Typical Client Situation
A couple is divorcing and the husband has been primarily dealing with the couple's investment portfolio. The wife has limited insight into the couple's finances. Now the couple is deliberating how to divide the marital assets, with input from their attorneys.
The husband informs the wife and her attorney that the portfolio has $2 million in real estate and $2 million in an investment portoflio. The easiest split would be for one spouse to take the real estate and the other to take the stocks. But that isn't always the smartest move.
See the following two possible scenarios where one client does not receive an equal portion of the assets over time.
Since the stock market is volatile and the wife is not experienced at picking stocks, the husband suggests that she take the real estate. After all, real estate is a solid investment; there will always be a limited supply of land. The wife and her attorney agree, and the couple reaches a settlement.
The wife is excited to own various pieces of real estate. It doesn't concern her that the real estate comes with debt, since the net equity is valued at $2 million. However, she soon learns that servicing the debt requires regular payments. The wife is struggling to cover her own expenses. Soon, she can't make the required payments. She learns quickly that real estate is an illiquid investment. It's a bad time to sell real estate. She doesn't have time to wait for a good price. She is able to sell some of the properties at a discount, and the lender forecloses on the remaining properties.
The couple's real estate assets are located throughout the United States. The wife agrees to take the stock positions because they are liquid and require less ongoing management. Her attorney agrees. Eager to end negotiations, the couple signs a settlement agreement.
Nobody questioned the husband's valuations of the real estate because he presented recent purchase prices. The wife was unaware that the husband had purchased all real estate properties from distressed sellers within a year, at great discounts. The actual fair market value of the real estate was closer to $3 million. But the wife and her attorney did not realize that the purchase prices did not reflect fair market value. At the same time, the stock market experiences a difficult two years. The wife's stock positions drop in value from $2 million to $1.8 million.