Individuals who are contemplating divorce or going through a divorce in Bucks County, Pennsylvania often want to know about valuation of marital assets such as:
- real estate,
- personal property, and
- a business or business interests.
Like other aspects of a divorce such as child custody or alimony, the valuation of marital assets can go smoothly or may be quite contentious. Ideally, parties in a Bucks County divorce matter will reach an agreement by way of a marital or property settlement agreement, rather than having a family law judge divide the marital assets. With a settlement agreement, parties can exert more control over their own financial situations instead of leaving it up to a judge. In addition, litigating the division of marital assets in a divorce case can be costly.
Is the Asset Considered Marital?
Under Pennsylvania divorce law, marital assets are typically those acquired by either party during the marriage up until the date of separation. This may include real estate, business interests, retirement accounts, securities, etc. On the other hand, separate property is property acquired prior to marriage or after separation if post-separation income was used to acquire the property. However, any increase in the value of separate property that occurred during the marriage would be considered marital property. For example, husband owned a condo prior to getting married. During the 20 year marriage, the condo increased in value by 20%. That 20% increase would be considered marital property.
With respect to business interests, such as ownership of a company or corporation, the same principles apply. If a spouse acquires an interest in a company, i.e., starts a company, during the marriage, that ownership interest would be considered marital property. Likewise, if a spouse obtains an ownership interest in a company prior to marriage, any increase in that ownership or value of the company that occurred during the marriage would be marital property and therefore subject to equitable distribution under Pennsylvania divorce law.
Related: Marital & Separate Assets or Property [Our Doylestown and Newtown divorce lawyers discuss Pennsylvania divorce law pertaining to marital assets. When is an asset considered marital or separate?]
How Are Marital Assets Valued in a Divorce?
Fair market value tends to be the most common approach when valuing an asset. For example, the fair market value of the marital home or other real estate such as a vacation home or rental property would be used for purposes of distributing the couple’s marital assets. This is relatively easy and straight forward for real estate because there are usually comparative sales that can be used to determine value. Valuing a business’ fair market value can be much more difficult because businesses are not sold with the relative frequency of real estate, and therefore there is usually few transactions to compare.
When valuing a business, three approaches are utilized; the asset approach, the income approach and the market approach. The asset approach values the property the business owns (real property, equipment, vehicles) and is most appropriately utilized when a business is failing and needs to be liquidated. The income approach looks at the business financial performance and determines a value based on the revenue and profit the business earns. The market approach is what a third-party buyer would pay for the business, essentially the “fair market value.” This approach can be the most difficult, particularly when there are not recent transactions of similar companies. This approach does take into account the intangibles of a business such as goodwill. For example, the if the business were sold, the owner may not be running the company any longer and therefore the value of the business is diminished due to the business losing that “goodwill.” So, this may or may not be the best approach when valuing a solely owned company depending on whether the owner plans on continuing to run the business, retiring shortly after divorce, or selling the business altogether.
One issue that often arises is the timing of the valuation. The value of a marital asset may change between the date of separation and the date of distribution, i.e., when the marital assets are actually distributed by way of an agreement of the parties or a court order.
For example, a couple separates on January 1, 2018. Over a year later, they are ready to negotiate their marital assets. During that time, the value of the marital home has increased significantly due to a new retail development nearby. Which value is used?
Valuation of Marital Assets in a Bucks County Divorce – Date of Separation or Date of Distribution
Pennsylvania divorce law specifies that the valuation should be determined at the date of distribution or division. Bucks County divorce courts typically use the date of distribution for purposes of determining the value of most marital assets. There are some cases where the Court may use the date of separation value but, those are typically when one party owns the business and it can be proven that the business was intentionally diminished for purposes of the divorce.
For example, a husband who owns a 50% interest in a company begins to sell his shares off as soon as he and his wife separate. By the time the parties are ready to settle their assets, the husband has sold half of his interest in the company, so that he now owns 25% of the company. Here, the valuation of the husband’s ownership would likely be the date of separation (50% ownership), as opposed to the date of distribution (25% ownership).
Learn more about valuation of a business in a Bucks County divorce case.
Brian Coverdale, Certified Divorce Financial Analyst
As a Certified Divorce Financial Analyst, firm partner Brian Coverdale is uniquely positioned to aid high net worth clients in financial analysis and implications of divorce settlement agreements. He counsels clients on their financial goals during and after divorce, including short-term and long-term effects of property division.