Valuing Assets in Divorce Proceedings: An In-Depth Review of the Various Factors Used to Determine a Valuation Date
By Toni Megna, Manager, Advisory Services
Once a divorce case progresses past the initial discovery of documents and identification of the marital and/or community assets and liabilities, the forensic accountant has the task of determining the date of valuation of each. This often includes valuing assets at multiple dates, tracing the differences, and deciding the best date to use.
There are many asset valuation dates depending on state laws and the facts and circumstances of each case. In some cases, not every asset and liability have to be valued as of the same date, however consistency and tracing are important to ensure there isn’t double counting of the same asset. The most commonly used valuation dates are the date of legal separation, the date of filing the action for divorce (also known as date of petition in most states), an agreed upon date between the parties, the date of settlement, and/or the date of trial or distribution. All but six states recognize legal separations in lieu or as a preamble to a divorce filing (states that do not are Delaware, Florida, Georgia, Mississippi, Pennsylvania, and Texas). Many states leave the valuation date to the court’s discretion after hearing testimony from each side as to the date they believe assets should be valued. Different assets may be valued at different dates.
Passive vs. Active
In states where there is discretion, the forensic accountant can help determine based on the facts in evidence the assets and liabilities as passive or active to determine the valuation date of each. Passive assets and liabilities values fluctuate with their market value and are not affected directly by the actions of either party to the divorce case. Using the most current date, either the date of trial or settlement, to determine the value of passive assets is most common. Neither side benefits or is harmed with the passing of time it takes to litigate a case. Examples of passive assets and liabilities include:
- Real property that isn’t being improved during litigation
- Publicly traded stocks in the market
Active assets and liabilities values are directly or indirectly affected by the actions of the parties. In this situation, the courts generally utilize valuation dates closer to when the marriage broke down, as of the legal separation or filing of the action of divorce. This precludes one party’s efforts from affecting the other’s settlement whether positively or negatively, as well as segregating the positive or negative impact of one party’s efforts. Examples of active assets and liabilities include:
- Income tax liabilities generated from one party’s post-filing earnings
- Owner operated businesses with post-filing efforts
There are assets that have a hybrid of both, where the forensic accountant tries to parse out the amount to be included in the division of marital assets. 401(k) plans that have publicly traded investments (passive) and contributions from the employer as post-filing earnings (active) can be allocated to separate the value into marital and non-marital components based on the chosen valuation date.
Change in Value from Date of Filing through Trial or Settlement
The ultimate determination of the marital net worth and division of assets between the parties may result in an equalization payment from one party to the other. Differing valuation dates result in different marital net worth totals and resulting equalization payments.
What’s the solution when you are restrained by a valuation date that isn’t in line with the passive and active theory above? In states where assets must be valued as of the date of filing of divorce, but are being distributed as of a current date, who receives the benefit of the overage or takes the loss on the shortfall? For example, in the last few years due to economic uncertainties, brokerage accounts and retirement plans invested in publicly traded securities saw fluctuation from quarter to quarter. Assume a brokerage account holding various stocks had a balance as of date of filing of $100,000 but as of the date of trial decreased to $50,000 purely due to market change. If one party receives the full account, there is a $50,000 overstatement in the division and equalization calculation. If the parties split this asset, they share in the decreased value and the equalization payment is not affected.
Dissipation vs. Allowed Spending
How should the forensic accountant treat assets and liabilities without an obvious valuation date? For example, cash accounts historically used for a variety of purposes like depositing income, spending on lifestyle expenses, and transfers. Is the date of filing balance or the date of trial balance appropriate to use? Depending on the jurisdiction, here are a few factors to consider:
- Is post-filing earned income marital or non-marital? If it is non-marital, the party earning the income will want the valuation date to stop when the divorce is filed so they may keep the change in account balance which includes post-filing effort to earn the income as their non-marital asset.
- Is there a status quo order in place which says the historically paid expenses must be maintained during litigation? The account paying such expenses would have a valuation date as of most current because the expenses are allowed.
Cash deposits and spending during the litigation must be traced to determine whether the funds were spent on appropriate expenses or transferred to other accounts being included in the net worth calculation. The expenses paid may be considered all above board and deemed to be similar to the custom, habit, and practice of spending during the marriage. On the other hand, what if one spouse starts to waste funds on gambling or an extramarital significant other? When the only option is to value as of the most current date, a solution can be to prepare a list of credits due between the parties. This recapture is “below the line” of division of assets and equalization payments. To make each party whole, the forensic accountant will remedy each side for their share of what “would have been” if not for the dissipation.
Valuing assets in divorce litigation is not always cut and dry. A forensic accountant can be useful to help the attorneys and parties not only identify assets and liabilities, but provide a roadmap for the valuation date, value of each, and facts supporting the classification for marital, non-marital, community, or separate, in assisting the Court to an ultimate appropriate resolution.