Finance for Lawyers:

Divorce Written Assignment

After twenty five years of marriage, Jane (age 44) and George (age 55) have decided to
divorce. They have hired you to help them effect a fair division of their assets. Their two children
are fully grown and living out-of-state; so there are no issues of child support.

Just a few month ago, the couple put together a balance sheet (reproduced below) in
connection with an application for a home equity loan with which they paid off some credit card
accounts and also refinanced a loan taken out several years earlier to help finance their children’s
education. Both Jane and George are comfortable with the valuations that appear on this balance
sheet. Aside from financial assets (consisting of bank accounts and various investments with a
current market value of $700,000), the largest asset on the couple’s balance sheet is their home, an
old Victorian house with an estimated market value of $350,000. Beyond miscellaneous personal
property (cars, clothing, and household furnishings), their only other significant asset is an art
collection consisting of a dozen early American primitive paintings, which the couple had purchased
over the years largely as a result of George’s interest in the subject. The couple’s insurance company
recently appraised the collection as having a current market value of $300,000. Aside from their
home equity loan, the couple has no significant financial liabilities.

Balance Sheet as of December 31, 2002

Assets Liabilities and N et Wo rth

Bank Acc ounts and Home Equity Loan $ 100,000

Investm ents (market) $ 700,000 Total Liabilities $ 100,000
Art Collection (appraised) $ 300,000
Othe r Persona l Property (est.) $ 100,000 Net W orth $ 1,350,000
Value of H ouse (est.) $ 350,000
To tal Assets $1,450,000

George works as an engineer for a manufacturing firm where he has been employed for the
past fifteen years. He expects to remain with the firm for ten more years until he reaches the age of
sixty-five at which point he will retire to Florida where his twin brother has a condominium. Under
his company’s pension plan, George is entitled to a pension (at age 65) in the form of a lump sum
payment equal to twenty percent times his final annual salary times his years of service at the firm.
George currently earns $100,000 a year. So, if he were to leave his employer today, George would
be entitled to a single lump sum pension payment of $300,000 (15 years times 20 percent times
$100,000). On the other hand, if he were to remain with his employer until he is 65 and if his salary
were to increase with expected inflation and likely promotions – meaning his final annual earnings
would be about $150,000 – he would retire with a lump-sum pension benefit of $750,000 (25 years
times 20 percent times $150,000). Pension benefits, such as the one George is entitled to receive,
are insured by the Pension Benefit Guarantee Corporation, an agency of the federal government.
George is interested in preserving as much of his previous life-style as possible until he retires in ten

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years. In particular, he would like to stay in the couple’s home for the next ten years and pursue his
hobbies, including collecting more art.

Jane spent much of her married life working at home, but when her children entered high
school, she returned to college to finish her degree, and then began working as an office manager for
a local health maintenance organization. Jane recently accepted an attractive offer to work for
another large HMO on the west coast, where she will be making approximately $100,000 to start out
with, and will have prospects for promotion in the future. As soon as the divorce is finalized, Jane
plans to move west and start a new life. In light of her pending move to the west coast, Jane
anticipates that she will need at least $100,000 to get herself established in a new community.
Otherwise, she does not have an immediate need for substantial financial assets. She is, however,
concerned that the divorce settlement provide her a substantial nest-egg for her retirement.

George and Jane have drawn up the following preliminary proposal as to how their assets
might be divided in light of the couple’s differing needs and desires:

Item Jane’s Share Geo rge’s Sh are

1. The outstanding balance o n their ho me equity loan will be repaid — ---

with $100 ,000 o f their cash and investmen t securities.

2. Their personal property can be divided evenly by mutual $ 50,000 $ 50,000

agree ment.

3. Jane will receive an immediate cash payment of $100,000 from $ 100,000 ---
their cash and investments to finance her move to California.

4. In order to satisfy Jan e’s desire for a retirement nest-egg, Jan e will $ 350,000 ---
receive one hundred percent of the proceeds from the sale of the
couple’s house, in which George will live until he retires at 65, at
which point the house will be sold.

5. George, as the more dedicated art collector of the two, will be $ 150,000 $ 150,000
allowed to pick his six favorite painting from the collection and the
rema ining six will be assigned to Jane to sell or keep as she sees fit.

6. All rights in George’s pension plan will be assigned to him. — $300,000

7. The rem ainde r of the couple’s cash and investment securities will $ 175,000 $ 325,000
be divided in order to balance their respective shares as follows:

Total $ 825,000 $825,000

Please write a short memorandum analyzing this proposal from a financial perspective. Does
it represent an even division of assets? What changes would you recommend?

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