On behalf of The Marks Law Firm, L.L.C. posted in Divorce and Property Division on Wednesday, July 16, 2014
With the Dow Jones hitting record levels, we thought this would be an opportune time to discuss the issue of asset valuation in divorce.
Many couples own stocks, bonds, mutual funds and other securities tuned very much to the rhythms of the financial markets. Any of these assets purchased during the marriage are considered marital property (unless purchased with separate property and not titled jointly), and any increase in the value of these assets during the marriage is considered marital property.
All of these assets tied to the financial markets have values that fluctuate over time – even during the time between filing for divorce and obtaining a judgment of dissolution. How, exactly, do courts go about valuing these assets?
In one sense, the answer is very simple: a court will measure the value of the asset as of the date of dissolution.
In another sense, the answer becomes complicated because assets change over time and can affect the equal distribution of marital property.
As an example, consider an estate with two marital assets – a mutual fund with a balance of $100,000 at the time of the filing of the divorce, and a savings account with a balance of $100,000 at the time of the filing of the divorce. During the divorce proceedings, the parties reach an agreement to divide the assets by having wife keep the mutual fund and husband keep the savings account, since both believe the values of the assets to be the same. Several months later, when the judgment of dissolution is entered, the value of the mutual fund dropped to $75,000 due to a run on the market. Should the court reallocate the assets on a motion to amend the judgment because the distribution is now unequal?
A court could very well choose to do that because of the delay between an agreement and the entry of judgment – what we call “staleness of valuation” in the law. A court has a duty to divide the assets equitably, which means equally unless a party meets certain statutory requirements for an uneven distribution. The court is not watching the markets daily; rather, the court relies on the parties to produce evidence of the value of assets. For assets that fluctuate, it is important that the parties keep the court updated as to values and minimize the time between receiving evidence and judgment.
Given that assets fluctuate, how can parties protect themselves?
One method, suggested by the title of the post, is to wait to get divorced until the market is at your best position – a peak, if you want more value, or a valley, if you want to pay less out. But timing tends to be more fortuitous than strategic. And in a situation where a market-traded asset is at a low, parties should be wary of compensating a low with more of a liquid asset, given that over time the market-traded asset will turn higher. Equally dividing the marital share of a fluctuating asset protects both parties, evenly distributing the risk of gain or loss.
A better method is to think strategically in terms of asset distribution and incorporate protective provisions in the agreement. One party may want liquid assets now while the other would wait for a market-driven asset to gain value in several years. Parties willing to make such exchanges to meet their needs can do so in a separation agreement. Or perhaps both parties may reach an agreement as to distribution of market and non-market driven assets and enter a provision in a separation agreement that the distribution would change if at the time of entry of dissolution the value of the market-driven asset shifted by a certain percentage, thereby assuring truly equal division at the time of dissolution.
What about an asset that lost value during the marriage – should a spouse be forced to make compensation? For example, suppose the largest asset the parties hold is a mutual fund that had been growing by 10% each year for most of the marriage, but tanked the last two because of a downturn in the economy. Can the court impute value to the asset to help one spouse? Generally, no – unless the parties agree otherwise. The court must value the asset as of the time of dissolution and divide equitably. Inherent in valuation of market-driven assets is the issue of risk – one both parties assume by purchasing that kind of asset. The court can correct for stale valuation but not for bad luck.
If you have questions about asset valuation in divorce, contact us – we can help.