EP 17: Dividing Your Investment Portfolio in Divorce

This article was re-published by Investopedia here. 

What to Ask When Dividing Investments in a Divorce
During divorce, you are facing the division of all your assets and debts and each one has its own complications. Oftentimes, one of the largest liquid assets is a taxable investment portfolio, which can include stocks and bonds, hedge funds, mutual funds and other financial instruments.

If you are thinking about how to properly divide investment accounts during divorce, you should consider asking the following five questions to keep you from making major investment mistakes with these assets.

1. Do You Have Any Investment Accounts?

One of the first things you need to determine is if you have any taxable investment accounts. You may not have been actively involved in the day-to-day finances during your marriage, but there are still some clues about how to find investment accounts.

For example, check your mail. If you have statements from financial firms such as E*Trade, Ameritrade, Charles Schwab Corp., Scottrade or Merrill Lynch, that is the first clue. You should be looking for statements or accounts at these firms to negotiate the divorce settlement process.

2. What Types of Investments Do You Own?

Once you gain access to the relevant investment account statements, you need to analyze what types of investments you may own. For example, does the account contain stocks, mutual funds, exchange-traded funds, bonds or other types of investment instruments? You will need to familiarize yourself with the meanings of these types of investment terms.

Furthermore, you should make note of how much money is in each of these accounts. If the investment accounts represent a large percentage of your net worth, you should make sure you really dive into the details.

3. Do You Want to Keep the Investments?

Many names and acronyms exist for financial assets in different types of investments and they are often very complex. In addition to some of the financial instruments mentioned in question two, you may have hedge funds, index funds, bonds or many subsets of these items.

You will need to understand the intricacies of investment and whether it is something you may want to continue to own after the divorce. A financial expert, such as a Certified Financial Planner or Certified Divorce Financial Analyst, can be very helpful for guiding you through the intricacies of various investments. This person can help you evaluate prior performances and future prospects of those accounts.

4. Are the Investments Easy to Sell?

All investments have different liquidity, which means they cannot necessarily be sold immediately and converted to cash. Some investments (e.g., most stocks) allow you to sell your shares at any time during market hours. By contrast, a mutual fund usually involves not receiving your money until the next day. It becomes a bit complicated if you have a private equity fund or hedge fund, as they can sometimes hold your money for years at a time before you have the opportunity to get it back.

If you are negotiating your divorce settlement, you will need to know how long it may take you to get money from a particular investment if you need the funds. Otherwise, you could be facing this situation – you to try to sell but cannot access the money from a particular investment.

5. What Are the Tax Implications for Selling?

You should determine the tax implications of selling your share on the investment, specifically the capital gains tax. Short-term gains could be taxed on a federal and state level as high as 50%, depending on your income. Meanwhile, long-term gains (for investments that have been held over one year) generally have a lower tax rate.

When it comes to evaluating your investment portfolio, it is not what you get that is important, but what you keep. You need to know the potential tax consequences for selling any investment. Otherwise, you could find yourself facing a large tax bill further down the road.

Know Your Options

Investment portfolios can add an additional layer of complexity to divorce settlement negotiations. When considering which investment assets you want to keep, you should keep the five questions above in mind during the process. Then you can make an informed decision and avoid regrets down the line.

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