To be in a position to understand how to fairly divide assets and obligations in a divorce, we need to know their value. For complying with the Court’s disclosure requirements we are also required to place values on everything. For many assets this is an easy task. For items such as bank accounts, investment accounts, cash balance retirement accounts and credit cards, it is as simple as getting the most current statement. Other assets such as the family home, the family business, furniture and furnishings, and pensions don’t usually have a document to confirm their value. In this week’s blog we explore some considerations involved in the decision to pay for appraisals and valuations as we address these issues in a divorce. These considerations include complying with disclosure, understanding how the asset will be divided, and what is required if enlisting the Court to make the decision.
Disclosure requirements and estimates. For assets that have documents verifying values, the Court’s requirement is that the stated value be included in the disclosure and the supporting documents be exchanged between the parties. For assets such as the ones mentioned above, the parties can provide educated estimates of value to comply with the disclosure requirement. For compliance a value needs to be provided but a formal appraisal or valuation is not required if the party has another means to provide an accurate estimated value. For example, when listing furniture and furnishings a party can estimate the value of their household items without needing to have someone come and appraise each item. For the family residence, a party can make an educated guess on value based on their personal knowledge of what houses in the neighborhood are selling for or based on information they have gathered from Realtors, or otherwise to indicate value.
Things get a little more complicated with business values. You can go online and find formulas that might help you make an educated guess on values. For small businesses this may be an economical way to address disclosure. With bigger businesses it may be a risky approach because while you are allowed to use informal means to value your assets based on personal knowledge, if you provide inaccurate values it may be grounds to set the division aside or may even give rise to punitive consequences if it is determined the valuation was intentionally misleading.
How will the asset be divided? Figuring out how the asset will be divided is another big consideration is the decision on whether or not to have something valued. Let’s run through a few examples when a formal appraisal or valuation might or might not make sense.
The family home. If the family home will be sold to accomplish the division then it probably does not make sense to proceed with an appraisal to determine the value. When you work with the Realtor who will help you sell the home, they will be able to guide you on the listing price without the need to appraise. When the disclosure is completed the estimated value will be sufficient as in the end the value will be set at whatever it sells for. If one spouse is going to buy out the other then it makes a lot more sense to invest in an appraisal. Since any buyout will be based on the estimated value, it becomes important to try to be as accurate as possible so that both spouses are treated fairly. An appraisal is not required if the parties can agree upon the value, but the investment in an appraisal is justified given the anticipated buyout.
Furniture and furnishings. A common approach to dividing the furniture is for the couple to agree upon an equal division. If they are able to do so then the actual valuation becomes less important and for disclosure purposes an estimation of a cumulative garage sale value for the assets will suffice. If one spouse plans to keep more than half of the items, figuring out a reasonable value becomes more important. If the parties cannot agree it may be necessary to enlist a professional to provide values.
Pension valuations. Retirement accounts such as 401(k)’s and IRA accounts will have statements that indicate the balance of retirement funds held in the accounts. Pensions, and specifically pensions that are not yet in pay status, might have statements available, but they do not typically indicate the actual value of the pension, as these other forms of retirement do. If one spouse is going to receive their pension in the overall division then it will be important to find a way to properly value the pension. There are companies that will place a value on the pension based on the projected monthly annuity amount coupled with an assessment of life expectancy tables. This valuation will be speculative but it will at least provide more than an educated guess. More typically the community interest in the pension will be divided in which case there will be no need to seek an actuarial valuation of the pension to include with the disclosure.
Businesses. If both spouses will remain in the business after divorce and will continue to jointly own it, having a valuation done to determine value may not be necessary. If one spouse will look to buy out the other, then taking a more formal approach to determining value becomes more important. There are different degrees of valuation. Formal business valuations can be expensive given the analysis required for such appraisals to meet industry standards. If both parties are open to taking a less formal approach to the valuation, they can select a professional such as a Certified Divorce Financial Analyst, to more informally look at the books, the asset and liabilities, and provide an analysis of the estimated value of the business. If the parties are in a position to settle their matter this approach can provide a fairly reliable value to assist with fashioning a fair settlement.
What about when cases don’t settle? Parties are allowed to provide opinion testimony to the Court for the Judge’s consideration when determining the value of assets to be divided by the Court. With that said, the Court is going to provide the most weight to any evidence provided by a qualified valuation professional or a certified appraiser. If you will enlist the Court to divide furniture and furnishings, they will require evidence of values or will assign a professional to provide such information. For real estate you will need to provide a certified appraisal. For a business, the Court is going to require a formal appraisal. Litigating the property division will result in the need to provide the Court with as accurate of information as possible. Investing the money in more formal valuations may very well be necessary.
Before investing time, money and energy into having formal appraisals and valuations of assets in the divorce that don’t have clear values, it is important to first consider how things will sensibly be divided. If assets are going to be sold, or equally divided, it may not be necessary to spend money on valuations. If one spouse will be buying out the other or if the division will need to be addressed by the Court, it will likely become much more important to invest in getting an accurate valuation of the assets in question. The Court’s disclosure requirements are focused on making sure both spouses have a clear understanding of what things are worth before proceeding with division. It is important to make use of valuations and appraisals to assure well informed decisions are able to be made.