Before their divorce in 1987, Dianne and Mark Johnson of Orange, Calif., met over lunch several times to discuss the division of their assets.
Much more than the silverware and the checking account was at stake: After 20 years of marriage, the Johnsons had a prosperous business, ample retirement plans and real estate valued in the millions of dollars.
He got the business, a medical supply company he started in 1974, and she took most of the real estate. And both came away feeling the deal was fair. “Revenge or vindictiveness never pay,” said Dianne Johnson, who went on to form a real estate company.
It was “a great divorce,” said Violet Woodhouse, a certified financial planner who reviewed the settlement that Dianne Johnson and her lawyer drew up. Mark’s legal bills were $2,200, Dianne’s $5,000. Had the couple fought, Woodhouse said, attorneys’ fees easily could have been $300,000.
Even if far less is at stake, the principle is the same. Full disclosure and cooperation can maximize each person’s share of a divorce settlement, while minimizing taxes and legal fees. And even if the parting is less than friendly, divorce can yield a long-term financial plan for each spouse, financial advisers say.
The basic tasks are identifying all assets subject to division, determining their value and negotiating a split.
None of that is easy. Increasingly, couples have hard-to-value assets, such as professional licenses and contingent retirement benefits, said Sam Margulies, the author of “Getting Divorced Without Ruining Your Life” (Fireside, 1992) and a lawyer with a divorce mediation practice in New York City.
Is a law or medical practice the property of both spouses? (That depends on the state.) If it belongs to both, what percentage goes to each? (That’s not the same in any two cases.) And what is it worth anyway?
The first step is an inventory of property and income. Woodhouse, who is now a lawyer and co-author of “Divorce and Money” (Nolo Press, 1993), recommends looking at the last five years of tax returns. These papers list many investments and assets sold, as well as income.
She also recommends consulting every financial professional used over the years-accountants, brokers, bankers, insurance agents. For the Johnsons, the tally was enormous, since they had married young with little more than a $500 gift from her grandmother to buy furniture.
In a marriage of 10 years or more, a partner might be entitled to some retirement benefits, or other benefits, accrued by a spouse. Employers can provide copies of a spouse’s retirement plan, although the request may have to be made by a lawyer. The Social Security Administration can supply information on its benefits (800-772-1213).
The truly contested divorce might require a financial detective, often called a forensic accountant, to track hidden assets. Alan Dunninger, a forensic accountant in West Caldwell, N.J., said he looked for municipal bonds or investments in closely held corporations, which are not reported on tax returns, among other items.
In a letter to spouses of clients, Dunninger asks for canceled checks, bank statements, insurance policies, closing statements from property sales and correspondence pertaining to passive investments.
Not all assets are marital property, subject to division by a court at divorce. (Generally, gifts and inheritances directed to one spouse are excluded, as is property acquired before marriage and kept separate from marital assets.)
The next step is valuing assets. This requires appraisals, not just of real estate and businesses, but of antiques, cars, boats and jewelry. Determining the current value of a pension might require an actuary.
Typically, each side hires its own appraiser. If the wife is likely to keep the house, she seeks a conservative estimate-perhaps from an appraiser who works for mortgage lenders-while the husband might go to a real estate broker.
A better choice, Margulies said, is for one spouse to make a list of appraisers and to have the other choose from it. (It’s even easier, of course, if the couple can agree at the outset on a disinterested appraiser.)
In any event, certain businesses do not lend themselves to appraisals. “Take a law or medical practice,” he said. “For all intents and purposes, you can’t sell it.”
Even more conventional family businesses are subject to widely disparate valuations, and valuators are expensive. Charges of $20,000 to $50,000 are not unusual. The single largest expense in the Johnsons’ divorce-at $100,000-was the appraisal of their company by Peat Marwick.
Finally, many people overlook tax liabilities in valuing assets. To take a common example, compare $10,000 in stock and $10,000 in a certificate of deposit. If the stock was bought five years ago and followed the general drift of the market, capital gains taxes would be owed on $3,000 or $4,000 if sold. The CD carries next to no tax liability, because tax has been paid each year on the interest earned.
Similarly, the spouse who gets the house may well be taxed on its eventual sale if the proceeds are plowed into a less expensive home. In such a case, federal capital gains tax of 28 percent will be owed on the difference between the sale proceeds (adjusted for house improvements and other costs) and the cost of the new home.
Typically, the wife keeps the house, and the problem arises when she can no longer afford it, said Cicily Carson Maton, a certified financial planner in Chicago who specializes in divorce.
“Courts tend to want to see women stay in their homes,” she said. “I tell women that’s fine, but run the numbers first.”
With such information in hand-or, more likely, two sets of information-the spouses can negotiate. Margulies suggests that each make a list of assets, assigning values and proposed percentage dispositions, and then look at the total. The margin of difference on the whole estate may be surprisingly small.
“The adversary system exaggerates the divergence,” he said. “Typically people are very close, often within 5 or 10 percent.”
