September 1, 2015
Blake and Crystal are getting divorced, and they have agreed that Crystal will keep 60 percent of Blake’s IRA.
This statement sounds simple enough, but writing out this order is more complicated than it looks. Because investment account values fluctuate from day to day, the simple act of dividing it into two pieces requires more thought and attention so that the intent of the agreement is upheld.
First there is the issue of the value of the account. During the divorce process it is important to choose a date at which you value all the investment accounts. It could be any date, but choosing a month-end day is recommended so that the value of an account can be corroborated with an account statement. Both parties must agree that negotiations will be based on the value as of the agreed-upon date, regardless of subsequent fluctuations to the account value (these will be addressed below.) Without this understanding you might get pretty far down the path of an agreement, only to have one spouse cry foul because of a dip in the stock market.
Once fixed values are assigned the negotiations will continue and the outcome will be one of two things: either a fixed dollar amount of each account will be assigned to one or both parties (not a good idea if the account value fluctuates) or a fixed percentage is used. Assuming percentages are used, how should this be written in the agreement?
If written as “Crystal will receive 60% of Blake’s IRA, based on the value of the account on July 31, 2015” and the account is worth $50,000 then Crystal will receive $30,000 – not a penny more or less. If the IRA has increased in value since July 31 Blake will keep all of that growth. Likewise if the account has gone down Crystal will still get $30,000 and Blake will suffer all of the loss.
This is not the intended outcome in many situations, where it is more likely that the intention is for the account to be divided 60/40 on whatever date the account is actually split. In that case the instructions could be written as ““Crystal will receive 60% of Blake’s IRA, based on the value as of the date of distribution.”
It could also be written as “Crystal will receive 60% of Blake’s IRA valued as of July 31, 2015 plus or minus any earnings or losses on her share as of the date of distribution." The difference from the option in the previous paragraph is that if one party contributes or withdraws from the account after the valuation date that increase/decrease is not awarded to the other party. However if the parties cherry-pick which holdings in the account are given to one spouse or the other (to achieve the desired split) this option could result in a meaningful difference in value. What if Husband takes Stock A and it goes up 5% after July 31st, while Wife gets Stock B which goes down 8%? For this reason I prefer the simple instruction in the previous paragraph.
As an aside, it can simplify the division of assets if the holdings are sold at the beginning of the divorce process and left in cash. There will be minimal if any fluctuation in the account value (especially with the low interest rates currently being offered). This may not be a good idea for a taxable investment account (such as a joint account or trust account) where selling the investments could generate taxable capital gains, but can be done with no tax consequences in tax-deferred accounts including IRAs, Roth IRAs, 401(k)s and 403(b)s.
Remember that the account custodian who receives the decree is going to carry out the instructions exactly as written, so be sure they are written the way you intend.
