Divorcing couples often worry the most about dividing assets fairly. While regular bank accounts usually split easily, you can’t really say the same for investment assets.
In the Bay Area, where many people earn company stocks as part of their pay, understanding how California values and divides various investments during divorce can protect your financial future.
Tangling up marital and separate assets
Generally, California law considers investments you bring into your marriage as separate property. But your actions during the marriage can potentially convert them to community property.
One example of this is adding your spouse to investment accounts. Another is using marital earnings to grow pre-marital investments.
If your investment falls under marital property, your options to divide the assets include:
- Buying out your spouse’s share
- Offsetting the value of the investment with another marital asset
- Selling the investment and splitting the proceeds
Determining the value of your investment before dividing it up is a different challenge entirely.
Stock options count while not yet exercisable
Stock options let you buy company stock at a set price in the future. In California, options earned during marriage belong to both spouses, even if you can’t use them yet.
Basically, courts look at when you received the options, not when you can actually use them. They will use a formula to figure out how much belongs to the marriage and how much might be your separate property.
Additionally, you’ll eventually pay taxes when you use these options, which affects their true value.
RSUs may depend on the vesting period
Restricted Stock Units (RSUs) are promises from your company to give you actual stock after a vesting period or a certain amount of time working. RSUs credited and vested while married count as marital property.
For RSUs that you received before the wedding but vested during marriage, the courts generally use a time-based formula to get the percentage of the investment that counts as marital property.
Retirement accounts may need special handling
Your 401(k), pension and other retirement savings may need special court orders to split up.
Courts use QDROs or Qualified Domestic Relations Orders for 401(k) and similar accounts. This way, you won’t trigger any tax penalties. Individual retirement accounts are simpler in comparison and only need a “transfer incident to divorce”
Startup equity creates valuation headaches
Stock in private startups might be similar to stock options but are a little harder to divide. After all, unlike public companies, private company stock has no clear market price.
Different types of shares, future funding events and vesting rules all affect the value. You might need experts to estimate what your startup equity is actually worth.
Additionally, the company might even restrict whether you can transfer shares during divorce, creating extra complications.
Protecting your financial future during divorce
Working with experienced professionals helps ensure fair division of complex assets during divorce. Lawyers who understand investments, stock compensation and California property law may help spot problems before they happen.
Taking time to properly handle investment division creates better financial stability for both parties after the split.