Property Valuations During Divorce

Property division is often one of the most complex aspects of the divorce process. Whether for the purposes of mediation, negotiation, collaboration, or litigation, property valuations are typically necessary to determine how much certain assets are worth. Some types of marital property, such as defined contribution retirement accounts, have a straightforward value as of a specific date. However, valuing assets like the defined benefit retirement accounts, the marital home, and family businesses can be much more complicated.

Key Takeaways

• Property valuation is the process of assigning a dollar value to marital property for the purpose of equitable division during the divorce process.
• While certain assets are straightforward to value, others such as the marital home and family businesses can be much more complex.
• Typically the first step is to value all marital assets based on the type of asset: cash or equivalent; real estate; retirement accounts (again by Roth, defined contribution, or defined benefit), brokerage accounts and other financial investments, business interests, and high value personal property. Once this is done, trading between types of assets, after considering taxes, transaction costs, and time factors, can occur with more fairness.
• There are three methods that can be used to value a business: the asset approach, the income approach, and the market approach.

Valuation vs. Classification: What’s the Difference?

Property valuations and classifications are not the same thing. Classification refers to the designation each asset receives, and whether it is characterized as marital or separate property for the purpose of equitable distribution. Valuation is the process of assigning a dollar value to each piece of marital property, whether it is tangible or intangible, so that it can be divided fairly between the spouses. In most circumstances, the value assigned is the “fair market value.”

What is Fair Market Value?

When it comes to property valuations in divorce, the fair market value of an asset is defined as the price a willing buyer would pay to a willing seller to purchase it on the open market, with neither party under compulsion to complete the transaction. Needless to say, this can create a myriad of issues during the divorce process. For this reason, qualified appraisals may be necessary to establish the true value of the asset for equitable distribution.

Valuing the Family Home

When a divorcing couple sells the family home as part of a divorce, they often (but not always) divide the net-equity of the house. Net-equity is the market value of the home (in this case the gross sales price) minus the balance of any mortgages and other costs associated with the sale of the home. Although tax assessments can sometimes be used to calculate the value of real estate, these may differ significantly from the true market value of the property. It is usually necessary to conduct a comparative market analysis or have a professional appraiser with knowledge of the local housing market determine the specific value of the home.

There are two ways the marital home can be sold as part of a divorce: the couple may agree on the sale and divide the proceeds (minus the costs associated with the sale) between them or a court may order it. In the event a court orders the home to be sold, a trustee is often appointed to facilitate the sale and divide the remaining proceeds after the costs of the sale, the trustee’s fee, and any other necessary costs have been deducted. When one spouse buys out the other spouse and keeps the home, these costs may or may not be considered in the valuation as part of the negotiations.

What Are the Three Approaches to Valuing a Business?

There are three approaches used for valuing a business in a divorce. While each approach has specific strengths and weaknesses, some provide a more reliable conclusion than others, depending on the circumstances. While a skilled valuation expert will consider all three, it is often the case that they should not all be applied. Ultimately, it is the responsibility of the parties and their attorneys to persuade the court (or other expert) that their expert’s valuation conclusion is more reliable than the other’s.

The three approaches used when valuing a business include:

1. The asset approach: This approach involves determining the net value of the company by calculating the total value of all assets, minus liabilities. This is often inappropriate for an ongoing business.
2. The income approach: This determines a company’s worth by focusing on its ability to generate revenue and future cash flow, rather than just its current assets. It is, of course, by its nature more subjective than the asset approach.
3. The market approach: The market approach determines the value of a business by comparing it with similar businesses recently sold. The associated limitation is finding comparable sales data.

Valuing a family business can become further complicated by unique situations that require other considerations such as partial ownership interests, when the owning spouse owns less than the whole business or minority vs. majority ownership interests which reduces the minority owners’ control of the business. A lack of marketability, which means that the shares of a closely held corporation cannot be readily sold on a public market, can also make valuation more complex. In addition, lack of business voting rights can dilute a value since the owner has no voting rights for the company at all.

Are There Special Considerations in Valuing a Family Business?

In some cases, part of the value of a business may be considered separate, non-marital property and the remainder of the business is considered marital property. This is frequently the case when one spouse had an established business at the time of marriage. A court would consider whether the non-owner spouse contributed directly or indirectly to the success of the business.

Personal versus Institutional/Enterprise Good Will

When valuing a business under the income or market approach the personal goodwill of the interest owner must be subtracted from the total value of that owner’s interest in the business. This is a complex question, and is very fact specific. Many other technical issues, including how the marital value of an ongoing business can be divided, whether by negotiation or by a judge after trial, must also be addressed.

Contact an Experienced Maryland Divorce Attorney

If your divorce case involves property valuations, it’s essential to have an experienced divorce attorney by your side to protect your legal rights and financial interests. At Strickler, Platnick & Hatfield, we are adept litigators and skillful negotiators who are committed to ensuring the best possible outcome in your case. To learn more about how we can assist you with your divorce matter, contact Strickler, Platnick & Hatfield to schedule a consultation.