While the vast majority of people enter into their marriages hoping that they’ll last forever, sometimes this simply isn’t the case. Whether you are contemplating a divorce, or whether you find yourself in the midst of one, there are certain important steps you should take to manage and protect your investments. These include:
- Awareness and access: It is not unusual for married couples to divide household obligations. In some homes, this means that one spouse is primarily responsible for family finances and for the managing of accounts. This is beneficial in some ways, and can certainly serve to streamline the process. One of the downsides, however is that when the relationship ends, the spouse who was not responsible for handing the financial matters often lacks knowledge about important details pertaining to those matters. In some instances, one spouse may even be unaware of the different types of investment or savings accounts that may exist. Obviously, it is difficult to take appropriate steps to protect your interest in accounts you don’t even know about. As a result, one of the best things you can do during a divorce is to ensure that you are aware of all of the accounts and assets you have, as well as the important information about those accounts. This information includes not only the value of the assets, but also how each account is set up. Ask yourself:
- Is the account in the name of one spouse or the other, or is it held jointly?
- Do I have the necessary login information, permission, and credentials to access these accounts?
- Am I able to make decisions about these accounts?
- What might my share of these accounts be following the divorce?
Obtaining and understanding this information is necessary before you can truly make any educated decisions about the best path forward following a divorce.
- Updating your account beneficiaries: This is a fairly simple, but very important step. Typically, married individuals have their spouses named as beneficiaries on their investment accounts. Depending upon whether you have children, and depending upon the laws of your state and whatever support arrangements you make as part of your divorce, you may or may not be able to remove your spouse as a beneficiary on each and every account. It is worth checking into, and consulting your attorney and/or your financial advisor about the possibility of doing so.
- Consider potential tax and penalty issues: Often, as they contemplate divorce, people consider whether or not they should sell or liquidate their assets – and sometimes, this may truly be the best option. Prior to doing so, however, it can be wise to consider any tax consequences or potential penalties you may have for doing so. Sometimes, selling securities will trigger capital gains taxes. Moreover, some assets, like annuities, may have steep penalties if you exist the investment early, as may certain types of retirement accounts. Additionally, depending upon the type and amount of the account, different taxes might be assessed that may ultimately make the sale less appealing than it would otherwise. Talking through any potential sales or liquidations with your attorney and financial advisor prior to making any final decisions is always wise.
- Splitting retirement accounts: One of the most common investment-related questions during a divorce concerns what should happen to any retirement accounts that the couples hold. In the majority of states, retirement accounts are generally considered marital property. While different rules will apply depending upon the type of account at issue, couples will often have to provide a court order known as a Qualified Domestic Relations order (QDRO) to their employers for the purpose of splitting employer-sponsored 401(k) or 403(b) plans. Each plan will have its own guidelines which will determine how the assets can be divided. Some plan administrators will allow the non-employee spouse to open his or her own account within the plan, while other plans will roll over into an IRA. Still others might allow the non-employee spouse to take a penalty-free distribution. With respect to IRA accounts, however, there is typically no QDRO, and plan assets are usually divided based upon the terms of the couple’s separation agreement or divorce decree, which are submitted to the IRA custodian. Typically, IRA assets are subject to a penalty if withdrawn early, so often, those with IRA accounts will choose to roll those funds over from one IRA into another rather than be subject to that fee. As with all complex financial matters, when trying to decide how best to divide your retirement accounts, it is best to consult with your attorney and your financial advisor prior to making any final decisions.
- Dividing taxable investment accounts: When considering how to divide your taxable investment accounts, it is important to consider not only the current value of your statement, but also what you might get to keep after taxes. Generally, when dividing investments accounts during a divorce, the options are:
- Sell the investments and divide the proceeds: While selling the investments and dividing the proceeds would allow you to realize immediate income, it would also have tax consequences. Generally, profits from the sale of investments held for a year or less are taxed at your ordinary income tax rate, while those investments held for longer than a year are usually taxed at lower long-term capital gains rates.
- Split the investment holdings: Sometimes, instead of immediately selling an investment, couples will opt to split the holdings and keep the same cost basis (the price at which the investment was originally purchased) and the same holding period.
Of course, when deciding which option is best for you as a couple, it is also important to consider other factors, like future prospects for growth and income, your own tolerance for investment risk, your financial needs, and your long-term timeframe for investing.
- Seek the assistance of qualified professionals: As is the case with many other life situations, sometimes, in order to feel that we’re proceeding with confidence that we’ve thoroughly assessed a situation from all angles, seeking help from a professional who specializes in our particular area of concern can be tremendously helpful. This is true in many financial matters, including protecting your investments and accounts throughout a divorce. Seeking advice from a qualified financial advisor can help relieve the stress and anxiety of worry about your investments during a time when so much else is already stressful. Take advantage of that opportunity if you are able to do so.
In the end, the truth is that divorce is complicated. There are any number of complex matters you’ll have to consider and work through, and the most important thing to keep in mind as you attempt to do this is that typically, an attitude of cooperation and willingness to work together toward a resolution that is satisfactory to everyone involved is the best course of action, and one that will result in greater happiness for everyone in the long run. Don’t hesitate to reach out for the professional and legal assistance that you need as you work toward doing so. It can make a world of positive difference.