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A statement of net worth is a summary of an individual’s financial condition at a particular moment in time. Consequently, a statement of net worth can change quite frequently. This statement lists all of an individual’s assets and liabilities. The basic formula for calculating net worth is simply net worth = assets – liabilities.
If a person’s assets exceed their liabilities, he or she has a positive net worth. Conversely, if a person’s liabilities exceed their assets, he or she has a negative net worth.
Assets are simply defined as anything a person owns that has any monetary value. Note that the statement of net worth does not include one’s future income such as annual salary. The statement only includes any liquid assets such as money held in a bank, investment and/or retirement account(s), and the fair market value of non-liquid assets a person owns such as personal property (e.g., artwork, jewelry, vehicles) and real property (e.g., home, rental property, land).
Logically, liabilities are defined as any obligations a person owes to another. Simply put, any financial obligation, which has a balance that exceeds zero, is a liability. Liabilities commonly include mortgages, credit card debt, student loans, auto loans, as well as any other judgment, lien, bill, loan, or line of credit, which an individual is obligated to pay.
Despite being married, a couple’s net worth may not be split evenly. It is quite likely that one spouse may have a greater net worth than the other. As a married couple, it is important to consider the rules of every state in which the couple has lived. Specifically, the statement of net worth must include assets or liabilities that reflect whether the property was acquired when the couple lived in a community property state or a common law state. The following states are community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska allows married couples the option to opt into the community property system.
Common Law States
Property will be divided based on whose name is on the deed or title documents. If such documents only bear one of the spouse’s names, that spouse alone can include the value of the property on his or her net worth statement. However, if the title document bears each of their names, they will split the property’s value evenly when determining each spouse’s net worth.
Community Property States
Generally speaking, any money earned and any property acquired during the course of a marriage in a community property state is split evenly between each spouse. This is done irrespective of how much the spouses earned or contributed individually. Separate property is any property acquired prior to marriage or acquired at any time by either gift or inheritance.
Example: A couple is married and purchases a home in a community property state. The home is worth $100,000 upon dissolution of the marriage. Each spouse’s statement of net worth will include an asset value equal to half the value of the home, or $50,000. Even if the couple originally married in a common law state, a consequent move to a community property state requires the application of community property rules.
Like any general rule, there may be applicable exceptions. Determining how to divide assets and liabilities when preparing a statement of net worth can be a complex tax. It is always advisable to consult a divorce attorney NYC that specializes in family law issues for further guidance.