Dividing assets in a divorce

Dividing your property can be one of the most challenging and convoluted aspects of your divorce. What appears to be an easy decision such as I want the house, you keep the cars, may in the end deliver you a settlement you hadn't bargained for.

Janet and Jake are getting divorced and they are both age 64. They had two assets: a 401k worth $120,000 and a money market worth $120,000. Janet was really concerned about retirement and wanted to take the retirement fund. It felt more secure to her. Two years later, they each wanted to buy a small house. Jake took $90,000 for a down payment out of his money market fund to make the down payment on his house. Janet asked for $90,000 from the 401k to make a down payment on her house but the net amount she realized was only $60,000 due to the taxes she owed on money from a retirement fund!

Remember that you cannot compare a cash account with a retirement fund because of the tax issues. This is one area that many people do not think about.

Big mistake in divorce

There are lots of mistakes made in getting divorced. Let me tell you about one of my very first clients.

During their marriage, Joyce's husband had done all of the investing of their money. He had chosen all of the investments, and made all of the financial decisions. At divorce time, he said, "Let's just split everything 50/50. You take this half of the investments and I'll take that half. Is that okay?" Joyce thought that sounded pretty fair so she agreed. She talked to her attorney and the attorney thought it sounded okay, too.

Joyce came to me after the divorce to do a financial plan and I saw what really happened. What no one realized - Joyce, her attorney, and the judge - was that Joyce's half of the investments included all the limited partnerships. They are known to be illiquid and high risk. She couldn't get at the money - it was all tied up for years. And the worst part was that she owed an additional $18,000 in taxes because of the way the partnerships were structured!

If Joyce had only come to me before her divorce was final so that I could look at the assets, I could have explained to her how the different assets worked and she could have made a more intelligent decision.

It is so important for people going through divorce to consult with a trained financial divorce professional. We often know more about their assets than their attorney!

Problems with dividing a business in divorce

Joyce was married to Carl who owned a large business in Denver. During their divorce proceedings, the value of the business was furnished by the CPA who worked for the business. He said the value was $360,000. We wanted Joyce to get the business appraised but she was nervous about the high cost of an appraisal (about $4,500). Then Joyce said, "Do you think it really could only be worth $360,000? I worked there last summer and I know they take in several million dollars a year."

Well, we finally talked Joyce into getting the business appraised by an outside appraiser. The final value came in at $850,000 - a good return on her investment! Lesson: Don't use an employee of the business to give you the appraised value, especially if he works for the other side!

The worst case of dividing a business

But the worst situation of dividing a business was one I was involved with on the East coast. The husband owned a large business that he said was worth $6 million and that the wife would get half - or $3 million. We tried to convince her to get it appraised, but husband was threatening to make trouble over the children if she messed with his business and she didn't want that. He did offer to pay her $10,000 per month for 10 years so she could continue her lifestyle without having to work. She thought that was fair. No matter what we said to her, she was firm and she took his offer.

Result? Within 6 months, he sold his business for $67 million! Now you know, he must have been in the middle of negotiations when the divorce took place.