Step 3: Value the Assets
Step Three is valuing the assets. This is where things can get complicated, so in a moment we’ll go through the categories of assets to see how this is done. Take note that the discussion below assumes that the parties are unable to agree on a value. To the extent that they can agree, then they can stipulate to that value for trial and settlement purposes, and nothing more needs to be done to establish value.
A note about appraisals and appraisers. Sometimes the only way to get an accurate value is to have the asset professionally appraised. Professional appraisers can be expensive. If both sides hire their own appraiser, there is a likelihood that the appraisers will arrive at different values, and it can be difficult for the judge to know which value to accept.
For that reason, litigants will often agree that the court will appoint an agreed-upon appraiser and split the cost of the appraisal. The benefit to this arrangement is that it lessens the respective cost that each party has to bear. Also, agreed-upon appraisals often result in agreed-upon values. The downside is that it can be difficult to convince the judge to reject an agreed-upon appraisal, even if it is just plain wrong.
An entirely different approach is to forego valuing an asset altogether and simply agree to divide it, whatever its worth. Unliquidated or contingent assets (e.g., a pending lawsuit that may or may not ever turn into actual money) are difficult to value with any certainty, so it often makes sense to say, for example, that each spouse will get 50 percent of the claim/asset.
Valuation of Specific Assets
Real Property Interests. These can of course be professionally appraised. However, parties can prove value by giving testimony of what they think their property is worth and the basis of their opinion.
Vehicles. Online databases for vehicles, including watercraft, aircraft, ATVs, tractors, and just about anything else with an engine can provide values. For big-ticket items, it’s probably worth it to hire a professional appraiser. Again, parties can testify about what they think their vehicles are worth.
Financial Accounts. This includes not only bank accounts, but also investment and retirement accounts. Valuing these accounts usually requires nothing more than an account statement from the date selected during Step One (“Pick a Date”).
Defined Benefit Plans. Some examples of defined benefit plans are a public employee’s PERS account, a federal employee’s FERS account, or a railroad worker’s pension account. Unlike 401(k) and IRA accounts, a spouse’s interest in a defined benefit plan cannot be valued merely by looking at a statement.
It is usually not difficult to obtain a statement of contributions that have been made into a defined benefit plan. But in many situations, this statement will not reflect the value of the employee’s interest in the plan. For example, a lifetime public employee might have $120,000 in PERS contributions, but the value of the PERS account will be significantly more, especially as the spouse nears retirement age.
The bottom line is that it will often require an expert to properly value an employee’s interest in a defined benefit plan.
Businesses. Properly valuing a business or a spouse’s interest in a business is a complicated subject. You can read the fine details here. The “Executive Summary” version is that in Mississippi, for purposes of a divorce, a business is not valued on the basis of what the business could be sold for or the income that it can produce. Instead, it is valued on the basis of what it would yield after its assets were sold off and its debts liquidated. This is a controversial approach to valuation.
Stock Options. Normally, stock options are valued under what is known as the “Black-Scholes model.” There are more complicated models of valuation, such as the “Monte Carlo Simulation” method, and variations of a lattice method. These are not details that you will need to master. Mississippi law has not clearly delineated which of these methods (if any) should be used in divorce. Suffice it to say that you will have to review this with your attorney and almost certainly hire a professional appraiser, particularly if the options are not in a publicly traded company.
Intellectual Property. Unless the asset has a fixed life and an extremely stable earning history, a professional appraisal will probably be required.
Personal Property. After you have made a list of the household furnishings, furniture, jewelry, collections, art, and firearms and ammunition, you should list the value for each item on your list. We will discuss the concept of “measure of value” below, but the important thing to remember here is that when you are listing value, you are not listing how much you paid for the item in question or what it would cost to replace the item. Instead, the value to use it what you could sell it for.
Most of the items in a house will only fetch “garage sale value.” You might have paid $1,600 for your home computer, but could you even get $50 for it if you tried to sell it? For divorce purposes, its value is $50 or less, not $1,600. Similarly, your jewelry might be insured for $100,000, but unless you own a jewelry store, there’s a good chance that for divorce purposes, your jewelry is only worth a fraction of its insured value.
Our experience is that litigants often have wildly inaccurate opinions of the value of their furniture, art, jewelry, firearms, and so forth. It is often worth the fairly nominal fee to have a professional appraiser value the family’s personal property.
Debt (as an Asset). If someone owes you money, that debt is an asset that should be listed, whether it is in the form of a promissory note or merely an oral promise to repay. Note that debt owed to a spouse’s business should not be listed, since that debt will be included in the business valuation. Any concerns that the debt will not in fact be paid should be communicated to the judge. On the other hand, if the debt is secured, that fact should be disclosed as well.
Debt (as an Obligation). Loan statements, credit card statements, etc. should prove the amount of debt owed within 30 days of the date picked under Step One (“Pick a Date”).
Four other things to know about valuation.
Fair Market Value
We have already touched on the notion that personal property is to be valued at “garage sale value” or “as is” value. In other words, the wrong way to value an asset for divorce is to list it at what it originally cost, or what it would cost now to replace, or what it is insured for.
Instead, an asset should be valued at “fair market value.” IRS Revenue Ruling 59-60 defines it as “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”
Commissions and Other Costs of Sale
Real estate agents charge five to six percent commissions on the sale of a house. There is an argument to be made that the value of the house should be reduced by this commission, particularly where the house will be sold (and the commission incurred) shortly after the divorce is completed. Courts are split on this question.
Taxes
Suppose one spouse has a 401(k) with a balance of $100,000, while the other has a savings account with $100,000. Are they worth the same? Not really, since the 401(k) can’t be accessed without paying 20 percent in taxes and maybe a 10 percent withdrawal penalty. Many assets have a built-in tax that springs into being once you try to turn the asset into money (think capital gains taxes).
A Practical Note on Valuing Assets
Listing the right value for the assets of the marriage is one of the most important projects in a divorce case. Your case is far easier to negotiate (or take to trial) once you and your lawyer have a comprehensive list of assets and reliable evidence of the value of each item on the list.
Ideally, you will have a chart that shows all of the assets (and debts), with a value for each item on the chart, and a short description of the document that supports that value. You can view an example of such a chart HERE.
Valuation can be a difficult, time-consuming project. One of the easiest ways to get a good result at trial is to tackle this project in the first month or two (although that isn’t always possible). On the other hand, one of the surest ways to leave money on the table is to take a slipshod, wait-until-the-last-minute approach to valuing assets.
