The headlines have been filled with the story of Reddit fueled stocks such as GameStop, AMC, and Tilray and the wild ride they’ve been on. GameStop’s
Even those that don’t follow the stock market heard the sensational headlines and wondered if they could place their bets as well. We heard the stories of 23-year-olds becoming millionaires overnight on these stocks. Their profits seemed to have come easy and it left some investors wondering if they could do the same.
So, what does this have to do with your divorce?
Imagine you’re going through the divorce process and your spouse decides he wants to cash in on these stock headlines. He sells out of your current diversified portfolio and takes his chances on GameStop, AMC, and Tilray stocks. As one might imagine, a couple of different outcomes could result.
The stocks drop dramatically in value and now your marital estate has been reduced significantly. What will the courts have to say about this? Will your settlement now be dramatically reduced because of this shift or will the courts say your spouse is liable for making a risky investment?
Now imagine the reverse is true. Your soon to be ex-husband bought and sold those stocks at the exact right time and now your marital assets have tripled in value. Does he have the right to claim all the gains are his alone or will your settlement be significantly increased because of this stroke of luck?
The answers to these questions are complex so it might help to look at how assets in divorce are split in general, which will give us guidance on how to navigate major investment decisions during a divorce. Of course, it’s very important to speak with your attorney about your specific situation and state laws.
How Assets are Split in Divorce
Depending on where you and your spouse live, marital property is divided either as community property or as equitable distribution. In community property states which include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, a court would typically award property equally between spouses, basically giving each party a 50/50 share of each asset in the marital estate. These states have much less leeway when it comes to awarding one spouse more in compensation for circumstances such as wasted funds.
In equitable distribution states, courts have the authority to divide a marital estate in a way that it deems fair (or “equitable”) given the circumstances. The courts in these states can award one spouse a larger settlement due to the circumstances at hand. For example, in our example of the GameStop stock trader, the courts may award a larger share of the losses to the spouse who made the decision to trade. Of course, all the facts surrounding this need to be considered.
In equitable distribution states, the interest that spouses have in marital property typically continues to accrue until the date the divorce is finalized. The valuation of the marital estate is typically close to the date of divorce. In some community property states, however, the date of separation is considered as the date for determining property interests. Any property acquired after that date, is considered as a spouse’s separate property. Rules differ state to state so it’s important to speak with your attorney.
So, this begs the question, what investment changes can you (or your spouse) make while you’re divorcing?
The divorce proceedings will determine most of the changes to your finances. So, while it may be tempting to starting trading on a hot stock tip, unless you get express consent from your spouse, it may be best to keep things intact in your portfolio and you definitely want to talk to your attorney. Often courts prefer finances are kept “status quo” during the divorce proceeding.
There are some couples that do decide to split some accounts prior to the divorce being finalized. However, there must be a clear understanding that this is happening by all parties, including the attorneys involved. While it’s more common to that no major movement of money or shifts in portfolio occur during the divorce, there are many cases where couples agree to make changes as the financial markets and their lives evolve – especially in divorces that last multiple years. This is perfectly acceptable if everyone agrees, and even advisable in particularly volatile markets such as the tech bubble in 2000, the financial crisis in 2008, and the spring of 2020 due to COVID-19.
A Risk to Trust
Another reason to keep things status quo during a divorce is that by moving money around or making significant changes to your financial set up, you risk eroding trust with your spouse. Whether it’s due to infidelity or other reasons, divorcing couples have come to this point due to some type of breakdown in trust. The most contentious of divorces are ones in which both sides have come to the point of completely mistrusting the other’s actions and intentions. The more you can do to keep things from degrading to that point, the better it will be for your divorce to end in a cost effective and speedy manner. When money is moved from one place to another, you risk further frustrating your spouse and having them question what you are doing.
It’s important to note here that just because an investment went down in value, does not necessarily mean that it was a risky investment. There is inherent risk associated with any type of investment. The courts will determine if the spouse that placed trades was acting as a “reasonable person” would. They will also consider whether the other spouse consented to these investments.
It’s crucial to realize that even if you may deem your spouse’s trades as risky, there is no guarantee you will be reimbursed for your investing losses. All facts surrounding the investments need to be considered such as the type of investment, how much money was lost, market forces, and reasonableness of the investments.
Gauge Your Risk Tolerance to Protect Yourself
If your tolerance for the ups and downs of the market is more conservative than your spouse’s, it is important that you communicate with your spouse, attorney and financial advisor. Make sure they know that you do not want any major changes to your portfolio during the divorce. Protect yourself further by getting online access to your accounts or monthly statements and reviewing them periodically. And finally, make it clear to your team of professionals (attorneys and financial advisors) what your wishes are with your investments.
Will trading games result in some of your assets going up in smoke?
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