How to Understand Illiquid Assets in Divorce: Businesses, Shares, Property, and Pensions

A song called: Grounds For Divorce” has one line that goes: “There’s a Chinese cigarette case, and the rest you can keep.” It colorfully illustrates that when it comes to dividing assets with your Ex, some things are relatively straightforward and can be settled easily. However, other assets are a little more complicated, and possibly emotional or sentimental, and others that sit squarely in the vague space. Many women make the mistake of not fully understanding the implications of dividing liquid and illiquid assets. In this article, we’ll look at why illiquid assets are more complicated and why it pays to take a more in-depth look.

The Wall Street Journal consulted divorce coach and SAS for Women Founder, Liza Caldwell, for a recent feature on five common financial mistakes people make during divorce.  SAS has been taking an in-depth look at each point. This penultimate article in the series examines why so many people mishandle illiquid, or fixed, assets. What exactly are they? And how can you avoid falling into the trap?

Liquid vs. Illiquid Assets in Divorce

So, what’s the difference between liquid and illiquid?

Simply put, liquidity means that someone has enough readily available cash to pay their way and cover their financial responsibilities. The most obvious liquid asset is money kept in a checking or savings account. Liquid assets also include tangible items you can sell quickly with minimal loss in value.

Okay, so what exactly are illiquid assets? Well, it depends.

Illiquid assets are acquisitions that, for various reasons, cannot be quickly converted into ready cash. I discovered this for myself when I put an item up for sale recently on eBay; just because something is expensive and has value in your eyes doesn’t guarantee there will be a horde of buyers clamoring to pay top dollar for it, as I sadly discovered.

Aside from belongings and equipment, some examples of illiquid assets include property and real estate, pensions, businesses, and shares, which are often a bone of contention among divorcing couples.

Of course, liquid and illiquid assets are equally important; the trick is getting the balance just right, so that you’re not asset-rich but cash-poor.

What About the House?

As mentioned in a previous article in this series, it’s important to make decisions based on financial logic, rather than an emotional attachment.

Let’s look at the example of a physical asset, the marital home. Some women are too focused on keeping the house, come what may, as opposed to selling the house during a divorce. However, it might not be the most sensible option. If you do decide to keep the house for yourself, you will need to buy your Ex’s share with a cash payout or sacrifice some other assets of the same value. Even when this is possible, many women fail to thoroughly examine whether their sole income will allow them to cover the mortgage payments, maintenance costs, and taxes, as well as day-to-day living expenses.

There are several other options open to you. Of course, one of the cheapest and most obvious options would be to simply sell the house and divide the proceeds equally. But don’t let yourself be short-changed. What if the current housing market isn’t particularly favorable? Would it be better to hold off for a while until you get a price that reflects the true value of the house?

Some divorcing couples have continued to share ownership of their home; everything from having separate bedrooms, to rotating who lives there and when, if you have young children.  For help with that particular challenge, consider reading about how to separate from your spouse while living together.

If you can’t bear the sight of your Ex, another option is to rent the house out and share the income from it. But of course, this comes with the added caveat of being business partners with your Ex!

The Right Time?

In general, men acquire a bigger pension fund than women, due to the fact that women often interrupt their careers to raise children. But remember too, statistics show that women live longer than men following retirement.

Hence, pensions are very often one of the most significant assets accrued during marriage and must be given due diligence during divorce settlements.

The good news regarding pensions is that the law requires both husband and wife to have the right to a fair share, no matter who contributed what during your time as a couple. When it comes to dividing pensions, there are different options available, and it depends on your circumstances. What’s right for you when you’re 30 may be vastly different from when you’re 60!

• If you want a clean break, there is pension sharing. This involves a percentage of one spouse’s pension being transferred to the other’s separate pension fund.
• Another common procedure is pension offsetting. The spouse with the lower pension is compensated with additional assets or a cash lump sum to the same value. If you feel this is the way to go, SAS For Women strongly advises you to get legal advice first. It’s not always easy to tell if an illiquid asset measures up to the same as property or savings. Check out this article on how to find a good divorce lawyer.

Do Your Homework

Before you even begin, don’t start carving things up until you have an accurate figure of the value of your illiquid assets. This is probably best left to the professionals who are experts in valuing things like property, pensions, and businesses, and what their future projections will be. SAS urges you not to negotiate things directly with your spouse until you get outside, objective feedback on what your rights are and what would be the best financial transaction for you.  To learn more about how to advocate for yourself and harness objective support, schedule a free, confidential consultation with SAS for Women.

Of course, the main danger of relying too heavily on illiquid assets is the impact on cash flow, which may leave you unable to cover your monthly expenses (liquidity). In order to remedy this, it’s a good idea to know what your financial outgoings will be, post-divorce. And I don’t mean just taking a rough guess; be sure to account for everything you’ll need for day-to-day living. This will include the obvious expenses, like your mortgage or rent, utility bills, food, health insurance, and even your daily travel expenses. 

If you have children, have you accounted for all their needs and submitted an accurate estimate that amply covers the necessary child support? Even something as simple as childcare fees, camps, extracurriculars, or taking them to and from school?

Don’t Panic!

Whether it’s dividing property, pensions, or business interests, get to know the true value of the illiquid assets within the marital estate. Ask yourself if you can really afford to keep the house and live without day-to-day money worries?

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Check out SAS’s article, Do stay-at-home moms get alimony?

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Dividing illiquid assets can seem a bit like walking a tightrope; making sure you have enough to live on now—and at the same time—have enough set by for later life. But rest assured, you can make it safely across the chasm by taking advice from a qualified divorce coach, which, together with sound legal advice, will help you make the right decisions.

NOTES

Whether you are thinking about divorce, dealing with it, or recreating the life you deserve, one thing we see making a significant difference for women is the conscious choice to not do it alone. 

Since 2012, smart women around the world have chosen SAS for Women to partner with them through the emotional, financial, and often complicated experience of breaking up and reinventing. 

SAS offers all women six free months of email coaching, action plans, checklists, and support strategies for you — and your precious future. 

Join our tribe and stay connected.

 

*We support same-sex marriages. For the sake of simplicity in this article, however, we refer to your spouse as your “husband” or “he.”