In this episode: Not everything in a marital estate is a bank or retirement account. Jon Peyton looks at illiquid assets, from a business or private investment to art, family heirlooms and a pension: how they get valued, and how to use them in negotiation without losing sight of what matters most to you.
Key insights
- An illiquid asset is one that can’t be sold or split quickly: a business, a private placement, real estate, art or a family heirloom.
- A business is usually valued by a valuation expert, and each spouse may hire their own, since one side benefits from a lower number and the other from a higher one.
- Art and jewelry need an appraiser who understands today’s market, not what the market paid a year or two ago.
- Sentimental items have little resale value, so who keeps them becomes an emotional decision, and a negotiating tool.
- A pension can be converted to a present value so it can be traded against other assets.
- Time is a cost too. Some assets aren’t worth the time it takes to fight for them.
Episode timeline
- 0:00 Introduction
- 0:37 Recap: liquid assets and income streams
- 1:01 What makes an asset illiquid
- 1:54 Valuing a business
- 2:28 Why each spouse may hire a valuation expert
- 4:25 Appraising art, jewelry and precious metals
- 5:50 Sentimental items and family heirlooms
- 6:55 Using your priority list to negotiate
- 8:35 The cost of your time
- 10:40 Pensions as an illiquid asset
- 11:40 Valuing a pension: the present value of future payments
- 14:30 A lump sum now or income later
- 16:40 When a judge may push back
- 18:15 The risk of leaving with only illiquid assets
The episode in brief
When it isn’t an account. Checking, brokerage and retirement accounts are fairly easy to divide. Many estates also hold things that aren’t: a business, real estate, a private equity investment, art. Some are illiquid because there are restrictions on selling them. Others are illiquid because one spouse simply doesn’t want to sell. Either way, they need a value before they can be divided.
Valuing a business. A divorce financial professional can coordinate the valuation, often with a business valuation expert who reviews the company and reports a value to both spouses. Each spouse may hire their own expert. The owner has an interest in a lower value, since it means less to pay out; the other spouse wants the highest value possible. The attorneys work toward the middle. Two experts, two attorneys and a financial analyst add up, but when a business is worth millions, the cost can be worth it.
Art, jewelry and precious metals. These go to an appraiser. Value is partly in the eye of the beholder, and markets move: a painting that sold for $10,000 a year ago might bring $5,000 today. You want an appraiser who knows what the market will bear now, not what it should bear.
Sentimental items. A lamp, a teddy bear, a Civil War sword passed down through the family. Their market value may be nominal, and few people would sell them anyway. Deciding who keeps them is an emotional decision, which makes them useful in negotiation. Go back to your priority list. If an item is below your line, you can offer it in exchange for something above it. The other side can’t have everything, and you’ll learn quickly what matters most to them. Giving up two items you care less about to keep the one you care about most can leave both sides feeling they’ve won.
Your time has a price. Time is the one thing you can’t get back. If an asset would take a long time to settle or maintain, you may decide it isn’t worth it. If you do give something up, make clear what you’re getting in return. When one side feels they’re simply getting everything, they tend to keep asking for more. A clear trade lets the other side decide which item matters more to them.
Pensions. A pension can be treated as an illiquid asset. Say a 25-year marriage overlaps a job with a pension that will pay $2,000 a month, and the other spouse is entitled to 40% of it: $800 to them, $1,200 to you. You might rather keep the full $2,000 and give up other assets instead. To make that trade, a professional calculates the present value of the future payments, adjusted for inflation where it applies. Payments of $1,000 a year for 25 years total $25,000, but their value today is lower. Buying out a 50% share means giving the other spouse half of that present value.
A lump sum or the income? If you’re far from retirement, a lump sum today has years to be invested, while pension income depends on when your former spouse retires. Whether a lump sum makes sense depends on the numbers, so run them with your divorce team.
What the judge sees. Judges usually approve what both spouses agree to. If one side appears to have given away far too much, a judge may question whether the split is equitable. A good attorney should catch that first.
Don’t leave asset-rich and cash-poor. If most of what you keep can’t be sold, you may have nothing to live on and end up borrowing to get by. Know your preferences, share them with your team and keep the back-and-forth efficient so the bills don’t pile up.
Key action items
- List every illiquid asset, including business interests, private investments, real estate, art, jewelry, heirlooms and pensions.
- Ask your divorce team who should value each one: a business valuation expert, an appraiser or a financial professional.
- Rank sentimental items against your priority list so you know what you’d be willing to trade.
- Get a present value for any pension before choosing between a lump sum and future income.
- Check your cash position so you don’t leave with assets you can’t sell.
Listen next: Episode 11: How to Turn an Illiquid Asset Into a Liquid Asset
Jon Peyton previously held the Certified Divorce Financial Analyst® (CDFA®) designation and no longer holds it. References in this episode reflect his credentials at the time of recording.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.