Buy, Sell Or Hold: What To Do With Your Investments During Divorce

Every now and then, the news headlines light up with stories of jumbo investment profits—whether it’s meme stocks like GameStop and AMC, tech names like Nvidia, or crypto assets like Bitcoin. You might have even heard stories about 20-year-olds becoming multimillionaires overnight and wondered if you 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 one of these high-risk/high-reward investments. 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 as 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 from state to state so it’s important to speak with your attorney.

Safer Investment Options

So, what investment changes can you (or your spouse) make while you’re divorcing?

While it may be tempting to start trading on a hot stock tip, unless you get express consent from your spouse, it may be safer to keep things unchanged in your portfolio. Often, courts prefer finances are kept “status quo” during the divorce proceeding.

While it’s common to agree 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 may even be advisable during particularly volatile periods, such as a major market correction or a unique disruption like COVID.

For this to work, there should be a clear understanding that this is happening by all parties, including the attorneys involved.

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. Divorcing couples have often come to this point due to some type of breakdown in trust. The most contentious of divorces are ones in which both sides mistrust the other’s motives. The more you can do to keep things from degrading, the more likely your divorce can end in a cost effective and speedy manner.

It’s important to note 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 who 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 deem your spouse’s trades as risky, there is no guarantee you will be reimbursed for your investing losses.

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 this 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. It is normal for you to be uncertain about your risk tolerance or for it to change with major life events. Take stock of how you feel when reviewing your accounts and hearing financial news as this will help you settle on an appropriate risk tolerance during and after your divorce.

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