Leah Hadley [00:00:01]:
Welcome to Intentional Divorce Insights. I'm Leah Hadley, certified divorce financial analyst, accredited financial counselor, and the founder of Intentional Divorce Solutions. I'll be your guide through the complexities of divorce, finance, and emotional wellness. Join me as we uncover practical tips and empowering insights to help you navigate your divorce with clarity and intention. Hey there, and welcome back to Intentional Divorce Insights. I'm your host, Leah Hatley. Lately, I have been getting a flood of questions from people going through divorce who are worried about how the recent market volatility will impact their settlement. And I get it.
Leah Hadley [00:00:41]:
Watching the stock market swing up and down can be nerve racking enough, throw in an ongoing divorce, and it can just feel completely overwhelming. I recently worked with a client who thought she and her ex could just split their investment accounts down the middle and call it a day. But when the market suddenly dropped, she realized that her share was worth significantly less than what they first agreed to divide assets. She was panicking, and that is exactly what we're talking about today. Dividing investment accounts into worse isn't as simple as just splitting a number. Market fluctuations, tax implications, and asset risk all come into play. And if you don't have a strategy in place, you could end up with far less than expected or less than you need. So today, we're breaking down how market volatility affects investment division and divorce, some of the biggest risk factors to watch out for, and some smart strategies to ensure a fair split.
Leah Hadley [00:01:45]:
So if you are going through a divorce or even just thinking about your financial future, this is an important episode. So let's dive in. So what does happen when the market takes a hit right in the middle of your divorce negotiations? First, before we dive into strategies, let's take a deep breath and talk about something that's really important. Market volatility is a normal part of investing normal part of investing. We expect the market to go up and down. It may feel unsettling, especially when you're going through a divorce, but fluctuations in the stock market aren't necessarily a cause for panic. Markets rise and fall over time, and, historically, they've recovered after downturns. Now with that being said, how you divide investments during your divorce can impact your financial stability long after the settlement is finalized.
Leah Hadley [00:02:46]:
And that's why it's crucial to make decisions strategically rather than emotionally, especially when you're reacting to short term market swings. And in the case of what we're seeing right now, a lot of it is more in the headlines, than we're seeing in the actual portfolios. Now think about this. You and your ex are negotiating the division of an investment account. Let's just say today it's worth $400,000. So you each agree that each spouse will get $200,000. That sounds fair. Right? But what if the market drops 10% before the assets are actually split? Now instead of $200,000 each, the account's total value is 360,000, meaning that each spouse would receive a $180,000.00.
Leah Hadley [00:03:33]:
Now if your divorce agreement was based on a fixed dollar amount, one spouse might still expect their full 200,000, meaning that the other spouse takes a bigger hit. That's just one way market swings can throw a wrench in divorce settlement. Let's talk about a few more risks. Declining portfolio value. If your settlement is based on today's market value, but the market drops before assets are transferred, there is the possibility of one spouse losing significantly depending on how the language was written and what the agreement actually was. Another issue that comes up, honestly, regardless of volatility is unequal gains and losses. So let's say just keep it simple. One spouse gets stocks and the other gets bonds.
Leah Hadley [00:04:21]:
Well, stocks are gonna be more volatile. They might go up, but they also might plummet. While bonds are generally going to be more stable, generally, the, earnings on bonds are gonna be interest. Right? Whereas, typically, the earnings on the stocks are gonna be maybe more capital gains or maybe some dividends. But if the spouse who took the stocks faces a market dip, they may end up with much less than expected. Right? Tax consequences are really important to consider. So I just mentioned part of this, but let's go into it a little deeper. If you're awarded certain investments in your divorce, you will potentially have to sell them at some point.
Leah Hadley [00:05:01]:
Right? And that can trigger capital gains taxes. So if one spouse is getting assets with a low cost basis, meaning they were bought for much less than they're worth today, they could owe a significant amount in taxes when they sell. So this is something that a lot of people overlook. A lot of times when clients are providing me with the information needed to discuss these divisions, they're giving me account balances. Right? And sometimes they're not even necessarily, communicating the exact type of account to me. When you're working with your financial professionals and your attorneys, you really need to provide an entire statement. A statement is gonna have how the account is titled on that statement. It's also gonna have the individual holdings.
Leah Hadley [00:05:49]:
And some statements do show the cost basis information as well, which is really valuable. If your statements don't show cost basis information, you should be able to request that from your financial institution. You still need that information whether it's on the statement or not, if you're dividing these investment assets. So how do you avoid some of these pitfalls? That's what we're gonna talk about next. Let's talk about some solutions. How can you divide investment accounts fairly even when the market is unpredictable? So one very common way is to use a percentage based split instead of a fixed dollar amount. So instead of saying, you get 200,000, I get 200,000, saying we'll split so we'll split it fifty fifty no matter what the market does. Why is this helpful? It's because both parties are then, feeling both the benefit of an increasing stock market and the risk of a decreasing stock market.
Leah Hadley [00:06:50]:
So you're both affected equally when it's divided that way. But here's the thing. A lot of times, people are actually offsetting investment accounts with other kinds of property, maybe home equity. So let's talk about real estate versus investments because this is also a mistake I see way too often. I often see divorcing couples trying to balance out assets where one keeps the investment accounts and the other keeps the house. Now this may seem like a fair trade, but here's where it gets tricky. For example, I have a client who chose to keep the marital home instead of taking a portion of the investment account. She assumed she'd be able to sell the home quickly and walk away with the equity.
Leah Hadley [00:07:31]:
Here's the problem. It's been six months, and the house still hasn't sold. Meanwhile, the real estate market has slowed. She's been stuck paying the mortgage, the property taxes, and the maintenance cost the entire time. The home's value on paper when the parties were negotiating was 500,000, but the reality is she's still waiting for a buyer. So it's only worth as much as somebody's gonna pay for it. Right? And on top of that, she's dealing with expenses that she hadn't anticipated. Meanwhile, her spouse's investments have actually grown over that period of time.
Leah Hadley [00:08:08]:
So while we've seen volatility here recently, we've had some pretty strong years in the market. So that's why it's so important when you're looking at these things to go beyond just the numbers. You wanna really think about, is it worth trading a liquid investment like a 401k or a brokerage account or a real estate asset that could take months or even years to sell if you're in a position that you you want to or need to sell it. Right? That's important to think about because right now, a lot of people that I'm talking to are saying, okay. Well, if there's all this risk in the market in the stock market, then I'd rather have other assets. But we have to understand the risk within all of the assets that we own. Right? When negotiating asset division, you wanna consider liquidity. Can you easily access the value of the asset? You do wanna consider market conditions.
Leah Hadley [00:09:06]:
So is the real estate market slowing down? Is the stock market volatile? I mean, you wanna consider these things and how it's gonna impact the values of the things that you're walking away with. You also don't wanna look at long term growth. Will the asset appreciate, or will it come with costs like maintenance, taxes, and repairs? So a lot of times when we're looking at investment accounts, you know, over time, we're looking at pretty significant returns over and above what we see in the real estate market. So here is another major risk that, I see in a lot of divorce settlements that I talk to clients about a lot, and that's concentration risk. That happens when one spouse ends up with too much of their wealth tied up in a single type of asset, whether that might be real estate, it could be a business, comes up a lot with a business, or a specific kind of investment, maybe a concentrated stock position. I see it all the time. A spouse will say, I'll just keep the home or I'll take my share of the business instead of the investment accounts. Now on paper, that may look like a fair division of assets.
Leah Hadley [00:10:12]:
Here's the problem. When you have all your financial eggs in one basket, you are actually taking on a lot more risk. And that's in any particular asset. Like, too much real estate can be risky. So let's go back to the example of my client who thought she'd sell her house quickly. She opted to take the home instead of her share of the investment accounts thinking that she would have the flexibility to liquidate the house, and she honestly, she thought she'd be able to sell within just a few weeks and walk away with the cash. Now it's six months later, and not only has she had to, you know, continue to pay for the house, but it still hasn't sold. Meanwhile, her ex spouse has, took a mixture of the brokerage and retirement accounts, which while there has been some, increased volatility as of late, they are actually up quite a bit from the time that they divided assets.
Leah Hadley [00:11:06]:
So sometimes real estate it it's just a really difficult conversation when we're talking about the marital home. It can be a really solid option for somebody. It can also be not the best option. And so keep in mind, home values fluctuate. It can take time to sell, and, it's not as liquid as a retirement or investment account. So most of your assets are tied up into real estate. You may find yourself house rich but cash poor. Another place that I see this is with business ownership.
Leah Hadley [00:11:41]:
Many times, one spouse wants to keep full ownership of a business while the other takes liquid assets like cash or investments. Now on the surface, this may seem like an even trade, but business does come with significant risks. What if the business experiences a downturn? What if the industry shifts or there are economic struggles? What if a key client or supplier leaves? I've worked with people who are awarded the business and their divorce settlement only to watch it lose value within a year due to market conditions or unexpected disruption. Meanwhile, their ex took a diversified investment portfolio that continued to grow. So the smart way to avoid concentration risk. The key here is really about diversification. Instead of taking only real estate or only business assets. Try to balance your portfolio with a mix of liquid assets like investments and retirement accounts, stable assets like cash and bonds, long term assets like real estate or business interests.
Leah Hadley [00:12:46]:
A more balanced division of assets gives you greater flexibility and financial security in the years to come. And that really is why it's so valuable to work with a certified divorce financial analyst or a CDFA like myself who can help you see beyond just the dollar values and assess the true financial impact of your settlement over time. So what to do if your, if the market drops before your divorce is finalized? I know this can be a really stressful situation, but the good news is you do have options. And the worst thing you can do is make a panicked decision without a strategy. So let's talk about three ways you can protect yourself if the market drops before your divorce is finalized. Now first and foremost, I know this isn't always an option. I wanna be clear about that. But sometimes, you can consider delaying asset division until the market stabilizes.
Leah Hadley [00:13:45]:
I know oftentimes you just wanna be done with the divorce process. And a lot of times, especially, you know, if you're working with somebody like myself, we're probably talking about cutting financial ties and, you know, getting things wrapped up and all of that. But if the market is especially volatile, it may be worth discussing a temporary delay on dividing search and assets. And so something to keep in mind. If you cash out investments during a market downturn, you could be locking in significant losses. If you wait until the market recovers, you may walk away with more. But this is something you really need to talk with your financial professional about to see what makes the most sense for your situation. Right? Sometimes, honestly, the market going up and down, if you're dividing each individual investment, you know, let's just say equally to make it simple.
Leah Hadley [00:14:41]:
So let's say, you know, we have a bunch of Apple stock and we have a bunch of Google stock and Microsoft stock. We're actually dividing the not only the shares, but also the tax lots, right, so that each party is getting the same cost basis, essentially, and the same value of the shares, the market's gonna go up and down. It's not gonna make a big difference. It becomes a big issue when the plan is to cash these things out, and we wanna plan for that. So protect assets with investment adjustments, but be careful with taxes. Okay? Some people do shift their investments into safer assets while their divorce is pending. The thinking is if the market is rocky, I'll move my money into something more stable so I don't lose too much before the settlement is final. A common move is shifting stocks into, like, money market or cash equivalents, and this can be a good strategy.
Leah Hadley [00:15:37]:
Of course, it's not a risk free strategy. Right? There's always risk. You wanna consider the potential tax consequences. Now if you sell investments to rebalance your portfolio, you could trigger some big capital gains taxes depending on the nature of your situation, And that could create a large tax bill, which could also be end up part of part of your settlement. Right? It might be a better approach to instead of selling everything outright, consider looking at your tax advantaged accounts, like your retirement accounts, your IRAs, your 401k's, your Roth, potentially adjusting the holdings in those accounts because those accounts, you you know, there's not gonna be a tax impact with moving investments out of those accounts. Now I am not in any way, shape, or form recommending that people try to time the market because the fact of the matter is none of us has a crystal ball. And when we're looking at a long term investment strategy, we really are looking at what your long term objectives are. How do we position you best for those long term, investment returns, acknowledging that we know market volatility is a completely normal part of investing, and we expect it.
Leah Hadley [00:16:52]:
We absolutely expect it to happen. When it's gonna happen, we don't know, but we do expect it to happen. Right? So a better approach than just shifting your, taxable accounts to something, more stable would be to do it gradually over time. That's gonna spread out the tax hit on that. So that's something to keep in mind. You wanna work with your financial professional to make sure you're not making an emotional move that could hurt you later. So I was saying, like, we don't have a crystal ball. The fact of the matter is, you know, I I often look to 2020 as a really fascinating year in the stock market.
Leah Hadley [00:17:33]:
So in 2020, the market dropped off in March of 2020. And by the end of the year in 2020, the market had hit new highs. And there were a lot of people, it was all the news of COVID coming out, who were just terrified, and selling their investments in 2020, and we had never experienced anything like this. And, it was a really scary time for a lot of people. There were other people who continued to put money into the market throughout that downturn and actually had some of the best returns they ever had because, again, the market went up dramatically, interyear that year. Right? And so really looking at what's gonna be best for you. Like, why are you trying to protect the value in the short term? Is it necessary? It may absolutely be necessary and look at strategies to do that. But, also, what what are the long term implications of any of the decisions that you might be making? The other thing is you can really structure your accounts your, settlement to account for market fluctuation.
Leah Hadley [00:18:34]:
So some strategies that you might consider to structure your settlement to protect against the swings in the market, use a percentage based split instead of a fixed dollar amount. So in my original example of that $400,000 account where one party was getting paid out 200,000, that 50/50 split that we talked about, that can be, a way for both parties to share in the risk and the reward. Revaluing assets right before the final division. Now this is gonna vary by state to some extent, but if market conditions do change significantly, you can request that investment accounts be reassessed, rather than locking in an outdated valuation. So that's something that you might wanna consider. And I mentioned before potentially negotiating a delay in dividing certain assets. Maybe you wanna hold off on dividing certain things. The other thing is you have to know your risk tolerance.
Leah Hadley [00:19:34]:
Right? You have to know how comfortable you are with seeing your investments going up and down. And you may be extremely risk averse. Now talk with your financial professional because even for those who are extremely risk averse, they still often need need to take some risk in order to be able to ensure they're not gonna run out of money. Right? We need to make sure we're outpacing inflation with our our money and things like that so we don't lose purchasing power. Now with that being said, you might be looking at the overall marital estate and figuring, you know what? There are some assets that are less risky, more stable, things like cash, maybe real estate, maybe your partner, your former spouse, is more comfortable with risk, and they want the investments. Right? Now keep in mind though again that over time and that's where, you know, CDFAs are really looking at what are the implications of these financial decisions and not just in the short term, but in the long term. So over time, the person who takes those assets will likely see a larger net worth just from that, that piece of the marital estate. But if you can't stay invested, it doesn't really matter.
Leah Hadley [00:20:50]:
So if you are really that risk over, she might work with us your professional to find a settlement that's really gonna work for you and your tolerance. So here's the bottom line. Markets do fluctuate. Okay? That that's reality. Your divorce settlement doesn't have to suffer as a result of it. There are ways to protect yourself, whether that is delaying asset division, adjusting your investments, negotiating, you know, a fair agreement. But before making any big moves, please be mindful of tax consequences and future growth potential. Now if all this feels overwhelming, don't worry.
Leah Hadley [00:21:29]:
You don't have to figure it out alone. This is exactly the kind of work that I do with clients to ensure their settlements are structured for long term financial security. So feel free to reach out if you need support in this area. So let's recap what we talked about today. Market fluctuations can significantly impact your settlement. Consider using a percentage based split, not a fixed dollar amount. Or if you're splitting, you know, individual stocks, for example, the number of shares rather than a dollar amount. Think twice before trading a liquid investment for real estate.
Leah Hadley [00:22:03]:
There are risks associated with doing so. Consider delaying asset division or adding a some language around how to deal with market fluctuation. And if you are currently going through a divorce and want to make sure that you are making the best financial decisions, please don't hesitate to reach out. Thanks for tuning in to Intentional Divorce Insights. If you found this episode helpful, please remember to subscribe, leave a review, and share it with somebody who needs this information. Until next time, take care. Thank you for joining me on Intentional Divorce Insights. It's a privilege to share this time with you.
Leah Hadley [00:22:43]:
I hope each episode offers valuable guidance to navigate your journey. If you find our content helpful, please leave a review to help others discover the benefits of intentional decision Until next time, take care and continue to embrace your path with intention.
