How Courts Value Marital Assets During Divorce

Splitting everything down the middle sounds like a fair deal. Then you realize someone has to decide what everything is worth—someone you don’t know.

Before a court can approve an asset division, it must decide what each one is worth, from the house and the 401(k) to the family business and the bass boat in the driveway. Those numbers are seldom easy or obvious, and a bad figure on any one asset can tilt the whole settlement.

The Valuation Date Can Change the Number

It’s not enough to tag each asset with a value. There needs to be a date attached.

A stock portfolio can swing tens of thousands of dollars between the day one spouse files for divorce and the day of the trial. A house also can gain or lose value over a long and contentious divorce.

The exact day that each asset’s value is frozen can vary by state.

Ohio, for example, generally treats the marriage as running through the final hearing, though a judge can choose different dates if those would be unfair. Florida draws a firm line for deciding what counts as marital property, usually the filing date or the date of a separation agreement.

It then lets the judge pick whatever valuation date is fair and even value different assets on different dates.

Commingled assets add another wrinkle. When a savings account you owned before the wedding has absorbed years of paychecks, someone has to dig into it and trace which dollars belong to whom as of the valuation date.

That paper trail is rarely tidy.

Appraising the House and Everything in It

Fair market value. That’s the standard that courts start with when it comes to appraising marital property.

Fair market value is what a willing buyer would pay a willing seller. For the house, a real estate agent’s comparative market analysis could be enough when both spouses roughly agree on the number. When they don’t, or when the house is the biggest asset in the case, a licensed appraiser’s report carries far more weight.

Personal property follows the same rule. Fair market value in divorce means what your furniture would fetch today, which is usually far less than it would cost to replace. The $4,000 sectional you bought three years ago might fetch a few hundred dollars from a stranger. Jewelry, art, and collectibles are different situations.

Each could deserve an appraisal of its own.

Valuing a Business Without a Price Tag

A family business doesn’t have a sticker price attached. That is why business valuation in divorce often leads to the most expensive disagreements. Valuation experts tend to look at it three ways:

• What the business earns
• What similar companies sell for
• What its assets are worth after debts are settled

A lot rides on the approach a judge finds most appropriate. Goodwill complicates things further because many states split it into two parts.

Enterprise goodwill belongs to the business, its name and its location, and it’s typically divisible. Personal goodwill rides on the owner’s own skill and reputation, and states including Texas and Florida generally keep it out of the marital estate.

Forensic accounting in divorce comes into play when the books don’t match the lifestyle. A forensic accountant can trace money out of the company, spot personal expenses run through the business, and test whether a sudden drop in revenue is real or just conveniently timed.

Retirement Accounts and the Hidden Tax Bill

A 401(k) at least comes with a statement. A pension is harder to value because it’s a promise of future checks rather than a pile of accumulated money. Courts usually rely on one of two pension valuation methods.

With the immediate offset method, an actuary calculates what the pension is worth today, and the employee spouse keeps it while the other spouse takes other assets worth their share.

With the deferred distribution method, the court waits until benefits are paid and then splits each check, often by the share of the pension earned during the marriage.

Dividing most workplace plans takes a qualified domestic relations order, a court order that tells the plan administrator how to pay the other spouse. The Department of Labor’s guide walks through how those orders work.

Payments to a former spouse under one also escape the 10 percent early withdrawal penalty, though income tax still applies, and IRAs follow different rules.

Taxes shape the rest of the math, as well. A $100,000 savings account and a $100,000 traditional IRA look identical on a spreadsheet, but only one of them has already been taxed. Property transferred between spouses in a divorce generally isn’t taxed at the time, according to IRS Publication 504, but the spouse who receives it also inherits the original tax basis.

If you keep the house with a big built-in gain, you’ll have to pay the eventual tax bill on that gain.

Get the Real Numbers Before You Divide Them

A fair split depends on honest numbers, and honest numbers depend on the right date, the right method, and a clear look at the taxes behind them.

Davis & Associates works through those questions with you before anything gets signed. Our custom monthly pricing also means you know your legal costs up front, so you have one less number to worry about.

If your divorce involves a house, a business, or a retirement account, reach out to our firm to talk through your options.