Identifying and Valuing Nontraditional Benefits in a Divorce

Initial Considerations

Before you can decide the ultimate question of how to divide a nontraditional asset or benefit in a divorce, the asset or benefit in question must be identified. The identity of the asset or benefit may be easily ascertained. For example, identification may come directly from a party through personal knowledge and/or the exchange of sworn inventories and supporting documents. If a method of identification is unavailable, discovery (e.g., a request for production and inspection) may be necessary. If discovery fails to identify the asset or benefit in question, hiring a third-party expert witness may be beneficial.

Is There an Interest to Divide?

Once you have identified the asset or benefit, determine whether there is an interest to divide. The answer may depend on whether the interest is tangible or intangible. Examples of nontraditional benefits that may be subject to this analysis include the following.

• Prepayment or overpayment of income taxes: This could be an attempt to hide available funds for purposes of the divorce—to reduce a potential support obligation (child or spousal) or to reduce the overall value of the marital estate. A party may prepay or overpay an income tax obligation with the intent to refund the excess monies in future tax years (i.e., after the divorce is finalized).
• Stock options: Are the options vested or unvested? Are the options restricted or unrestricted? Are the options eligible to be conveyed to anyone other than the plan participant? To answer these questions, specific plan information from the plan administrator will be essential. Even if the options are vested and unrestricted, their actual value may be subject to plan specifics and market fluctuation.
• Employment perks: These benefits may be provided by a third party or entity (a boss or company). Examples include a company plane or automobile, a luxury suite, or an automobile or clothing stipend. If a party has an interest in the company, it may be possible to make an “alter ego” claim.
• Assets held in trust: Is a party named as a trustee? Is a party named as a beneficiary of the trust? A review of the underlying trust document would likely go a long way in determining what assets, if any, may be subject to division in a divorce.
• Personal goodwill: Personal goodwill may exist in a profession or business dependent on the personal qualities of a spouse owner/operator. In some states, personal goodwill of a spouse does not possess value and does not qualify as property subject to division by a court, while in other states it is an asset subject to division. For example, a spouse who earns a living as a professional athlete has a specific contract for personal services (endorsements). In the event of divorce, the nonathlete spouse is not likely to be capable, either physically or contractually, to perform under the terms of the contract. As such, there is an argument that the contract concerns personal goodwill accrued during the marriage and, depending on the laws of the state, not property subject to division upon divorce.
• Excessive retirement contributions: This may be another mechanism used to hide available funds for purposes of the divorce. If a spouse appears to have contributed a larger amount of monies to their retirement accounts since the date of the divorce filing, this could be an attempt to shield and/or reduce available funds for purposes of property division or a potential support obligation.
• Deferred compensation or unpaid bonuses: This may be yet another mechanism used to attempt to hide income for purposes of the divorce. The delay or sudden discontinuation of otherwise regular bonuses or other compensation could be an attempt to shield and/or reduce income for purposes of property division or a potential support obligation.

There Is an Interest. Is It Subject to Division?

Black’s Law Dictionary defines “characterization” as the process of classifying property accumulated by spouses as either separate or community property. In most states, a spouse’s separate property generally consists of: (1) the property owned or claimed by the spouse before marriage; (2) the property acquired by the spouse during marriage by gift, devise, or descent; and (3) the recovery for personal injuries sustained by the spouse during marriage (but not any recovery for loss of earning capacity during marriage). Marital or community property generally consists of the property, other than separate property, acquired by either spouse during marriage. Property possessed by either spouse during or on dissolution of marriage is presumed to be marital or community property. In some states, the degree of proof necessary to establish that property is separate property is clear and convincing evidence, but generally the burden of proof is on the party seeking to establish the property is “nonmarital” or not community property. A spouse’s separate property is not subject to division by a court; only the marital or community estate is divisible. However, the court may consider the size of the parties’ separate estates in making a “just and right” division of the marital or community estate.

Characterizing property as either marital/community property or separate property may be essentially a task of elimination. If property falls within a delineated category as separate property, the property is separate property. All other property is marital or community property.

How Do You Value the Benefit?

So now that you have determined that there is an interest in the benefit that is subject to division, what is the next step? Determining the value of the benefit. There are multiple different standards that may be used to determine the value of the benefit in question.

Fair Market Value

In general, the primary standard of value in divorce cases is fair market value. “Fair market value” means the amount that would be paid in cash by a willing buyer who desires to buy but is not required to buy, to a willing seller who desires to sell but is under no necessity of selling. The concept of fair market value means the price at which a transaction could be expected to take place under market conditions existing at the valuation date. In valuing an asset to be received in the future (e.g., real property), you are to find its present value as determined from the evidence.

Value to the Owner

A secondary valuation standard is “value to the owner.” If an asset has no fair market value, its value is the value to its current owner as determined from the evidence. This standard contemplates that the owner is not selling the property but, rather, is maintaining it in its present form or, due to certain circumstances, the asset being valued has no market value. This standard may be appropriate in valuation of restricted stock of a closely held corporation owned by the marital/community estate or valuation of a personal services contract specific to the abilities of one spouse.

Intrinsic or Fundamental Value

Intrinsic value (also known as fundamental value) is the value that an investor considers, on the basis of an evaluation or available facts, to be the “true” or “real” value that will become the market value when other investors reach the same conclusion. This standard is usually appropriate in valuation of stocks or other securities. For example, a security analyst who performs an analysis of a company’s underlying assets, earning power, and other relevant factors might conclude that the intrinsic value of the company stock is worth twice its actual selling price. If the intrinsic value is determined to be greater than the sale price, the analyst might recommend that the stock be bought. Conversely, if that analyst determines that the sale price of the company stock is greater than the intrinsic value, the analyst might recommend that the stock be sold.

Special or Pecuniary Value

In some situations, a benefit may not have a fair market value. Further, the “value to the owner” standard may also be inappropriate. Under the standard of special or pecuniary value, the “sentimental value” of the asset is considered. An example of a benefit or asset that may be valued using this standard is a “priceless” family heirloom. A spouse may want to keep Great-Great-Grandma Agatha’s ivory brooch, even if the other spouse never liked Agatha anyway. Suddenly, the spouse who could not care less about the gaudy piece of jewelry now has a bargaining chip to use in negotiation.

What Is the Value of the Benefit to the Parties?

Placing a value on a benefit may be easier when considering the value of the entire marital estate. The value to either spouse may really depend on where the benefit in question is prioritized given the value of all the other property in the marital estate. Consider the “traditional” assets such as real property, vehicles, personal property, investment or bank accounts, retirement benefits, business or partnership interests, and insurance benefits. Additionally, the liabilities associated with the marital estate must be considered as well. These may include secured debts, unsecured debts, promissory notes, “loans” from family members for expenses incurred during the pendency of the divorce, and the like. Further, support obligations also must be considered. If the parties have minor children, child support and medical or dental support obligations must be accounted for. If spousal maintenance or contractual alimony is a possibility, that must be factored in as well.

Finally, you also should have a conversation with your client about “walk-away” value. What is the benefit worth to your client when measured in terms of settling the matter and avoiding the costs (both financially and emotionally) of further litigation? In the grand scheme of things, how much does your client really care about Great-Great-Grandma Agatha’s ivory brooch? No matter who you represent, the answer may be something to the effect of “not enough.” A discussion with your client regarding the potential opportunity cost of making a deal now versus heading to the courthouse and litigating further may be where the real value lies—and you might discover that the “walk-away” value was at the top of your client’s list all along.