Dividing Investment Accounts in Divorce: What You Need to Know

Divorce can be one of the most stressful transitions in life, especially when it comes to dividing assets. In many marriages, one spouse handles the finances, including investments, while the other may not be as involved. This can make dividing investment accounts in divorce particularly overwhelming—especially when market volatility affects the value of those assets.

Understanding how investment accounts are divided, the impact of a declining stock market, and how to protect yourself financially will help you make informed decisions throughout the process.

Educate Yourself on Your Investments

If you haven't been actively involved in managing your investments, now is the time to educate yourself. A Certified Divorce Financial Analyst (CDFA) can help you assess each asset and understand its implications. When reviewing investment accounts, consider the following:

1. What type of asset is it? Stocks, bonds, mutual funds, ETFs?

2. How is the value determined? Market fluctuations can impact value.

3. What type of account holds the asset? Taxable brokerage accounts, IRAs, or 401(k)s?

4. What is the cost basis? The original purchase price, which affects capital gains tax.

5. How volatile is the asset? Stocks and funds fluctuate, affecting division fairness.

6. How liquid is the asset? Some investments take time to sell.

7. What are the tax implications? Liquidation can trigger taxes.

8. How is the asset titled? Joint ownership, individual, or in a trust?

9. What documentation is required to retitle the asset? Certain accounts require additional legal steps for division.

Understanding these factors ensures that you’re not just looking at account balances but also considering tax implications, liquidity, and long-term value.

Why Cost Basis Matters When Dividing Investment Accounts in Divorce

One commonly overlooked aspect of dividing investment accounts in divorce is cost basis. The cost basis determines how much capital gains tax you’ll owe when selling an asset.

For example, let’s say you and your spouse decide to split a $400,000 investment account. If you receive assets with a low cost basis, you could owe significantly more in taxes when selling those investments compared to assets with a higher cost basis.

Example Scenario:

• You receive $200,000 in investments with a cost basis of $50,000.

• Your spouse receives $200,000 in investments with a cost basis of $150,000.

• If you sell your shares, your taxable gain is $150,000, while your spouse's taxable gain is only $50,000.

• If the capital gains tax rate is 15%, you could owe $22,500 in taxes, while your spouse owes only $7,500.

This imbalance could make what seemed like an equal division unfair once taxes are considered. Always analyze the after-tax value of investment accounts before finalizing a divorce settlement.

Offsetting Assets: Considering Market Volatility

Investment accounts are often offset against other assets in a divorce, such as the marital home. However, when markets fluctuate, the division can quickly become unfair.

For example:

• One spouse keeps the marital home valued at $300,000.

• The other spouse keeps an investment account valued at $300,000.

• If the stock market drops 10%, the investment account’s value falls to $270,000.

• Meanwhile, if home values rise 5%, the home’s equity increases to $315,000+.

This demonstrates why the timing and valuation of investment accounts matter when negotiating asset division.

The Importance of Settlement Agreement Wording

When dividing investment accounts in divorce, the wording of your settlement agreement is crucial. If your agreement states that one spouse receives a specific dollar amount rather than a percentage of the account, market fluctuations could create an imbalance.

Example:

• The agreement states that Spouse A receives $200,000 from a $400,000 investment account.

• If the market rises 10%, the account is now worth $440,000.

• Spouse A still receives $200,000, while Spouse B benefits from the increased value and receives $240,000.

• Conversely, if the market drops 10%, Spouse A still gets $200,000, while Spouse B’s share is reduced to $160,000.

To ensure fairness, your settlement agreement should specify a percentage of the account rather than a fixed amount, and address how market fluctuations should be handled before finalizing the division.

Protecting Your Financial Future

If you’re concerned about how dividing investment accounts in divorce will impact your long-term financial future, working with a Certified Divorce Financial Analyst (CDFA) or financial planner is essential.

A professional can help you:

• Evaluate after-tax values of assets.

• Strategize the best division of investment accounts based on market conditions.

• Plan for long-term financial security post-divorce.

Need Help Dividing Investment Accounts in Divorce?

At Intentional Divorce Solutions, we specialize in helping individuals navigate the financial complexities of divorce, including dividing investment accounts. While we are based in Ohio, we work with clients nationwide. If you need guidance on understanding your financial picture, exploring your options, or developing a financial plan for your future, contact us for a complimentary consultation.

Dividing investment accounts in divorce requires careful consideration of market fluctuations, cost basis, tax implications, and wording in your settlement agreement. By educating yourself and working with a professional, you can ensure a fair and financially secure outcome.

If you have questions about your specific situation, we’re here to help. Reach out today to schedule your complimentary consultation.