In this episode: A business, a piece of art, an engagement ring or a pension can be worth a lot without being cash. Jon Peyton explains how illiquid assets get valued and divided, and the options when one spouse wants to keep the asset and the other wants their share.
Key insights
- Before an illiquid asset can be divided, both spouses have to agree on what it’s worth.
- Selling isn’t free. Fees and taxes reduce what’s left to split, and the seller gives up future growth.
- A buyout paid over time, usually through a property settlement note, should carry an interest rate that reflects the growth the receiving spouse gives up.
- Pensions differ in payout options and cost-of-living adjustments, and the marital share depends on how many years of the pension were earned during the marriage.
- Splitting everything down the middle is simple, but it isn’t always the best financial outcome.
Episode timeline
- 0:00 Introduction
- 0:42 What counts as an illiquid asset
- 1:35 Do you want to keep a stake in the business?
- 3:26 Agreeing on value and getting your share
- 5:56 Artwork and the cost of selling
- 8:15 The engagement ring and other gifts
- 10:45 Two ways out: sell, or pay over time
- 11:54 Paying a buyout from cash flow
- 13:44 The risk of a long payout
- 14:38 Property settlement notes and interest
- 19:31 Pensions as an illiquid asset
- 20:48 Payout options and cost-of-living adjustments
- 25:34 Calculating the marital share of a pension
- 27:59 Why the math needs a professional
The episode in brief
Not for everyone. If neither spouse owns a business or other illiquid asset, this episode may not apply. Jon treats anything that can’t become cash within roughly 30 days to six months as illiquid: businesses, real estate, private equity, art, jewelry and pensions.
Do you want to stay in? If a spouse owns a business, the first question is whether you want any piece of it after the divorce. If not, how do you get your share out of something that isn’t cash?
Agree on a value first. A business can be valued on its cash flow, its assets or its intellectual property. Ultimately someone has to be willing to pay that price, and both spouses have to accept the number. Say it’s $1 million and you’re entitled to half. There’s no $500,000 sitting in the bank.
Trading for liquid assets. If the household has enough in checking, savings or retirement accounts, you might take more of those and leave the business to your spouse. That suits someone who wants a clean break. Keeping a stake could pay off if the business grows, but nobody knows which choice will turn out better. Your attorney can explain what’s negotiable under your state’s law.
Art and the cost of selling. Art turns into cash only when it sells, and selling costs money. A piece that sells for $100,000 with $20,000 in fees nets $80,000. If one spouse keeps it, is the other owed half of $100,000 or half of $80,000? Whoever keeps it also takes the risk that it loses value or is destroyed.
The ring and other gifts. A large engagement ring can be worth $100,000 or more, and whether it’s marital or separate property depends on the circumstances. Twenty years of gifts, such as golf clubs, a car or a watch, can add up too. Tallying them can let each person keep what they want, with any gap made up in cash.
Sell, or pay over time. Without enough cash, there are two routes. Selling brings fees, taxes and lost future growth. The alternative is paying from cash flow. Jon’s example: a $1 million business producing $100,000 a year, where the owner pays the other spouse’s $500,000 share at $50,000 a year for 10 years.
The catch. Over those 10 years the owner might grow the business to $10 million, while you wait to be paid. That’s why a buyout over time is usually written as a property settlement note with an interest rate, typically on the unpaid balance. The rate reflects what you might have done with the money had you received it up front. If the business doesn’t grow, that risk sits with the owner. A property settlement note is separate from alimony and child support.
Pensions. A pension pays income from a set retirement age. Some pay for life only; others pay for a fixed period and continue to beneficiaries. Some include cost-of-living adjustments. At the time of recording, Jon noted that Social Security had just announced a cost-of-living increase of more than 8%; a pension with a similar feature would rise too.
The marital share. Jon’s simplified example: $3,000 a month from 65 to 85 totals $720,000. If you were married for half the years the pension was earned, your share in general terms might be 25%, or $750 a month. Fifteen years from now, without a cost-of-living adjustment, that may not buy much. You might negotiate a lump sum or more of the liquid assets instead, though the employee spouse may resist trading cash for a pension they haven’t fully earned. Read the plan’s summary plan description, and have a CDFA or forensic accountant run the numbers.
Don’t default to 50/50. In Jon’s experience, many attorneys keep things simple and split everything down the middle. That may not serve you best, so know your goal and your backup options.
Key action items
- List every illiquid asset and note who might want to keep it.
- Get a professional valuation of any business, and ask how each method changes the number.
- Estimate the net value of a sale after fees and taxes before deciding whether to sell or keep.
- If you’ll be paid over time, ask your attorney about a property settlement note, the interest rate and what happens if payments stop.
- Request the summary plan description for any pension and have the marital share calculated.
Listen next: The Entrepreneur’s Adviser™
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, including references to certified divorce financial analysts at C-Suite Planning™.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.