Investment Accounts - How to Value and How to Divide

Personal investments are accounts or other financial assets used to build wealth, achieve financial goals, and secure financial stability for individuals and their families over the long term. They may be intended to fund retirement, education expenses, major purchases (like a home or a car), and other life milestones, as well as providing financial security and flexibility for unforeseen circumstances. Regardless of the intended purpose of these savings, personal investments can present a challenge in a divorce.

Most Common Types

These are the most common types of personal investments:

• Stocks: Ownership stakes in publicly traded companies, subject to market fluctuations and typically held in shares.
• Bonds: Debt securities issued by governments or corporations, providing fixed interest payments.
• Mutual Funds: Pooled investment vehicles that invest in a diversified portfolio of stocks, bonds, or other assets with investors holding a mix of assets within the portfolio.
• Exchange-Traded Funds (ETFs): Similar to mutual funds but traded on stock exchanges, offering flexibility and liquidity.
• Real Estate Investment Trusts (REITs): Pooled investment trusts or companies that own, operate, or finance income-generating real estate properties with investors owning shares of the larger pool of investments.

Key Features

• Diversification: Personal investments may be diversified across different investment classes and sectors to spread risk and optimize returns. Diversification often helps mitigate the impact of market fluctuations and potential losses on overall investment performance.
• Risk Tolerance: Personal investments also involve assessing the risk-return trade-off of various investment opportunities. Higher-risk investments typically offer the potential for greater returns, but also carry a higher risk of loss, while lower-risk investments may offer more stable returns but with lower growth potential.  Spouses may have different feelings on the risk tolerance which can make the analysis and division of investments in divorce challenging.
• Taxes: Personal investments may have tax implications, including capital gains taxes on investment profits and dividend income taxes, which can make valuation difficult.  

First: Gather the Facts

When working through personal investments in a divorce, the first step is to identify the assets, ownership and value. Determining the value of these accounts may be challenging as stocks are often fluctuating in value throughout the day. It is often good to start by choosing a consistent date for all values, such as the end of a recent month, and basing your negotiations on the values as of that date.  You can choose to update the values at a later date if needed, but its good to work off a consistent date at first.

When valuing personal investments it is helpful to include the cost basis in your evaluation.  Cost basis is the amount of original investment made in the asset.  Capital gains or other taxes are typically calculated off the growth over your original investment, or cost basis, so it makes sense to track it so you can consider the tax implications on these assets while working through division. If the investment has lost value since purchase, then there will be no taxes.

Here are some examples:

First, if a $20,000 current investment was purchased for $12,000, then $8,000 is subject to capital gains taxes.

If that same $20,000 current investment was purchased for $25,000, then the investment has lost money and is subject to no capital gains taxes. If this investment was sold, there would be no taxes incurred.

Here is an example of the potential tax implications of liquidating the $20,000 investment. Only the growth is subject to capital gains tax. Note that capital gains range from 0% to 20% depending on your tax bracket in that year, so the 15% is only used as an example. How long you have owned the investment also may impact the percentage of taxes.

You only incur taxes on an investment in the year you sell the investment. So these taxes are only hypothetical but you may want to consider them in the analysis. If you have large embedded tax implications in an asset, meaning the asset will be subject to a lot of taxes when sold (for example, if an investment has grown substantially during the marriage and most of the value will be taxed as capital gains), you should consider that if you are receiving that asset.

A bank account with $20,000 will have no taxes. But an investment account with growth (like the second example above), may have taxes that make it worth less than $20,000.

And because investment accounts may have different holdings (or stocks) in them, there could be various cost bases.

If you are comparing the value of Stock A, Stock B and Stock C, the table above shows how you can consider all elements of each stock. If you were to divide these holdings, without selling, you will want to understand what potential taxes you may have in the future.

Second: Understanding the Law

How the accounts are titled may not matter, its more about how the asset was purchased.  If the investments were purchased with funds earned/saved during the marriage and not from a gift or inheritance, the investment is likely marital. In a community property state, jointly titled investments are typically subject to equal division, while individual investments may be considered separate property.

In divorce, personal investments can either be kept, divided or liquidated with the proceeds shared.  You can divide investments without selling the underlying holdings and splitting the cost basis between the portions each spouse is keeping. If you reach an agreement to divide the investments while maintaining their investment status, you should consider how the underlying holdings are to be shared.  Its most common to proportionately share the underlying holdings, cost-bases and resulting tax consequences.  For example, if you are equally sharing an investment account with various stock holdings, you may want to equally share each of the underlying holdings and the corresponding cost bases.  Alternatively, one spouse may want to keep certain holdings within a portfolio – this type of division will result in varying cost bases for each spouse and different tax implications.

Here are two examples showing division options for investment accounts:

However you divide the account, you need to understand the tax consequences and clearly instruct the plan that manages your investments (or your portfolio manager if you have one) on the division.  Consulting with a financial advisor or tax professional may help you better understand the implications of any division of personal investments.