Heading for a Divorce? Tally and Appraise Your Assets

Divorce and your finance
Divorce and your finance

Editor's Note: This is the second of a three-part series that will cover five key financial steps to take before entering divorce negotiations. Part One covered why a review of your credit report is essential.

With the obvious exception of child custody matters, dealing with the division of assets is always the main area of stress during divorce proceedings. Determining the real value of assets isn't always as easy as people would like to believe. But you can take concrete steps that will take at least some of the pain out of the process. Part One of this series explained what to do in the first step, checking your credit report. Here are steps two and three of the process.

2. List All of Your Assets: When getting a divorce, you need to tally all your financial assets so that you know where they are and what they're really worth. This often can serve as a wake-up call about what each party has to lose in the negotiations. Because both spouses will need to list all of their assets, forgotten pensions or stock-trading accounts that spouses may never have mentioned also need to be disclosed before the negotiations begin.

Carole Peck, a licensed certified divorce financial analyst (CDFA) in Florida and Illinois, notes that married couples can sometimes use tax returns to determine assets that their partner has. Capital gains on all investments must be reported to the IRS, and that's generally done through the tax return. On a personal tax return, Schedule B (Interest and Ordinary Dividends) shows interest earned from any stock brokerage accounts or other investments that a spouse has.

Additionally, if your spouse owns a business, you'll need to gain access to its tax records to determine how profitable it has historically been, if possible. The business could be a valuable asset that produced significant income for allowing the married couple to maintain a particular lifestyle. For example, if one spouse had access to a company car that the business paid for, should she continue to get that perk after the divorce if the business isn't dissolved?

Compensation received from the business is also considered an asset. "If the business was paying your spouse $100,000 a year, and now that the divorce is coming they switch to paying $50,000, you must find out why," says Peck. "This could be creative accounting or might indicate money is being diverted to other places."

3. Have Assets Appraised: When dividing property, some jointly held items may have to be appraised to determine their real current value. The perceived value of assets such as furs, jewelry, paintings, memorabilia and family antiques can become sticking points during the settlement process. Peck says it may be necessary to prove what individual items are worth because your spouse may set a very high value for an item in the expectation that you'll have to give them cash compensation to keep it.

For example, if a husband owns sports memorabilia and his wife isn't a sports fan, she may claim the items in the collection are very valuable, when in fact, their true worth is rather modest. An appraisal will solve that conflict.

"You want to know what things are worth because you want to know if they are worth fighting for," says Peck. If a "treasured" family heirloom is only worth $500, you can reason that it's not really that important. However, if items are authentic and valuable, then the cost of insuring and safeguarding them may be factored into the settlement as well.

Noah Rosenfarb, a CDFA and managing director of Freedom Divorce Advisors in New Jersey, says he encourages his clients to educate themselves on the pros and cons of owning certain assets prior to getting a divorce. Some assets come with hidden costs and devaluation risks, so individuals should know what it may cost to own an asset over the long term before fighting hard to get it.

For example, Rosenfarb points out that many people going through divorces don't realize the risks involved in accepting money in retirement accounts. Money accepted in this manner is subject to taxation when you withdraw it, so it's actually worth less than its face value at the time you receive it. This becomes an extremely important consideration if one needs to use the money immediately -- early withdrawal penalties can reduce the settlement's value even more.

So before agreeing on a settlement, Rosenfarb warns: "Make sure that you do not take all of the assets where you must pay the burden of taxation while the other party is getting assets that are regular cash."

Coming Next: Part Three will cover the fourth and fifth steps in preparing your finances for a divorces -- projecting post-divorce expenses and determining child care costs.