California is a community property state when it comes to dividing property in a divorce. This means that marital assets are generally divided equally.
Dividing marital assets can become more complicated when the assets are investment accounts. Before you determine how to divide the investment accounts, you must decide if they are legitimate marital property.
Marital property is generally any property you and your spouse acquired during the marriage. Only marital property gets divided in a divorce.
Separate property are assets owned by you or your spouse prior to marriage or any assets you receive as a gift or inheritance during marriage that are not comingled with marital property.
How commingling impacts separate property
When marital and separate property are commingled, or mixed, together, it becomes challenging to determine which pieces are marital property.
For example, an investment account that you owned prior to marriage is separate property. But if you transferred money into that investment account from a joint marital account during your marriage, that investment account could now be considered marital property.
However, in this scenario, the entire value of the account may not be marital property, but only the account’s increase in value.
Additionally, investment earnings during marriage can be considered marital property. The purpose of investing money is to grow investment accounts and earn money.
Any growth or earnings on investment accounts during marriage are typically considered marital property. This often depends on the type of investment accounts and how they are structured.
The same concept applies with re-invested earnings. Earnings from separate investment accounts may be marital property.
If you hold investments and are concerned about losing them or being required to give a portion to your spouse in a divorce, it is best to explicitly keep the investment accounts and any earnings separate. This usually requires clear documentation that tracks the investment accounts over the course of your marriage.
Dividing retirement accounts
Retirement accounts are a common type of investment account to be divided in a divorce. When dividing retirement accounts, a special form called a qualified domestic relations order (“QDRO”) is used.
This form allows funds to be transferred from one retirement account to another while avoiding tax penalties usually associated with retirement account withdrawals.
Although a QDRO may not be required, splitting other types of investment accounts may require certain forms, as well. It is extremely important to research the specific requirements for QDRO’s or other investment accounts since any mistake could have negative tax or other financial consequences.
You and your spouse are always free to reach your own agreement on how investment accounts, or any other marital assets, are split. A court will typically approve the agreement if it is fair, but if you have questions about whether the agreement is in your best interest, you should consult a professional.