Community Property vs. Equitable Distribution States
Whether your investments are divided evenly or in some other ratio depends on where you live. In the nine community property states, both you and your spouse have an equal ownership interest in assets acquired during the marriage. In these jurisdictions, the split is normally 50-50. In the other 41 equitable distribution states, the division depends on what the judge feels is fair, given the unique circumstances of your marriage. The court will weigh how long you were married, which of you needs the investment more because you may have less earnings potential, and personal contributions you made to the asset or investment. He may consider that one of you worked to put the other through school, short-changing the non-student spouse career-wise. When all these factors are tallied, the court can divide marital assets in a 55-45 split, 60-40 split or more unevenly.
Separate Assets vs. Marital Assets
Investments may be marital property or one spouse's separate property. Separate property is that which was acquired by either spouse through inheritance or gift and immune to division in a divorce. Assets you owned before you married are also your separate property. The distinction is actually a bit more intricate than this, however, because in some states, any increase in the value of a premarital investment that accrued during the marriage is considered marital property. If you had an investment worth $50,000 when you married and it appreciated, making it is now worth $100,000, $50,000 may be subject to distribution if you divorce. Another complicating factor is that it's possible to commingle separate investments, turning them into marital property. This might occur if you added to your premarital $50,000 investment account with marital income. You muddied the waters, so the asset may now be divisible if you divorce.
Marital property is typically divided by allocating a group of assets of certain value to each spouse. For example, if you live in a community property state and you have a total of $500,000 in marital assets, you would receive some with a total value of $250,000 and your spouse would receive the same. Your $250,000 might include the marital home, but none of the investments. Your spouse may receive $250,000 in investments, but relinquish his ownership of the marital home. Some courts consider it more fair to divide investments between spouses rather than give them all to one spouse, so each of you can manage them into the future for optimal growth. Ownership of each investment is usually transferred into the sole name of the spouse who will retain it – the court doesn't order that they be cashed in. If you don't own enough investments for them to be divided equally between you, one of you would receive other marital assets of equal value to compensate for the difference.
The most complicated investments are those you set up for retirement. Normally, if you cash these in, you'll be hit with taxes and penalties. You must divide them pursuant to the terms of a Qualified Domestic Relations Order to avoid this, and because plan administrators are not permitted by federal law to make distributions to anyone other than the earning spouse. QDROs override this rule, and as a bonus, the spouse who initially held the account is not subject to penalties or taxes when a distribution is made by order of a divorce decree. The spouse who receives a share is typically only vulnerable if she cashes out the account instead of rolling it into a retirement account in her own name.