I wanted to speak in this episode to what you can do when you have an asset that you can’t divide and that you also can’t sell. First of all, let me just describe what I’m talking about. What types of assets might that be the case with? Well, if you have an asset you can’t divide, you can think of something, for instance, physical, what we would call tangible property. Your home, for instance, unless you are partitioning it, which is pretty unusual, you’re not going to take a chainsaw and divide your home physically in half. That won’t work. There are then other kinds of assets, for instance, like restricted stock units or stock options, where the terms of ownership of that asset don’t allow the titled owner to transfer it. So they can’t transfer, say, half of their restricted stock units to your name. They have to continue to hold them.
Then in both of those cases, how could it be that you couldn’t sell an asset? Well, I don’t exactly mean you can’t. In some cases, you literally can’t because, for instance, if you have an investment in a startup, maybe you’re not able to sell your equity in the startup at this time. Maybe you have points in a hedge fund, and they’re not transferable to anyone else, and you are not going to realize any money on those, if ever, for another couple of years. So you may legally not be able to sell the asset, but sometimes you can legally sell the asset, and you don’t want to. For instance, you own a home and it’s not a good time in the real estate market to sell, so both you and your spouse are in agreement that, “Okay, we can’t physically divide the home in half, but we also don’t want to sell it right now and then divide the proceeds.” That’s more what I mean by can’t sell. Either you’re legally not allowed to sell at this time, or it’s just such a bad idea to sell, or you and your spouse are both in agreement that neither of you wants to sell, but you also cannot take the asset itself and give half to one spouse and half to the other.
What do we do in cases like that? Well, typically, the titled spouse or the person whose name is on the asset will continue to hold the asset, and your contract would spell this out. They continue to hold the asset, and we identify that a certain percentage or amount of that asset is actually yours if you’re the non-titled spouse. The titled spouse will hold your share of the asset for you and then will transfer to you as that asset produces income. That could be not arising out of a sale per se, but just if it’s producing income while you’re owning the asset, they will transfer your share of the income to you. Then when the asset is sold, you will also receive your share of the proceeds. In some ways, that sounds simple enough. It’s regulated by your contract, so you are protected. You’re not just relying on the goodwill of your spouse to hold on to your share of the asset for you and transfer income to you as you’re entitled to.
There are a few complications that come up with dividing an asset or sharing an asset in that way. Number one, during the co-ownership period of that asset, what if there are costs associated with owning the asset? That could be that with a home, maybe you have to fix the boiler, so there are repair and maintenance costs of the asset. That could be a capital call that you and all other investors have to put up money to remain invested in the particular asset that you’re currently invested in. There are different ways that owning an asset can cost you money. If you and your spouse are co-owners of the asset, whether it be that you’re both on the title or whether it be that one of you is on the title and holding the other person’s share for them, you need to think about and you would want your contract to spell out, “What’s going to happen if we, as owners, have to put money into this asset?”
The other challenge that comes up, and this is more relevant where the asset is held in only one spouse’s name, is that as the asset generates income, you will owe tax on that income. So you want to be careful to make sure that the income that is transferred to the non-titled spouse, the spouse whose name is not on the asset and, thus, who is not being taxed on income from the asset, you want to make sure that the income transferred to them is truly post-tax income and that it’s all of the post-tax income they’re entitled to but not more.
Essentially, how do we do that? We do that by looking at and having a neutral accountant calculate exactly how much tax the titled spouse had to pay on the income generated by the shared asset. The titled spouse is first entitled to pay off all the taxes owing on that income. Then, only then, once the taxes owed are paid, would you be entitled to your percentage of the remainder of that income, after taxes have been paid on it. It’s not impossible to figure this out. It’s pretty easy for an accountant to do it. It does mean that every year, there’s a bit of an accounting hassle in that you have to figure out ,“Did we calculate and withhold taxes properly on that? Did the non-titled spouse receive all of, but not more than, the income that they were supposed to receive from this asset?”
Essentially, if you do find that you have the kind of asset that you can’t sell or just don’t want to sell at this time, but you also can’t divide the asset itself between you easily, don’t despair. There are solutions for that. It’s a little bit more complicated than simply selling an asset and dividing the proceeds or dividing the asset itself between you, but it’s doable. Essentially, what you want to be mindful of are that you’ve figured exactly how you’re going to be responsible for covering any costs of co-owning that asset, that you have figured out exactly how you’re going to pay for any taxes associated with co-owning that asset or any income arising out of that asset, and then that you have spelled out in your contract exactly how you’re going to divide between you the income that that asset produces, and then if and when the asset is ultimately sold, how you will divide the proceeds between you.
That was a brief overview of what happens when you have an asset that you can’t divide, and you can’t sell. I hope it was helpful for you.