proposals based on what is in the marital estate. In an ideal world, this is a relatively easy process. Sometimes it’s not.
Some assets unfortunately are not easily valued and require additional work in order to set that value. Typical assets that sometimes do not have an immediately apparent value are: a closely held small business (Corporations, LLC, Partnerships and Professional Practices), annuities and pensions, included survivorship benefits, and oil and gas Interests.
These assets, among others, can pose special problems for valuation.
Closely Held Businesses (non-publically traded companies usually only consisting of a few shareholders or members): The divorce lawyer is going to check to see if there have been any changes in the company equity to see how much a new partner or shareholder paid to buy into the entity. If there is a recent change, then it will give a basis for valuing each share or unit. For example; if a new member purchases 100 units of an LLC at $250,000, then each share was valued at $2,500.00 ($250,000 / 100 = $2500). You simply take how many units the marital estate owns and multiply it by the value. Another way to value closely held business interests is to look at the operating or company agreement. Usually there are restrictions on transferring ownership which would affect value and oftentimes there are terms for buying-selling ownership in the event of divorce. These provisions have routinely been upheld and Courts follow them.
Annuities and Military Pensions: While not necessarily difficult to value, they do pose special valuation issues and considerations. One often overlooked aspect of a defined benefit plan is the survivorship benefits attached to the plan. A survivorship benefit allows the non-participant spouse to continue to receive benefits when the participant spouse dies. If you are the non-participant spouse you are going to want to elect this. It does lower the overall monthly benefit so from a value perspective it needs to be taken into consideration upon division. Additionally, it’s very difficult if not impossible to come up with a present day value (which most divorce Courts attempt to do) for an asset that has monthly payouts for an indefinite and indeterminate amount of time. Theoretically it’s not possible. Some lawyers will try to use tables for life expectancy to come up with a probable payment term based on life expectancy and actuarial tables. It really depends on which side of the table you are sitting on if this is viable or not.
Oil and Gas Interests: Oil and Gas interest have problems similar to annuities and pensions although not as restrictive from a transferability point of view. You typically have monthly payments for terms that may not be specified so coming up with a present day value, just like an annuity explained above, may be difficult.
While this list by no means is meant to be exhaustive it does illustrate some of the various valuation issues faced by a potential litigant in matrimonial court.