“Fears of a recession have surged in recent weeks,” Reuters reported earlier this month. A global trade war, persistent inflation, supply chain disruptions amidst various geopolitical tensions, and a volatile stock market have shaken investors and companies.
Even in steady times, the financial aspects of divorce can be thorny and anxiety-provoking. However, a rocky market can make things more complex and unnerving, especially concerning asset division.
If you’re going through a California divorce, it’s important to remember that this is a community property state. This means that, with few exceptions (such as inheritances and certain gifts), ALL assets acquired during the marriage are considered jointly owned and will be divided 50/50 in your dissolution. This includes stocks and investments. Assets acquired individually before the marriage are considered separate property. However, they may have become commingled (originally separate assets that got mixed in with shared property) during the marriage. Remember, too, that community property principles also apply to debts.
While straightforward in principle, asset division in a community property state can still be very complicated. Investments, in particular, can be challenging to divide for numerous reasons:
Valuation
- Complex assets. Businesses, real estate, stock options (especially if unvested), art collections, intellectual property, and so forth are inherently complex assets and difficult to appraise.
- Market fluctuations can heavily impact stocks, cryptocurrency, mutual funds, real estate, and retirement accounts.
- Tax implications can impact the value of an investment (examples: capital gains, or penalties for early withdrawal from a retirement account).
Classification
- The process of determining what is community vs. separate property is often complex, contentious, and emotionally charged. Again, this can be especially true with various investments, which may involve significant commingling. For example, suppose one partner purchased an investment property while single, but the couple developed the property with shared funds during the marriage, greatly increasing its value. Examination of timelines and funding sources will be crucial.
Divisibility
- Hard-to-divide assets. Many assets, including investments such as real estate and fine art, are unlike cash, in that they cannot be easily split unless liquidated.
- Retirement accounts. Shared accounts like an IRA or savings account can be split without a court order, but a 401K or pension requires a QDRO (Qualified Domestic Retirement Order) to transfer. The process can be pretty complex, and mistakes can be very costly.
Disputes over asset and investment classification, valuation, or division can be highly contentious even under the most straightforward conditions. The stakes are raised in a high-asset divorce, especially when the market is tumultuous.
An unpredictable market significantly increases the complexity of all these factors. It can make it difficult to reach an accurate, fair, and balanced division of the marital estate, even under community property law. In other words, equal division of investments—a moving target in the best of times—becomes harder to pin down in a volatile market. Achieving a truly equal division requires careful strategy.
Timing, vis-à-vis the valuation method, is very important in a fluctuating market. If valuation is based on a particular moment in the timeline of your divorce (say, when you physically separated), by the time your divorce is final and the assets are divided, the value of certain investments may be very different. Up or down.
A common predicament involves unvested stock options, an increasingly popular feature of employee compensation packages, especially in emerging Silicon Valley companies. These are tricky to appraise as they currently have no concrete market value but may become enormously valuable over time. California courts have several formulas (“time rules”) to determine what percentage belongs to the non-employee spouse if you obtained stock options during marriage, but divorce before they are fully vested.
Accounting for the different ways various types of investments are taxed is crucial. So, it is factoring in the level of risk one investment carries compared to another (two investments might be roughly equal at present, but one is fairly stable, and one swings wildly).
When it comes to liquidating certain assets, you might consider negotiating to wait for better market conditions; for example, deferring sale of a property until it reaches an agreed upon value.
Professional support is essential! Work with an experienced family attorney, skilled in handling complex financial scenarios and unpredictable markets. It’s also wise to hire a financial adviser with expertise in divorce to help you understand your investments and the market and create a solid financial plan. For advice on what you can do to prepare, see our article on managing investments post-divorce.
The veteran family law attorneys at SFLG are experienced in high-asset divorces; we understand the nuances of investments and the market. If you’re navigating the dissolution process in these uncertain times, we will ensure your rights are protected and that you feel informed, confident, supported, and ready to focus on the future.
By Debra Schoenberg
