How Financial Experts Can Help in Divorce

Divorce involves complex financial issues. Fortunately, a financial professional can help the parties resolve such matters as divvying up a marital estate and valuing private business interests. It’s also important for the parties to understand the tax implications of various settlement options under current tax law.

Dividing Up the Marital Estate

The first step is to compile a marital balance sheet. The couple may own such assets as:

• Savings and checking accounts,
• Vehicles and equipment,
• Principal residences, vacation homes, and other real property,
• 401(k) accounts, IRAs, pensions, and other retirement savings,
• Marketable securities,
• Private business interests, and
• Jewelry, artwork, furniture and other personal assets.

Examples of marital liabilities include credit card debt, student loans, vehicle loans, home mortgages and lines of credit, and retirement account loans. Whether the couple’s individual assets and liabilities are includable in the marital estate is generally a matter of law, which varies from state to state.

Once marital assets and liabilities have been cataloged, values must be assigned to each item. The value of bank accounts, retirement accounts, and debts can be taken from the latest account statement. But other items, such as real estate, collectibles, and private business interests, may require an independent outside appraisal — or they may be sold to a third party, so the spouses can share the proceeds.

When the parties own an interest in a closely held business, selling usually isn’t an option. Instead, a business valuation expert is used to determine its “fair value.” Any value that’s not attributable to net tangible assets and identifiable intangible assets is considered “goodwill.” The treatment of goodwill in divorce varies from state to state. Your expert can help determine the extent to which goodwill is includable in the marital estate based on the specific facts and circumstances.

Factoring Taxes Into the Equation

In general, assets can be transferred between spouses tax-free, but the transfers may be subject to certain rules and restrictions. It’s also important to consider that assets may trigger varying tax liabilities if they’re eventually sold for a gain.

For example, the Chavezes have two major assets: 1) an investment account with a current market value of $200,000, and 2) a principal residence valued at $500,000 with a $300,000 remaining mortgage (a net value of $200,000). At first glance, it might seem equitable to give one spouse the investment account and the other the house with the mortgage.

However, after factoring in taxes, the division might not be exactly 50/50. Suppose the investment account has a tax basis of $50,000. If sold, the account would generate a taxable gain of $150,000. On the other hand, a capital gain of up to $250,000 (or $500,000 for married people who file a joint tax return) from the sale of a principal residence may be excluded from taxable income, if certain conditions are met.

Need Help?

Divorce can be emotionally charged, and the parties may not be familiar with the financial issues that can arise. An outside financial expert can provide objective guidance on how to value assets and distribute them equitably in light of the spouses’ personal preferences, potential taxes, applicable state law, and required child support and alimony payments.