Property division in a Texas divorce relies on different rules than those used in many other states. In Texas, the presumption is that community property is divided equally between the two spouses. Before the community property can be divided, however, spouses need to know the exact value of each part of it.
While assets are divided equally, it does not always mean that they are split down the middle and distributed to both spouses. Some assets just do not lend themselves to division. Therefore, the divorcing spouses will need to attach a value to those kinds of assets, and one spouse will give the other money or different property to pay for their share.
Some assets are more straightforward and easier to value than others. For example, if a couple has an investment account, practically all assets can be valued on a real-time basis because they are liquid and trade actively. However, other investments may be more illiquid. Some people have large real estate investment portfolios. Homes and land are more difficult to value, and there can be vastly different opinions of what they are worth.
The Challenges of Valuing Certain Assets
Valuing a business co-owned by divorcing spouses is also difficult. After the divorce, many spouses would not want to remain co-owners of a business. The spouse who will keep owning and operating the business would need to buy out the other’s share, assuming the business is part of the community property.
Finally, there may be different valuations of personal property. Assets can be valued by the book value or by the replacement value. In some cases, the sentimental value may cause one party to attach an even higher value to a piece of marital property.
The divorce process will be complicated when an asset lacks a ready market valuation. This often occurs in high-net-worth divorces. Each party will hire its own valuation experts to appraise the property and assign a value.
Valuing a Business
One of the most complex valuation issues comes when dividing a business that is not co-owned by divorcing spouses. This issue arises any time one or both of the spouses is self-employed. This kind of ownership interest is not traded on the open market, so there is no objective external valuation. Businesses have many assets, and some of them are not tangible. Of course, a business may have physical assets. But its intangible assets, like its intellectual property and goodwill, may also have value. Some spouses may value the business based on a multiple of earnings, while others could focus on the physical assets. Yet another way to value a business is based on market sales of comparable businesses.
Business valuation is a complex and detailed process, and it could involve the following:
- Obtaining background information on the business
- Gathering data upon which the valuation would be based
- Interviewing stakeholders and people relevant to the business
- Visiting the site to learn more about the business
- Reviewing the financial documents and detecting trends that affect the business’s future
- Issuing a written report that values the business and explains that number
Further, not all of a business’s value may be considered community property. One spouse could have owned the business before the marriage. In that case, the appreciation in value of the business would be considered part of the community property. One spouse would want the business valued lower because it would mean they need to pay the other spouseless. The other would argue the business was valued low before the marriage and appreciated in value greatly. One way to avoid this issue is to establish a business valuation before the marriage or to sign a prenuptial agreement that addresses what happens to the business in the event of a divorce.
Current market valuation does not always tell the whole story about an asset. Even if an asset has value, it does not mean you can sell it at that price. There may be an illiquid market or transaction costs involved. Additionally, you may need to pay taxes on the appreciation of value. These are all issues that need to be considered before signing a divorce agreement.
Necessary Experts For Valuation Issues
The most common types of experts you may need when valuing property in a divorce include:
- Business valuation experts – these experts will look at financial documents, such as income and account statements and balance sheets to come up with the business’s value.
- Forensic accountants – can provide advice in a number of areas, including valuation of property, asset tracing, tax issues, and the construction of the community property.
- Real estate experts – they will analyze the features of a home or other real estate property and comparable sales to figure out the value.
- Tax advisors – they will advise about what tax obligations one spouse may have if they sell property in the future. The valuation would need to be adjusted to reflect the portion of the value that would belong to federal and state governments.
If the two spouses cannot agree on one expert, they would need to hire their own. The costs of these experts can add up quickly. In the end, a court will decide the value of a property if the two parties cannot agree outside of court on a valuation. Given how community property rules work, agreeing on the proper valuation of assets often constitutes much of the heavy lifting in a divorce. Both spouses should try to work through these issues with their respective family law attorneys because establishing property values in court can be time-consuming and expensive.
To schedule a consultation, contact us today. Our Brazoria County, Texas family law attorneys are ready to help.