Going through a divorce can be an incredibly difficult and stressful time. On top of the emotional toll, there are many complex financial and legal matters to navigate, especially when it comes to dividing up investments and assets accumulated during the marriage. This process requires careful consideration to protect your financial future.
In this comprehensive guide, we’ll walk through the key things you need to know about handling investments and other assets when divorcing, including:
Understanding Equitable Distribution
Most states follow the principle of equitable distribution when dividing marital property during divorce. This means that assets and debts are divided in a fair and just manner, but not necessarily equally.
Factors like length of marriage, earning capacities and ability to generate future income, custodial provisions for children, healthcare needs, and more are taken into account when determining what is equitable.
It’s important to understand in advance that equitable doesn’t always mean an equal 50/50 split. The court aims to split things reasonably and fairly, all things considered in your specific situation. There is no one-size-fits-all formula.
Documenting All Investments & Assets
The first critical step is uncovering all existing assets and investments accumulated during the course of the marriage, including:
• Retirement accounts like 401(k)s, IRAs, Roth IRAs, SEP IRAs
• Investment funds and taxable brokerage accounts
• Bank accounts – checking, savings, CDs
• Annuities and whole life insurance policies with cash value
• Pensions and deferred compensation accounts
• Real estate including primary home, any additional properties, timeshares
• Private businesses
• Vehicles
• Other valuable assets like art, collectibles, jewelry, etc.
Thoroughly document every investment vehicle, when it was acquired, whose name it is titled under, its current fair market value, and any outstanding loans or debts owed on the asset.
Gathering up all bank statements, fund shareholder reports, loan documents, titles, deeds, purchase agreements, tax assessments, insurance appraisals and other financial paperwork is essential. Online account screenshots can also serve as documentation.
Understanding Ownership Types
Investments and property can be classified in three main ways when determining ownership and division in divorce:
• Separate property – Assets acquired before the marriage, assets received as an inheritance, and gifts or trust funds established by third parties naming a specific spouse all typically belong solely to that individual spouse. If you owned a home prior to marriage for example, it would likely be your separate property not subject to division.
• Marital or community property – The majority of assets and property acquired or earned during the marriage are deemed joint marital or community property that will be divided between spouses. This includes things like savings contributed during the marriage or equity built up in a home.
• Commingled property – When separate property has been mixed or combined with marital property, it can become commingled property. This most often comes into play when separate assets like an inheritance or premarital savings get added into jointly held accounts. The separate vs. marital percentages have to be determined.
Properly classifying assets as listed above will be a major determining factor in how property gets divided and who is entitled to what portions. It can have significant financial implications for each spouse.
Determining Fair Market Value
In addition to cataloging all marital investments and assets, determining the current fair market value of each item also comes into play when negotiating an equitable split.
Some assets like bank accounts and brokerage funds provide clear monthly or quarterly statements reflecting current dollar balances or portfolio market values. Getting up to date statements is critical.
For real estate including the marital home, vacation properties, timeshares and commercial properties, professional appraisals are almost always required to objectively determine present value. The same often goes for privately held businesses being divided.
Independent appraisals from accredited professionals serve as unbiased opinions versus relying solely on past purchase prices, assessed tax values or Zillow estimates, for example, all of which could be outdated or inaccurate. And given the stakes when dividing substantial marital assets each spouse will likely get their own independent appraisal in disputed cases.
Pro tip: If selling or transferring ownership of the marital home, consider getting appraisals BEFORE listing the property publicly. Once it’s on the market, emotions and egos can come into play around list prices and acceptable offers.
For other personal property like vehicles, collectibles or jewelry, certified appraisers of that specific asset type also come into play to assess fair market value.
Bottom line, documented fair market valuations of all divisible marital assets remove guesswork and help provide an equitable, mutually agreeable foundation for settlement negotiations.
Splitting Retirement Accounts
Retirement assets like 401(k) accounts, IRAs, pensions and deferred compensation often represent one of the largest marital assets up for division in a divorce, making them central points of negotiation from a financial standpoint.
Generally speaking, contributions made to retirement funds during the marriage are considered joint marital property regardless of whose name the accounts are technically held in. Of course proving exactly when specific contributions occurred can be challenging decades into a marriage. This is where documentation again becomes critical.
There are several options on the table for splitting retirement assets depending on the types of plans involved, balance complexity and other assets in play. Common approaches include:
• QDRO – Getting a qualified domestic relations order issued by the court, which formally divides funds from one spouse’s qualified retirement account into a separate account for the other spouse. This allows a portion of funds to be segregated without incurring early withdrawal penalties or taxes if the recipient keeps funds in a retirement account.
• Cash-out – Liquidating a portion of retirement account assets, withdrawing funds, and splitting net proceeds between spouses per the negotiated settlement. One spouse effectively buys the other out. This often incurs income taxes and a 10% early withdrawal penalty if the spouse removing funds is under age 59 1⁄2. So not maximally advantageous, but liquid funds obtained may be used to settle other marital debts or pay legal fees.
• Keeping retirement accounts separate but divided – Simply determining equitable division percentages across existing qualified accounts accumulated during marriage without combining funds or initiating withdrawals. Allows accounts to remain separated by individual. May provide less closure psychologically around finances being comingled long-term. Ongoing communication required.
As with all divorce-related financial matters, each approach above has its own pros, cons and nuances to evaluate carefully before deciding on the right route for your specific retirement asset division situation. Having an experienced professional guide you through scenarios can prove helpful before cementing agreements.
Tax Implications
Taxes represent an often overlooked landmine when dealing with investment and asset division in divorce. A few key things to keep in mind:
• Transferring marital retirement accounts and property titles between spouses as part of settlement without actually distributing funds or selling off assets usually does not generate an immediate tax liability.
• If retirement plans or investment accounts are liquidated and cashed out to split proceeds, the spouse withdrawing the funds will be responsible for reporting it as taxable income. And if under age 59 1⁄2, they will owe the 10% early withdrawal penalty in addition to standard income taxes owed on the sums removed.
• When selling or transferring ownership of highly appreciated investments and property as part of divorce, capital gains taxes will often come into play from the inherent gains in value since acquisition. This gets complex quickly if one spouse retains property with built-in gains which haven’t yet been taxed.
Consulting tax experts around settlement options being considered is always wise, lest major unforeseen tax burdens crop up. Thoroughly projecting tax consequences in advance, and making reasonable tax allowance accommodations as part of settlements helps avoid surprises or ongoing resentment over an unfair and unbalanced tax burden placed on one spouse.
Seeking Legal and Financial Guidance
Divorcing spouses simply want a fair, equitable and drama-free division of joint investments and property accumulated during a marriage. But actually achieving this requires successfully navigating countless complex legal, tax and real estate issues that most average people rarely deal with until they find themselves unraveling a marriage under stressful conditions.
Given the financial complexities and emotional duress often involved with investment asset division, seeking guidance from professionals who provide such services routinely is almost always highly recommended.
An attorney well-versed specifically in marital property division and settlement structuring can be invaluable in helping:
• Uncover all existing assets and investments down to even obscure ones.
• Properly classify major possessions appropriately as separate vs. marital property.
• Determine valid fair market valuations for each divisible asset.
• Divide assets legally and equitably aligned with state law while considering your unique situation.
• Model various “what if” scenarios around settlement options and outcomes before cementing final agreements.
Likewise, sourcing input from a certified divorce financial analyst (CDFA) allows you to evaluate different settlement structures and potential outcomes from a dollars and cents perspective, optimizing financial value across divisions for your specific situation.
While using consulting professionals like attorneys and CDFAs represents an upfront investment, their input often saves substantial money long term by helping avoid information gaps or legally vulnerable rulings over such significant marital assets at stake. Their professional experience negotiating hundreds of cases also brings pragmatism to setting realistic expectations.
More important than potential cost savings, guidance from an attorney and financial analyst moves the process forward as efficiently as possible, reducing conflicts and taking some burden off divorcing spouses already dealing with high stress and emotions around unwinding an entire life together. Instead of flailing around uncertain of next best steps amidst chaos, you empower knowledgeable professionals to pilot the ship according to processes they know well.
If selling real estate or a business, enlisting input from real estate attorneys and brokers or business valuation pros and M&A experts may also prove prudent given state laws and tax codes affecting property sales.
Bottom line, don’t underestimate the wisdom of building a skilled collaborative professional team around major marital asset division rather than tackling alone. Yes, it may require some humble pie in admitting gaps in your own legal and financial expertise. But you’ll set yourself up for dramatically smoother sailing and better outcomes across the board.
FAQs
What happens to stock accounts in a divorce?
Investment accounts are typically considered marital property if acquired during the marriage, regardless of whose name they are in. They will be factored into the overall division of assets.
Can a judge force the sale of property in a divorce?
Yes, courts can and will compel the sale of real estate or valuable personal property items to achieve an equitable distribution between spouses if these assets are disputed and no agreement can be reached through mediation.
Is inheritance money separate or marital in a divorce?
Inheritances received before or during the marriage are generally considered separate non-marital property belonging only to the recipient spouse, not subject to division. Exceptions do apply in certain cases, such as if inherited funds were commingled into jointly held accounts.
How much does a divorce financial analyst cost? A divorce financial analyst typically charges by the hour, with rates ranging from around $150-$500+ per hour depending on their experience level and complexity of case assets involved. Expect to invest $2,500+ for an average mid-complexity divorce case all in.
What happens to frequent flyer miles and credit card points in divorce?
It usually depends on state laws and the specifics of loyalty program policies and account structures. That said, accrued mileage points and credit card rewards are often viewed as marital property if earned jointly during the marriage, even if held in only one spouse’s name. They may be split or offset with other assets per settlement.
Does adultery impact division of assets in divorce?
Not from a legal standpoint, no in most states. Only a handful still recognize fault-based factors like adultery when ruling on property division. Most states follow equitable “no-fault divorce” principles focused on overall contributions and marriage itself vs the actions or circumstances that led to the marital split.
Can I take half my spouse’s 401(k) balance in a divorce?
Typically 401(k) plan balances accumulate during a marriage are considered joint marital property under law. The values often get divided equitably as part of final settlement, either splitting the actual account balance or its cash value offset using other assets.
Is an ex-spouse entitled to my private pension?
Potentially yes, it depends. In general, pensions earned during the course of the marriage are considered marital assets up for division. The former spouse may be entitled to a portion of future pension payments based on a formula tied to the number of years pension-credit was accrued during the marriage.
Can I make withdrawals from an ex-spouse’s IRA post-divorce?
You can’t tap into their IRA directly. But as part of divorce terms, your settlement may grant you a portion of IRA assets via a QDRO transfer of that % of the balance into a separate Inherited IRA account now under your name. At that point yes you could access those inherited IRA funds.
Additional Resources
This article, 4 Things to Know About Splitting Up a 401(k) in a Divorce, provides valuable insights on the process.
For detailed information on understanding QDROs for splitting retirement accounts in a divorce, check this resource.
Additionally, here’s an overview of divorce and the tax impacts of asset division and transfers from TurboTax.
