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Dividing Assets in Divorce, Percentage or Dollar Amount?

During Dissolution of Marriage (Divorce) and the dividing of assets, there is an administrative detail known as "Valuation Date". The Valuation Date refers to the value of the assets on a certain day. This value is often used for the decisions regarding which assets are divided and how to divide them. An often-overlooked detail is the expectation issue in choosing a percentage or a dollar amount in dividing an asset. Why is this distinction important? Could there be a real difference to the outcome? Someone once said, "you can't spend a percentage, it is the dollar amount that matters".

Some assets are difficult to value and require an independent appraisal, others are easy enough to agree on a value, and still others are changing in value daily, like stock and bond market investments in an IRA or 401(k). If the value is changing daily, this presents a challenge in deciding how to divide these assets. Here is the challenge.

If you choose a particular valuation date for valuing assets and in the mix of assets there are stock market mutual funds, in a 401(k) for instance, these assets will likely not be divided until a later date. What will the values of these mutual funds be later? More than the valuation date value? Less than the valuation date value?

For example, you decide the valuation date will be July 31. In August, there will likely be investment statements generated showing the values for that date. Let us assume your divorce is final in November and one of the assets is a 401(k) containing stock mutual funds, which have changing values on a daily basis. How did you divide that asset in your agreement? If the intention is to divide the asset equally on a 50/50 basis and the value was $200,000 on July 31, did your agreement state the division as transferring $100,000 from the 410(k) to the other spouse? Was that at least your expectation? What if the value had changed to $250,000 by November? What if the value had dropped to $160,000? Would it have been better to state the division as a percentage, 50% to each spouse? But if the value dropped to $160,000, what was expected to be a $100,000 transfer to the other spouse is now down to an $80,000 transfer ˆ less than the other spouse expected. Receiving fewer dollars than expected can bring into question the fairness of the overall asset division, albeit after the fact. Would it have been better to state this as a dollar amount? There is still a problem. The intention was 50/50 and at $160,000, with $100,000 being transferred, only $60,000 would remain in the 401(k) ˆ not an equal split. There are solutions to this issue.

What is clear in these cases is that each party may have a different view of the assets and the risks inherent in dividing them. Care must be taken to satisfy each party‚s concerns and expectations in dividing assets. You may want to consult with a professional who understands the income tax, asset value risks, and administrative details involved in dividing assets.

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