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Episode 77 Transcript: Organizing Your Finances - Assets

In this episode, I want to continue our discussion of how to organize your finances and your understanding of your finances in preparation for the divorce process. When I say in preparation, obviously, it doesn’t mean that you would complete all of this before you even begin your divorce process. The understanding of your financial situation is something that needs to happen as much as possible at the outset of your divorce so that your conversations and negotiation can be grounded in your financial reality.

Let’s talk about why you need an understanding of your assets as part of this process. As a key part of the divorce process, you will be dividing your marital assets between you. In order to know how to divide those assets, you need to know what assets you have. It goes a little bit beyond that. You need to know not only what assets you have, but a series of different details about each asset that I’ll go through in this episode that will help you decide how those assets can and should be distributed between you.

Let me just start by listing some of the most common types of assets that people have as they’re going through the divorce process. First and foremost, you can have checking and savings accounts at your bank. You may have those at multiple banks. You may have multiple of those accounts. That’s probably the most common type of asset that people have as they’re going through the divorce process.

Another very, very common type of asset that people have is a retirement asset. There are a variety of different types of retirement assets. You can have a 401(k) or a 403(b). You can have an IRA, a Roth IRA, and various other types of retirement assets. Just as one global category of asset type, retirement assets are also very common to have as you’re going through a divorce process. Another really common type of asset would be an investment or a brokerage account. Many people have those. It’s not a retirement asset per se, but it’s also not checking and savings. It’s invested in the markets in some way, and it’s hopefully increasing in value over time.

Another very common type of asset would be real estate. Many people will own the apartment, or the home that they live in and/or they may have a vacation or an investment property that they also own but don’t live in. Depending on the kind of company that you work for, you may also have deferred compensation assets. Those would typically be stock options or restricted stock units, maybe stock appreciation rights. You could also have an interest in a privately held business. That could be the 100% ownership interest, meaning it’s your business. There’s nobody else who owns a stake in it. Or it could be that you have a very small ownership interest in, say, a friend’s startup that you invested in at an early stage.

Depending on where you live, some people have a car. Less common in the city, but many people do own their car. Depending on what type of industry you’re in again, you might have intellectual property, so copyrights, trademarks, patents. Also slightly less common but not uncommon would be if you had a life insurance policy that had some sort of cash surrender value to it. That’s also considered an asset. Then finally, another somewhat common type of asset would be any sort of money that is formally owed to you. That could be a personal loan that you made that is owed to be paid back to you. It could be a tax refund that’s owed to you, for instance. It could be, for instance, if you were involved in a court case and you had a money judgment issued in your favor and money is owed to you. That’s also technically considered an asset.

Hopefully, that gives you some idea of the universe of the most common types of assets that you might hold. When I say that you might hold, it could be that you own the asset yourself, alone, with no one else, or you own it with other people. It could be you own it jointly with your spouse. It could be that you own it with another member or members of your family. In some way, you are either one owner of the asset or one of possibly many owners of the asset. That’s what I mean when I refer to you as holding the asset. It doesn’t have to be you alone.

Now let’s talk about what are the specific details about each asset that are useful to us in the divorce process to know and, thus, that you want to try to put together at the outset of the divorce process to the best of your ability. The first thing that you want to specify is what is the type of this asset? I just went through some of the most common types of assets. Is this asset real property? Is this asset an interest in a business? It is a checking account? And then secondarily, where is that asset held? It’s the address of the asset if it’s real property. It’s the bank that holds the checking account or the bank or investment institution that holds the investment account or the institution that holds your retirement account. If it’s an interest in a business, it’s less so where the asset is held and more likely the full legal name of the business and the type of business that it is if you know that. Is it a partnership? Is it an LLC? Is it a C corporation?

There will be many components to putting together this information that you may not know. If you don’t know, you just say that. You are much better served by indicating where you’re not sure than by necessarily trying to guess at something you don’t know. If you don’t know, for instance, the type of business entity that it is that you have an investment in, just say that. That’s no problem. With regard to something like a car, you would just be specifying the make, model, and year. With regard to something like intellectual property, you would be specifying whether it’s held in your name outright, whether it’s held or owned by the name of a business rather than in your individual name, and so forth. The gist is indicating where the asset is held or giving more detailed specifics about the formal identity of that asset.

Then you want to indicate when you acquired the asset. That could mean when you purchased the real property or when you opened the checking or savings account when you were awarded the particular deferred compensation. If it’s your own business that you have an interest in when you started the business. Or if it’s a business that you invested in or were gifted a share in, say through family, when you acquired your interest in the business.

Then related to that, you want to specify how you acquired the asset. If that was with money, which sounds obviously, it would be with money, but not necessarily because it could be through your work that you acquired it. If it was with money, you want to specify where that money came from. Was it money that was earned during the marriage? Was it money from a savings account that you had prior to the marriage? Share as much detail as possible about where the money came from that you used to acquire the asset. Again, if you know. If you don’t know, just indicate that.

If you did not acquire or purchase the asset with money, but instead, you were gifted the asset by a family member, you want to indicate that. If you did work to create the asset, for instance, in the case of intellectual property or potentially in the case of an interest in a business that you got in exchange for what they will sometimes call sweat equity, you, say, provided consulting to a startup business of a friend of yours, and in exchange, you got a 5% ownership stake in the business, you then want to indicate when was the work performed that resulted in your acquisition of the asset? Again, if you can’t remember or you don’t know, you just flag it as something that is to be determined. If it is relevant in your process, either with the guidance of your mediator or with your attorney, you’ll come up with a way to figure out that information.

Then you want to speak to the value of the asset. Ideally, you’ll have two numbers for value at the outset. Number one would be the value of the asset when it was acquired if you know it. This is, for instance, likely pretty easy with regard to the purchase of real estate. There is an objective number with which you purchased that real property. There was a purchase price. That’s pretty straightforward. For other types of assets, it can be really hard to know what the value was when you acquired it. For instance, if you did consulting work, and in exchange, were granted a 5% interest in an existing business. It’s hard to say what the value, for you to know off the top of your head, as you’re getting started in this process, what the value of that interest was at the time you acquired it. That would be something that you would need to figure out whether it was relevant to determine and how you would determine it in the process.

The other number, a value that’s significant, is the value as of today. There is a little bit of nuance there. I’m saying today. It could also be the value as of the date your divorce process was commenced in court. It’s a little bit more nuanced of a topic than we can really go through in this episode, and I would advise you to ask your mediator or ask your attorney about what is the relevant date as of when to figure out the value of this asset. Let’s just use today, the present day, whenever you’re putting this information together as that date for our purposes. You want to look at what’s the value today. Well, with checking, savings, investment accounts, that’s pretty straightforward. With real estate, it can be more difficult because unless your property is on the market and you’ve got an offer that you’ve accepted, you’ll be guessing as to the value today. That’s okay to do, but it’s probably better to say unknown or to be determined to decide whether or not you and your spouse are on the same page about the value or whether you need a neutral appraisal of the value.

With regard to, for instance, a vehicle, that can be a blue book value. With regard to your ownership interest in a business, that’s something that you’re very unlikely to know the value of as of today unless you literally just had a valuation of your business done. Depending on the goal of that valuation, you may or may not feel like that was an accurate value that you were given through that process. You’ll rarely know the value of a business interest when you’re at the outset of a divorce process, but it is often something that you will determine in the course of the process. Same with intellectual property. That’s notoriously hard to value, and it’s unlikely that you would offhand know the value of it as of today or as of the date you acquired it.

Deferred compensation is interesting. You could determine the value of many of those assets if they are vested today and you’re able to liquidate them today, especially if they are in a publicly held company where the value of the stock is apparent. Often, much of your deferred compensation will not yet be vested, and it’s hard to know what the value will be as of the date that it vests. That’s another type of asset where determining the value as of today and even the value as of when you acquired it is likely something that you won’t know easily offhand, and you can flag as something to be determined with more certainty in the course of your divorce process.

Then finally, you definitely want to indicate for any of these assets if there is any kind of debt tied to or associated with the asset. The most classic example would be a mortgage and/or a home equity line of credit on your home. That’s very common. It’s pretty uncommon that people own real property and have no debt against it. For instance, sometimes people take out debt against a retirement asset. You definitely want to indicate that, that there’s debt against your asset when you’re listing the particular retirement asset. Similarly, you can also often take a loan against a life insurance policy. In that case, when you list the life insurance policy, you absolutely want to include the amount of the debt. I would include the original amount of the debt when you first took it out and what the present amount of the debt is. You also want to indicate what the debt was used for. Where it’s a mortgage, unless it was not used to purchase the home, it’s pretty obvious to most people what the mortgage was used for in the case of real property. With a home equity line of credit, you want to indicate what was the original amount of debt, what’s the present amount of debt, and what was that debt used for? Is it for renovation? Was it to cover marital expenses? What was it used for? Similarly, with a loan against life insurance or a loan against a retirement account, that’s less obvious what the debt would have been used for, whether it was used for marital purposes or whether it was used, for instance, to pay off a loan on a separate property asset of yours. So you want to indicate that. What was the loan used for to the extent that you know?

When you’re putting all of this information together, I suggest that you group it into similar categories. List all your checking accounts together, all your savings accounts together, your investment accounts, brokerage accounts, your deferred compensation. I didn’t mention more complex types of investments, like investment in a hedge fund or a private equity investment, but certainly, you group those together. If you have that kind of asset, you do want to indicate as well whether there is a possibility of not so much debt on the asset, but a future financial responsibility, like a capital call, related to the asset.

Those are less common types of assets, but many people have them, and so I just mentioned that in case you do. You want to group, as I was saying, your deferred compensation together. You want to group business interests together. Then few people have tons of vehicles or tons of intellectual property or life insurance policies. But again, group those together just so you’re looking at like assets together. Hopefully, your spouse will do the same, so that when you assemble everything as one global picture, you can take each type of asset in turn and be comparing apples to apples.

As a final word of advice, as I said before, if you don’t know a particular point of information, the value of an asset or when it was acquired or how title is held, you don’t need to guess. It’s more helpful to just indicate that you don’t know and then get some professional guidance, either from your mediator or from your own attorney, as to the best way to figure that information out. It’s also helpful to know, although you don’t have to know it at the outset, with each particular type of asset that you have, if you hold title in your sole name or you hold title jointly in name with your spouse, to know whether title to the asset can be changed. If it’s in your sole name and you wanted to, could you transfer it to your spouse’s name? If it’s in your joint names and you wanted to, could you take one person’s name off of the title and have title held solely by one person? That helps you know what the realm of possibilities of asset division would be as you’re discussing that in your divorce negotiation.

Finally, and I will speak to this in more detail in another episode, but if this list of information is overwhelming and confusing to you, you are not alone, and you don’t have to put this information together on your own. There are many different ways that you can get assistance in the process, and I will speak to that in the episode after, the next episode on putting together information on your debts. This was our episode on organizing your financial information around your assets. I hope it was helpful for you.

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Episode 78 Transcript: Organizing Your Finances - Debts

Episode 76 Transcript: Organizing Your Finances - Expenses