Guide to Intangible Financial Assets in Divorce
- What are intangible assets?
- How intangible assets are valued
- How intangible assets may be divided in a divorce
When couples divorce, a property division process is par for the course. Accurate asset valuation is key to a fair distribution between the two parties.
Intangible assets must be divided in divorce just like any other assets. However, these are often harder to value, and their distribution may be more complex.
What are intangible assets?
Intangible assets are non-physical assets that have financial value such as cryptocurrency, copyrights and patents, trademarks, intellectual property rights, goodwill, customer lists, and domain names. These assets can have significant economic value for organizations and individuals alike.
Examples of intangible assets include brand recognition (goodwill), intellectual property like patents and copyrights, software programs, websites, databases, and other digital content (including music files), customer loyalty programs, franchises, trademarks, and trade secrets.
The key difference between tangible and intangible assets is simply physical presence. Tangible assets are physical resources that can be owned or controlled by a company or individual. Examples of tangible assets include buildings, land, and equipment. Intangibles do not have a physical form; rather, they represent something of value to an entity or individual.
Can intangible assets be valued?
Intangible assets can be valued, and there are two main methods through which this is achieved: the relief from royalty method and the multi-period excess earnings method.
Relief from royalty method
The relief from royalty method is a commonly used technique for valuing intangible assets in divorce cases. This method estimates the amount of money that would need to be paid to license or rent the asset if it were not owned by one of the spouses. The idea is that the spouse who owns the asset should compensate the other spouse for their share of its value as if they were licensing it from them.
To use the relief from royalty method, an appraiser estimates what a third party would pay to license or rent the asset. They use this rate to calculate the value of the asset. This approach can be particularly useful when valuing intellectual property such as patents, trademarks, copyrights, and trade secrets.
It's important to note that this method is just one of several possible approaches to valuing intangible assets in divorce cases. Other methods include market-based approaches (such as comparing sales of similar assets) and income-based approaches (such as estimating future cash flows from the asset). The best method depends on the circumstances of the case.
Multi-period excess earnings method
The basic idea behind the multi-period excess earnings method is to estimate the future economic benefits the intangible asset will generate (such as revenue or cost savings) and then calculate the present value of those benefits over a certain period of time.
To do this, an appraiser starts by estimating the expected future cash flows generated by the intangible asset. They subtract from these cash flows an amount representing what they consider to be a reasonable return on all tangible assets used to generate those cash flows (such as plant and equipment). The resulting figure represents the "excess earnings" attributable solely to the intangible asset.
Once an appraiser estimates these excess earnings, they use a discounted cash flow analysis to calculate their present value over a chosen period of time. This involves discounting each year's projected excess earnings back to their present value using an appropriate discount rate.
It's important to note that this method can be complex and requires careful consideration of a number of factors, including estimates of future cash flows, discount rates, and useful lives. However, it can provide a robust valuation for complex intangible assets that are critical to the success of a business.
How the division of intangible assets may be handled in divorce
In an equitable division state, the court will divide marital assets fairly, but this does not mean equally or evenly. The court may look at each spouse's income, earning potential, age, and health. They may also look at the duration of the marriage and each spouse's contribution to the marriage (including homemaking and child-rearing).
Example: John and Jane in an equitable distribution state
Let's say that John and Jane are getting divorced in an equitable distribution state. They jointly own a patent for a new type of solar panel. The patent is the primary asset of their joint business, which also includes a website that promotes the product.
To distribute this intangible asset in an equitable manner, the court would consider a variety of factors related to the patent and website. These might include:
- The contribution of each spouse to the creation and development of the patent and website
- The value of the patent and website based on market conditions and potential future earnings
- Any agreements or contracts related to licensing or commercialization of the patent or use of the website
- Any other relevant factors, such as whether one spouse has greater expertise or experience in managing intellectual property assets
Based on these factors, the court may decide to award ownership of the patent to one spouse while awarding ownership of the website to the other. Or, they may divide ownership of both assets between them.
For example, if John was primarily responsible for developing and marketing the solar panel technology covered by the patent while Jane managed most aspects of promoting it through their website, it's possible that John would be awarded sole ownership of the patent while Jane would be awarded sole ownership of the website.
Example: John and Jane in a community property state
In a community property state, marital property is generally divided evenly between spouses. There are some exceptions to this rule, such as if one spouse inherited property or if the couple signed a prenuptial agreement before getting married.
In this case, John and Jane's patent and website would be considered community property. In order to divide these assets in a divorce, the court would typically aim for an equal division of community property between spouses.
For example, if the patent had a monetary value of $500,000 and the website was valued at $100,000, each spouse would be entitled to roughly half of that value. This could mean that one spouse is awarded ownership of the patent while the other is awarded ownership of the website. If that's the case, a judge is likely to order the spouse receiving the higher-value asset to pay the other spouse an equalization payment so they each receive equal value.
Getting help with your divorce settlement
Divorce is rife with difficult decisions, from the decision to go your separate ways to how to divide your property. Let us help. Schedule a free 15-minute consultation with Hello Divorce to learn more about our online divorce plans, attorney services, and other resources.