Thursday, 10 October 2013 00:00

Valuation and Division of Property

Written by

One of the most contentious issues during a divorce or legal separation is the division of assets and debts.  When dividing property, the parties must place a value on the property prior to its division.  The “value” of an asset is the highest price on the date of valuation at which a seller would agree to sell and where a ready, willing, and able buyer would buy.[1] 

Several specific assets have a particular valuation method that attorneys, experts and courts use to value property.  Our office has found that the following are some of the most common assets subject to division:

Real Property: There are three methods used to value real property that the courts generally recognize: (1) Market Approach, (2) Income Approach, and (3) Cost Approach.[2]  The Market Approach, often used for single family residences, is an appraisal that looks at comparable surrounding properties and adjusts for any differences.  Experts use the Income Approach to determine the value of income producing properties.  Under this approach, the expert bases his valuation on a capitalized value, which he estimates by looking at the net income that the property will likely produce throughout the remainder of its economic life.  Finally, the Cost Approach is used for unique properties.  Through this approach, the expert estimates the current cost to reproduce the structures and improvements on any piece of land.  The expert then subtracts this amount by depreciation and increases this amount by any increase in land value.[3]

Specific valuation methods are used for high priced homes, golf community homes, vacant land, green homes, shopping centers, and medical buildings.

Pensions: There are several types of pensions.  The most common pensions are defined benefit plans and defined contribution plans.  

A defined benefit plan fluctuates in value and is based on several factors including age at retirement, years of service at retirement, and income or salary.  To determine the value of a defined benefit plan, an expert must ascertain the present value of the pension benefits to be received in the future.[4]  To determine the pension’s value, experts use the actuarial method, which makes assumptions about interest, mortality, and vesting.

Unlike a defined benefit plan, a defined contribution plan is a plan where a specified amount is contributed annually and invested on the employee’s behalf.  The value of a defined contribution plan is the amount of the contributions between the date of marriage and the date of separation, together with the gains or losses in value that resulted from investments of those contributions.[5]  Valuing a defined contribution plan does not require an expert.

Valuing a pension varies depending on the employer.  For instance, pensions through federal civil service and military pensions have earlier retirement ages that increase the present value of the pension.  As a result, an earlier retirement age can nearly double the payout of a pension as compared to a Fortune 500 employee’s pension, even when the employees are of identical age, service, and salary history.  Since Fortune 500 employees have a higher average retirement age, the employee’s present value can often be lower than expected.

401K Plans: There are three different methods used to value 401K Plans.  The most common method, the tracing method, looks at the contributions made during the marriage plus earnings on those contributions.[6] 

Businesses: Due to the complicated nature of businesses, valuing a business requires expert testimony.  To determine the value of a business, experts look at three areas: (1) accounts receivable; (2) goodwill; (3) and fixed assets and liabilities.[7]  To determine “goodwill,” a phrase used to explain the expectation of continued public patronage to the business, experts use two methods: (1) the gross receipts multiplier method and (2) the capitalized excess earnings method.[8]

Different valuation methods are used for closely held businesses and professional businesses.

Examples of closely held businesses include automobile dealerships, media businesses, high-tech and high-growth companies, restaurants, construction companies, banks, and local stores.  The most common types of professional businesses are medical practices and legal practices.  Since each medical practice and each legal practice is unique, professional businesses require a more involved valuation method than do closely held businesses.

Look out for a separate blog detailing how to value closely held businesses and professional businesses in the near future!

Life Insurance: For whole life insurance policies, which build up cash reserves, the policy is usually valued at its cash surrender value.[9]  In contrast, term insurance is very complicated and courts have not agreed on how to value term insurance.  First, there are four views on whether term insurance is property that can even be divided.[10]  These views are that: (1) term insurance is not property subject to division; (2) term insurance is property subject to division; (3) term insurance is property subject to division, but only when the insured dies or becomes uninsurable during a time when the community funds were used to pay the premium; and (4) term insurance is property subject to division, but only when the insured dies during a time when the community funds were used to pay the premium – not if the insured becomes uninsurable.[11]  If the life insurance is deemed to be divisible property, factors used to determine its value include: (1) the face value, (2) the amount of the premium, (3) the insured’s life expectancy, (4) the replacement cost of the insurance, and (5) when the policy vests and is deemed fully paid.  Other courts use an actuarial present value model.[12]

Personal Property: When dealing with valuables like fine art, jewelry or gems, an appraisal process is necessary.  There are three standard approaches to valuing personal property: (1) the Cost Approach; (2) the Income Approach; and (3) the Market Comparison Approach.[13]  The Cost Approach examines the cost of a substitute property with equivalent function.  The Income Approach looks at the present worth of anticipated income, while the Market Comparison Approach looks at similar property for sale.  In most circumstances, the Market Comparison approach provides the most accurate valuation.  When determining value, the appraiser considers the condition of the item, the rarity of the item, and the provenance, or history, of the item.

Our clients often seek appraisals for gems and jewelry during a divorce.  The valuation of a gem, such as a diamond, depends on the gem’s carat, color, clarity, and cut.  For colored gems, such as sapphires, the valuation depends on the hue, tone, and saturation.  Another common item of personal property is oriental rugs.  For oriental rugs, appraisers look at qualities such as color and design, quality, condition, rarity, and provenance.  Finally, many couples seek to divide paintings, sculptures, or photography pieces.    Appraisers value art work based on the kind of painting or sculpture and comparable artwork through sample valuation.

Automobiles: Automobiles, with exception for classics, exotics, or luxury automobiles, generally do not require expert testimony. Instead, they are valued at the mid-point between the high and low retail values given by Kelly Blue Books.[14]

Determining the value of an asset can be complicated.  Our office has a team of highly qualified forensic experts to assist our clients’ needs.  Attorneys and experts should be consulted to determine the proper valuation method.

[1] Cal. Fam. Code Section 5.41.

[2] Cal. Fam. Code Section 5.55.

[3] Id.

[4] Cal. Fam. Code Section 5.57. 

[5] Cal. Fam. Code Section 5.58. 

[6] Robert D. Feder, Valuing Specific Assets in Divorce, 19B-4 (Aspen Publishers, 2007).

[7] Cal. Fam. Code Section 5.59. 

[8] Cal. Fam. Code Section 5.61.

[9] Cal. Fam. Code Section 5.66. 

[10] Cal. Fam. Code Section 5.65. 

[11] Id.

[12] Id.

[13] Robert D. Feder, Valuing Specific Assets in Divorce, 20A-6(Aspen Publishers, 2007).

[14] Cal. Fam. Code Section 5.67.

10.0Diana Pamela Zitser


1901 Avenue of the Stars, Suite 1100
Los Angeles, CA 90067
Phone: 310-948-6461