In this episode: When one spouse keeps an asset that can’t be sold or split, the other still needs to be paid for their share. Jon Peyton explains the property settlement note, how it turns an illiquid asset into a stream of payments, and the risks to plan for if you’re the one receiving them.
Key insights
- A property settlement note lets one spouse keep an illiquid asset and pay the other spouse’s share over time, usually with interest.
- The asset needs an agreed value first: an independent valuation for an asset, or a present value calculation for an income stream.
- Payments on the note generally divide property rather than create income, though the interest may be taxable. Confirm with your accountant.
- The main risks to the recipient are that the asset loses its value, the payer dies or the payer runs out of money.
- A property settlement note is not alimony or child support, and the payer may owe all three at once.
Episode timeline
- 0:00 Introduction
- 0:32 Where we are in the divorce process
- 1:12 Why illiquid assets are harder to divide
- 1:40 An income stream that couldn’t be split
- 3:19 Private placements and lock-up periods
- 4:25 What a property settlement note is
- 5:45 A $1 million example
- 6:55 Paying out over time, with interest
- 8:40 How payments and interest are taxed
- 9:20 Risk: the asset loses its value
- 11:10 Risk: the payer dies or can’t pay
- 12:55 Protections to write into the agreement
- 14:00 What a property settlement note is not
- 15:40 Buying out the other spouse later
The episode in brief
The hard part. By this point you’ve worked out how to split cash, brokerage and retirement accounts. The harder part is the asset no one can easily sell: a business, a private investment, a property with no ready buyer. Jon describes a case where a real estate investment trust refused to split its payments among roughly 17 beneficiaries of a trust. It would pay only the trust itself, which then had to stay open to pass the checks along. Whether it’s an asset or an income stream, if it can’t be sold or broken up, it still needs a value.
Lock-ups. Say the two of you invested in a private placement, a private equity fund or a hedge strategy with a lock-up period of a few years, or a decade. If it’s a marital asset, you both have an interest in it, even if only one name is on it, and that keeps you tied together until it’s resolved.
What the note does. A property settlement note records what the asset or income stream is worth and how one spouse will pay the other for their share. An asset usually needs an independent valuation, sometimes more than one. An income stream can be valued with a present value calculation. Say the asset is worth $1 million. In a 50/50 split, each spouse is entitled to $500,000. If the spouse keeping the asset doesn’t have $500,000 in cash to spare, and most people don’t, they pay it over time instead: one, three, five or ten years. Because the recipient is waiting for money they could otherwise invest, the note usually carries interest tied to a benchmark such as a Treasury rate.
Taxes. Payments on the note are generally a division of property rather than income. The interest may be taxable to the recipient and possibly deductible for the payer. Your accountant and attorney should confirm how it applies to you.
The risks to the recipient. Jon walks through three. First, the asset could lose value, even go to zero, before the note is paid off, and the payer may go back to court arguing they shouldn’t have to keep paying. Second, the payer could die. The asset passes to their heirs, but does the note survive? Third, the payer could simply run out of money if their income or liquid assets dry up. Your agreement should spell out what happens in each case, such as a right to unpaid interest or to a share of the asset itself.
What it isn’t. A property settlement note is not alimony and it’s not child support. It’s a way of dividing an asset. But the payer may owe all three at once, so they need to confirm their cash flow can carry the combined payments. If it can’t, the two of you may have to keep owning the asset together until it can be sold, or arrange a buyout once alimony or child support ends. A later buyout means a new valuation, and the asset may have gone up or down by then.
The bottom line. A property settlement note can help you separate your finances and move on, but it isn’t guaranteed. Understand how it would work in your situation before you agree to one.
Key action items
- Identify any asset that can’t be sold or split, including investments with lock-up periods.
- Agree on how each one will be valued: an independent valuation for an asset, a present value for an income stream.
- Ask your attorney what protects you if the asset fails, the payer dies or the payments stop.
- Ask your accountant how the payments and interest will be taxed.
- If you’ll be paying, add up the note, alimony and child support to confirm your cash flow can cover all three.
Listen next: Episode 12: The Scary Seven Letter Word… Alimony
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.