One of the hardest problems that a divorcing couple may face is how to divide up marital property. Each spouse makes a list of everything they own and everything they owe. This is called a Net Worth Statement. Then the court – or the spouses – must decide which property is separate (which that spouse will keep) and which is marital (or joint) and will have to get divided.
As you can imagine, this can be emotional, and may be a source of conflict.
Assets like bank accounts are relatively easy to deal with – you can look at a bank statement and know their value. But there are other types of assets that may require a professional appraiser because their value is not obvious. This might include a business, or the family house, or a pension. (Yes, pensions are considered to be marital property!)
What are financial neutrals?
It is useful and common for couples in mediation or collaborative process to use a financial neutral to help them make informed decisions. Financial neutrals are hired by and have a professional relationship with and duty to each spouse. They can help collect all of the important documents and information in one place and make reports that the team can use to make informed decisions. They can project how a certain decision will affect each spouse in the future. They can analyze the tax benefits or detriment of a particular decision. They can help to educate a spouse who has little experience with financial decisions. They can meet with the couple together to educate them.
When would you need a financial neutral?
Let’s go back to our fictitious divorcing friends, Lonnie and Chris. They bought their home together during the marriage, and there was no question but that it was marital property. They agreed that Lonnie would stay in the house and would buy Chris out. How will they know how much Lonnie will owe Chris?
In a litigated divorce, they would each hire their own separate appraiser. After all, Chris has an interest in getting a high appraisal, while Lonnie getting a low one, because the value of the house will affect the buyout price.
However, in our scenario, Chris and Lonnie are in mediation, so they could hire a neutral professional real estate appraiser to help them know the fair market value of the house. The appraiser will inspect the house, look at its condition and note whether it it up to code (it is!). Then the appraiser will look up comparable sales and houses on the market. They will do a detailed analysis of the current market for homes in that area and check public records to see if there are any liens on the property. They might comment on the neighborhood itself, the surrounding schools, and access to shopping, public transportation, and recreation since that may affect the house value. The appraiser will give a report and should explain their findings to both sides together. Appraisals are almost always based upon a set of assumptions that should be made explicit. For instance, a restaurant appraisal may assume that people will continue to be able to eat indoors. We have learned that this assumption, which would have been a no-brainer before March 2020, may not necessarily always be the case. By presenting their findings to both parties together, Chris and Lonnie will have a chance to ask questions and to learn more about the process and the assumptions the appraiser was making. The appraiser is more likely to come up with a true and fair appraisal because they are neutral.
Chris and Lonnie not only saved the time, stress and expense of having two appraisals, but also that of having the appraisers resolve the differences between their findings. This is commonly the subject of court hearings and can be very stressful for everyone involved.
In this example, they used a neutral appraiser, but neutrals may also be Certified Divorce Financial Analysts or Certified Financial Planners. Financial neutrals who are familiar with the tax code (such as accountants) can also help the divorcing couple figure out how to come up with a resolution that will maximize their tax benefits.
I have often found it to be very beneficial – and ultimately cost saving – for couples to use financial neutrals. It is certainly worth discussing with your spouse!
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