Phoenix Family Law Attorney Blog

Arizona Divorces, Equitable Division of Assets and Debts, Including Complex Business Valuations:

Submitted by Attorney Douglas C. Gardner

Under Arizona law, the Court must equitably divide the assets and debts of the parties involved in a divorce case.  The general rule is that the equitable division will also be an equal division, though there are some exceptions where an un-equal division is considered equitable or fair by the Courts. 

Many assets and debts are simple enough to divide.  If there is $1,000.00 in a bank account, each party simply takes $500.00.  If one side already took $400.00, then of the remaining $600.00, one party will receive another $100.00, and the other party will get the $500.00. 

Similarly, with debts, each party is generally required to pay 50% of the debts.  Sometimes a house can be sold and the equity can be used first to pay down the debts.  Sometimes one party will do a balance transfer of 50% onto a different card, and each party will then be required to pay their 50% off at their own pace. 

Retirement accounts such as 401(K) accounts can be divided quite readily, though doing so may require a court order or complex paperwork.  The concept though is the same in that each party will get 50%. 

By settlement of the parties, and occasionally by court order, certain items are offset against other items.  The Court may give Husband the $500 pink sewing machine and give Wife the $500 orange chain saw, which would be an equitable division as each party has an item of equal value. 

Some care must be taken when using offsets or setoffs.  For example, $1000 in a savings account is not equal to $1000 in an IRA or 401(k).  The $1000.00 in the savings account has already had the taxes paid.  The $1000 in the IRA or 401(K) will require taxes of approximately 20% and a penalty in most cases of about 10%.  So the $1000 IRA or 401(K) nets only about $700.00 and the $1000.00 in the savings account nets the full $1000.  Similar issues result in property, real estate, stock, and businesses that have capital gains and other tax issues involved.  A qualified and experienced attorney should be able to help you understand the principles, and a CPA or accountant should be able to help you specifically quantify these valuation issues.

Having been involved in many complex divorces, an issue that often arises is the division of a business owned by one or both of the parties.  In cases where one party owned the business prior to the marriage, the other party may still have some claim to a part of the business.  In cases where the business was purchased or built during the marriage, the business must be equitably divided. 

Sometimes the easiest way is to sell the business and each party receives 50% of the net sales proceeds.  This makes things simpler for both parties, both attorneys, and the Judge.  However, in many cases the business is not one that is easily sold, or the business is the livelihood of one of the parties.  In these cases the business may be sold by the community to one of the individuals, or rather the purchasing party will pay the other party 50% of the value of the business. 

Figuring out the value of the business can be expensive and complex.  An appraisal for most houses costs $300-$400, and these can usually be obtained quite quickly.  The abundance of houses, all somewhat similar to one another (most have a kitchen, a family room, a few bedrooms and bathrooms) allow for comparable sales to be used to quickly identify the going rate for houses of a certain size and in a certain location.  With businesses, they are much less one size fits all.  Some businesses such as accounting or medical practices are service related.  Other businesses such as restaurants and grocery stores are retail, merchandise, or goods related.  Some businesses own the real estate used, while others rent or lease.  Some businesses are very risky and demand much higher returns.  Some businesses have intense competition, while other businesses have unique niches. 

Having been involved in many divorces including businesses, and having an accounting, finance and business background myself, I have seen how important it is to have businesses professionally evaluated.  Sometimes this can cost a few thousand dollars, but think for a moment what the cost to just guessing would be.  Hypothetically, the parties “guess” the business to be worth $300,000.00.  A business valuation would have cost $3,000.00.  Each party would have paid half of the business valuation.  If the “guess” is off by more than $3,000.00, one party will get burned.  What if the business was really worth $320,000.00 instead of $300,000.00?  The receiving party would receive $160,000 instead of $150,000.00 for half of the business.   This small difference in value would have easily justified the cost of the business valuation. 

There are some cases where the business is a very small business, or a new business with lots of debt, that is simply not worth much.  In these cases the business may not merit a full blown appraisal or valuation.  There are some options that can be considered to help both parties make appropriate decisions in such cases. 

Once the value of the business is determined, the parties need to ensure that certain adjustments are considered.  A business worth $500,000.00 may not automatically require a buyout of $250,000.00.  What if the business has debts of $400,000.00?  The net value of the business may then be only $100,000.00.  

A more complex adjustment is for anticipated capital gains tax.  If a business has been largely depreciated, upon the sale (other than a sale to a spouse as part of a divorce) the sale will trigger capital gains tax on the business.  This can be up to 20% of the purchase price (and subject to change as tax laws seem to do from time to time).  A business worth $500,000.00 could have a built in $100,000.00 of capital gains tax that would need to be considered and adjusted as appropriate.  This is more complex as there is uncertainty as to when the business would actually sell, and what the future capital gains tax would be. 

If you are involved in a divorce case involving simple or complex asset and debt issues and want experienced legal representation, please call 800-899-2730 and ask to speak with Douglas C. Gardner, or visit our website at www.yourarizonadivorcelawyer.com.