In today’s episode, I wanted to touch on something that we spoke to somewhat in Episode 15, but I wanted to go a little bit deeper in this episode. And that is to look at the different significant qualities of the kinds of assets that you might be considering dividing in a divorce and to help you think through those, as part of your negotiation, as strategically and thoroughly as possible so that you can be making the best possible decisions about how to divide your assets in a divorce context.
The biggest thing that you want to keep in mind when looking at the different assets that you have to divide as part of your divorce negotiation is that assets of different types, like a home or apartment versus a brokerage account versus copyrights or intellectual property versus points in a hedge fund, they are all assets, but they are apples and oranges. They have very different qualities as assets. It’s important for you to be mindful of those different qualities and to consider them when you’re thinking through what is your ideal ultimate resolution of the division of your assets.
Let me touch on a few of the key qualities that you want to think about in considering what kind of asset division would be your ideal. First of all, you want to ask yourself, if you own a particular asset, what are the costs, if any, of ownership? What are the costs of owning that asset? An easy example of that would be a home. There are many carrying costs associated with owning a home. You might have your mortgage. You often have property taxes. You have the costs of upkeep of the home, like if something breaks or needs to be repaired. And it’s typical to have insurance costs associated with the home. Specifically, when thinking about a home, because it’s also providing you with a place to live, you want to actually think about the “costs” associated with owning that asset. You do want to reduce those for what you would otherwise be spending to live elsewhere if you weren’t living in your home. But suffice it to say, there are absolutely costs associated with owning, with taking the asset of the home.
Whereas in contrast, if you take the asset of, say, a checking account, assuming you have a no-fee checking account, which you may not, so there could be a cost associated with it. But assuming you don’t pay a fee for the checking account that you have, there are not really costs associated with retaining or owning the asset of a checking account. So that’s the first thing you want to consider. When you look at a particular asset, and you envision owning that asset, taking that asset away from the divorce settlement and retaining it, what are going to be the ongoing costs that you will bear as a result of owning that asset?
The second consideration you want to think about, if the asset is not basically cash, not literally cash but, say, a checking account or a savings account, you want to think about what the costs of selling that asset would be to convert it to cash. It’s one thing if you have a home that’s worth, just to give you a simple example, your home is worth $100,000, and let’s say, for some reason, in five years, you need $100,000 to actually do something to, God forbid, pay for a surgery or something. You need $100,000. You can’t give them, or likely, you’re not going to be able to just give your home. If you needed that money from the asset, you would need to sell the asset. So you want to think about if this asset that you’re taking is not actual cash, what are the costs of sale associated with selling the asset?
Usually, there are two main types of costs of sale. One is a commission on the sale. If there’s somebody who’s facilitating that sale, like a real estate agent or broker, then they typically will take a commission on the sale, and that would be a cost of the sale. If you sold a $100,000 property and your real estate agent took 5%, that’s $5000 that goes to them, not to you, and you only retain $95,000 of the sale. That’s an important thing to be aware of.
The other typical cost of sale would be taxes on the sale. And depending on the type of asset that you’re selling and how long you’ve owned the asset, there are differing rates for the kinds of taxes that you would pay on selling the asset. But essentially, if you are making money on the sale, you will pay some sort of capital gains tax, generally speaking, on the sale.
So, sale commissions, like a brokerage fee or whatever you’re charged by the person who’s selling the asset for you, and then also taxes are the most typical costs of sale. You want to make sure to factor those in so that you’re not comparing a $100,000 property as equal to $100,000 in a checking account because the former, the property, is going to have substantial costs of sale that will reduce the cash that you’re able to get out of that property too. Let’s say at the end of day, you sell a $100,000 property, and you pay a broker’s fee, and you have to pay capital gains taxes. Maybe you end up with $75,000 from the sale of that property in cash, whereas the $100,000 you have in a checking account, that’s just cash. You don’t incur costs of sale for that. You have that as cash. Those could really make significant distinctions in the cash value of an asset that you’re considering taking, so you want to be very mindful of those as well when you’re thinking through your asset division.
Another common consideration I think that people often intuitively raise and think of when they are assessing different assets and comparing them to one another is the likelihood of future appreciation or growth in that asset. For instance, if someone owns real property in a particular real estate market that’s very hot and likely to continue being strong, often people will attribute a value to the likelihood of future growth in the value of that property. But I want to caution you there because, in some ways, while it’s a psychologically significant consideration, that is, the likelihood of future growth of an asset, unless the investment opportunity itself has disappeared, like unless there are no more apartments to be purchased in this strong real estate market, you don’t want to get too hung up on attributing more value to that because if, for instance, you have a property in a very strong real estate market that’s worth $500,000 and then you have a checking account, that’s going to have guaranteed 0% growth in it that’s worth $500,000.
At the same time, you might feel like owning the real estate is more valuable, but in fact, if you wanted to own real estate in that market, you could just liquidate the checking account and purchase a property. It’s fungible. The gist is you want to be careful to assign any value, any added value to an asset simply because it’s likely to grow in the future, simply because you see it as a good investment, because if that investment opportunity is still available, for instance, if you could still buy an apartment in that same market or you could invest in that particular mutual fund, you will experience the same level of growth. You don’t have to actually keep that asset if you can invest in that same way.
The other element that comes up, and it’s challenging, but it’s relevant when you are looking at your assets and trying to figure out the best way to divide them, is how clear or certain you are of the value of an asset versus how uncertain, unclear, unknowable the value of that asset is. Let me give you an example. The value of your checking account or even of your 401(k) balance is very clear as of today. It’s very clear. You can go look online, see your account balance, and the value is clear. Whereas the value of someone’s equity stake in a startup, someone’s points in a hedge fund, the different copyrights that someone owns, the master recordings to a musician’s work product, or the different copyrights to different illustrations, for instance, if somebody was an illustrator and owns a ton of copyrights now over the course of their career, those latter examples you don’t get a balance statement for and it can be extraordinarily hard to know the value of.
Along the same lines, related to that would be how volatile or stable the value of something is. Now, if it’s impossible to know the value of it, it’s hard to say whether or not it’s been volatile because it’s gone from unknown to uncertain to unknown. So that can be a little bit hard to speak to. You might think of, for instance, shares in a public company. How stable or volatile have they been over time? Is the value changing by a lot over time, or is the value relatively stable over time? Just to take equities for a minute, as you, for instance, invest in, say, a mutual fund that owns a bunch of different stocks, it’s likely to have less volatility or less crazy swings in value than you are likely to see in an equity for one single company because there’s a lot of risk associated with just being invested in one single entity as opposed to spreading out your investment over a very diversified pool of companies, for example.
So the volatility in the value of a particular asset is also relevant and something you want to consider. The more volatile the asset, in a sense, the riskier it is to own that asset or the greater the risk that the value that you think that asset has, for instance, that you’ve based some of your negotiation on is not ultimately the value that you will be able to realize from that asset. If there comes a time when you want to liquidate it and convert it to cash, you bear a higher risk if the value of the asset has been highly volatile or changing a lot over time. You’re bearing some risk that when it comes time to convert that asset to cash, if you ever want to, that you won’t get what you thought you were going to get for the asset or what you valued the asset at in the course of the divorce process.
The third component I would add to this trio of considerations is how binary the value is. And this comes up a lot. You see this with, for instance, an equity stake and ownership stake in a hedge fund or in a particular fund within a hedge fund or, for instance, equity in a startup where, for instance, in the hedge fund for not the investment itself but the ownership stake in a particular fund to be worth anything, often the fund has to perform to a certain level. And if it doesn’t reach that level, the ownership stake can be worth nothing. And if it does reach that level and go beyond it, the ownership stake can all of a sudden be worth a ton. So it adds risk, basically, to owning that kind of asset that there’s a solid chance it will be worth exactly zero, but there’s also a chance that it will be worth $10 million.
Similarly, with a startup, you can have multiple rounds of investments that attribute a certain value to shares in the company, but it’s not until and if the company is purchased and the owners have some kind of exit where they actually do receive cash for their shares that those shares are realizing any real value for them. So it could be, “Well, we got a couple of rounds of investment” and that ,“Yeah, we were valued at $10 million, but the investment money we received was just enough really to keep us running for the three years that we tried to make the company work. But ultimately, we never got the sales numbers that we needed, or whatever we anticipated would happen didn’t happen and we weren’t acquired by a larger company. And therefore, we may have been valued at $10 million, but no one’s buying our shares anymore and they’re effectively worthless.” That also adds a big component of risk to owning that kind of asset in a company that could either be worth $10 million or $100 million or exactly zero dollars.
With these latter types of assets where the value is very uncertain or unclear, maybe there’s been a lot of volatility in the value over time and/or maybe there’s a very binary component to the value, which is that unless a certain series of things happens, this asset will be worth nothing. If that series of things happens, this asset may be worth a lot. With assets like that, often, if you can, the spouses will choose, will prefer to split the asset in kind, to split the asset itself. If there are 100 shares in this company held by one spouse, the spouses will agree on a number of shares or options to transfer to the non-titled spouse in that person’s sole name. Or if it’s a matter of points in a hedge fund, the titled spouse has all the points in his or her name, and the spouses will agree to transfer a certain number of points to the non-titled spouse’s name. Then, effectively, you’re both equally invested in the asset. If it does well, fantastic. If it does poorly, that’s a bummer, but at least nobody overpaid to retain that asset. And that can be, in some sense, a simpler way to deal with assets where the value is highly volatile, highly binary, or basically unknowable, very uncertain.
However, sometimes you can’t transfer title. You can’t transfer part of the asset to your spouse. If you can’t transfer the asset itself, a part of the asset itself to the other spouse, what’s typical then is to have the owner spouse, the so-called titled spouse, they continue to hold the entire asset in their name, but your contract will say that they’re holding a part of that asset, and would specify exactly how much, a part of the asset they’re holding for the other spouse. It’s really the other spouse’s asset. It’s just held in the name of the owner spouse, the so-called titled spouse, and the titled spouse will liquidate that asset whenever the other spouse says so. And they will transfer the proceeds and net of any taxes and costs of sale. They’ll transfer the proceeds to the other spouse whenever they say so. So it’s not impossible for us to deal with if you can’t legally or just under the particular bylaws of the company or the entity, if you can’t technically transfer a portion of a complex or a hard to value asset to your spouse. The agreement can allow you to hold that part on behalf of your spouse and sell it down the road on behalf of your spouse, but it’s just a little bit more complicated to do so.
The other thing I’ve seen people do, I’m thinking particularly with intellectual property assets where they produce an income stream over a longer time horizon, is to agree on how to split that income stream. Where the asset is more prone to a lower income stream over time rather than a one-time sale, if that makes sense, then I have also seen people where they can’t or don’t want to transfer title to the asset. I’ve seen them agree to share in all income from the asset going forward over time.
And then finally, a couple of non-financial considerations. One is just the sentimental or emotional value of a particular asset. That often comes up around the home, can come up around jewelry, for instance. That’s valuable too. How to put an exact value on that, I don’t know. It depends on your particular situation. But it’s not irrelevant, and I see it a lot where financially it may technically be slightly less valuable for someone, for instance, to hold on to the home. All things considered, including emotional considerations, it’s actually far more valuable to them to hold on to the home. So that’s completely valid. You just want to be conscious of when you’re doing that and of the value that you’re assigning to it.
The other component, it’s not quite emotional, maybe psychological, and it’s more of like a quality of life value. And sometimes that can mean not so much that there’s sentimental value to the home, but for instance, that staying in the home will help keep stability for your kids and will help make their transition through this divorce process from one to two households easier. That has a value to you. Or for instance, retaining simpler assets, like retirement assets and maybe checking, savings, and brokerage account assets, makes you feel far more comfortable than retaining assets that are complex and/or volatile, like a share of the hedge fund points or an equity position in a startup. That may just feel intimidating or confusing or complex to you in a way that is not appealing, and it may be just the opposite to the other spouse.
Quality of life is very valid to think about too when you’re considering the different attributes of an asset and retaining certain assets because they make your quality of life better or it feels easier to hold on to those assets. It’s totally valid. Again, you just want to be conscious and aware that you’re doing that and try to have some sense of the value that you are assigning to that, whether it’s ease of ownership of a particular asset or, again, stability in a transition for your kids, or whatever the consideration may be, totally valid and important to think beyond the purely financial. You want to be conscious of when you’re doing that, and to the degree possible, you want to be aware of what value you are assigning to that.
That was our episode on thinking a little bit more deeply about the different qualities of different assets and what you should take into consideration when you are analyzing the different assets you have to divide and thinking about what your ideal division of those assets would be. I hope it was helpful for you.