Clients sometimes fear what impact stock market fluctuations will have on asset division in their divorce. This is an important question when you consider that a divorce is not technically final until the judge has executed the decree, which could take a week or a few months. To further complicate matters, assets are typically considered community property until divided by the court. Therefore, the value of an asset on the day you settle may be significantly different from the value on the day the asset is actually divided.
If your agreement divides assets on a percentage basis, both parties will share equally in any gain or loss attributed to that asset up to the day the court divides the estate. If your order divides the assets based on a value on a specific date, you may run the risk of assuming any losses if the value decreases after that date.
If you are dividing stock accounts, or money market accounts, upon divorce you should obtain necessary transfer documents from the brokerage firm to effectuate the transfer. If assets are being transferred from a spouse’s account to your account, this will only be done after you open an account to accept the transfer of the assets. The transfer of stocks or mutual fund shares into your account is a tax-free transfer under the internal revenue code. If, however, you liquidate the stock or mutual fund and transfer cash, the primary holder of the account will be taxed on the liquidation if any gain is realized. If a loss occurs, the loss will be credited to the primary holder of the account.
In the case of a division of a 401k plan or retirement plan the vehicle for the division will be a Qualified Domestic Relations Order. The Qualified Domestic Relations Order (QDRO) instructs the employer how to calculate the portion awarded to the nonemployee spouse. A Qualified Domestic Relations Order has to be approved by the employer prior to execution by the Judge, otherwise the order signed by the judge could be ineffective and the assets may not be transferred at the time you request. The failure to get a 401k Qualified Domestic Relations Order approved could result in an inability to manage your assets at a critical time in the market.
In summary, to best protect assets during a divorce in a volatile market, you should:
1. Request the use of a percentage-based division.
2. Obtain a preapproved QDRO to ensure a timely transfer of assets.
3. Establish accounts with reputable money managers or brokerage firms to accept transferred assets from your spouse’s accounts.
4. Transfer assets without liquidation to avoid tax impact if you are the transferring spouse.
5. Do not rely on your ex-spouse to make financial management decisions on assets that have been divided after divorce but have not been transferred due to the fact that his or her fiduciary obligation to you may be limited.