Stock Market Volatility in a Washington State Divorce

Overview: Stock market volatility can add uncertainty to the division of investments and other assets in a Washington state divorce. Understanding how assets are characterized, valued, and divided can help spouses make informed decisions as market values change.

Key Takeaways 

• Market fluctuations can change asset values during a divorce. Investment accounts, stocks, retirement accounts, and other market-based assets may increase or decrease in value before a divorce is finalized.
• The character of an asset matters. Washington state property is generally classified as community or separate, and an account that began as separate property may still have a community property component if marital funds were contributed.
• Valuation dates can affect the division of assets. Spouses may need to consider when investment accounts and securities should be valued, particularly when significant market changes occur during the divorce.
• Market volatility can influence divorce decisions. Concerns about a market decline or hopes for a recovery may affect when spouses choose to settle and how they divide investments.
• Different asset division approaches carry different levels of risk. Spouses may divide investments between them or allocate different types of assets to each spouse, depending on their financial circumstances and goals.

If your marital estate includes securities, this will affect the nature of the division of assets that will be best for you in a divorce. In a Washington state divorce, stock market volatility can influence both the numbers and the decisions that follow.

Think of your investments as a snapshot in time. On paper, your accounts might, for example, show a value of $500,000. That number reflects what those assets were worth on a specific day, in a specific moment. When the market is for the most part stable, that number can feel like something you can depend on. When the stock market moves, though, that same number can fluctuate quickly and substantially, affecting not only your security in a practical sense but also emotionally. That’s on a typical day.

Now add divorce into the picture. 

In a Washington state divorce, all assets must be identified and valued. This includes retirement accounts, brokerage accounts, stock options, and, depending on your portfolio, business interests tied to the stock market. Whether and in what manner the assets will be divided will depend also on the “character” of the assets, i.e., whether they are separate property versus community property.

Common questions that come up when working with a Seattle divorce are: What will those assets actually be worth when it is time to divide them? Will the value assigned to them be based on the date of separation or when the case concludes?  What about the future value of an asset? The following is a discussion of the factors that go into calculating the answers.

Stock Market Volatility in a Washington State Divorce

All assets are not created equal. Investments may be subject to more volatility depending on whether they are high risk or low risk. Real estate is considered a more conservative investment by some experts, but that can still be impacted by market changes. Funds in an IRA or other retirement account are “pre-tax” dollars, so they are worth less than the value shown on paper. This is why an experienced Seattle family law attorney will look beyond the numbers to focus on the type of asset.

Community vs. Separate Property When Asset Values Move

In Washington state, property is typically characterized as either community or separate. Community property includes most assets acquired during the marriage. Separate property, on the other hand, usually refers to something you owned before the marriage, something you received as a gift or inheritance, or something you acquired post-separation with non-community funds. Where it gets more complicated is when a separate property asset is brought into the marriage, and then community property contributions are added to it.

Take an investment account. If it existed before the marriage, it is a separate property asset of the spouse who owns it. If no additional funds are ever added, the account has no community component. Any growth is still separate property. But if funds were added to the account from a community property source (for example, wages), the question becomes: What portion is community? This is referred to as “a community lien.”

When Community Property Funds Are Deposited Into a Separate Property Account

Depositing community property funds into a separate property account does not turn the account into community property. It is still separate property, but the issue is what portion belongs to the community.  The separate portion will include not just the original balance but also gains and losses on the original balance. Where matters can get further complicated are scenarios in which there were also withdrawals.  

This issue often comes up with retirement accounts, stock options, and business interests impacted by changes in the stock market. The asset remains separate, but the community property lien may be connected to how many years the couple was married and other factors. When values move up or down, the respective values can be harder to delineate, requiring analysis by a Seattle family lawyer.

How Stock Market Volatility Can Affect Emotions and Decision-Making in a Washington State Divorce

There is an emotional component to how stock market volatility can influence the divorce process. Market movement often brings stress. That stress can influence people’s decisions. For example, one spouse may want to resolve everything quickly out of concern that values will fall further, while the other spouse may prefer to wait, hoping the market improves.

These reactions are not uncommon. That being said, they can impact outcomes in ways people do not always expect or like. Making decisions under pressure usually does not reflect a full understanding of the long-term effects those decisions can have. The good news: A Seattle divorce attorney can help bring the focus back to the structure of the agreement and how it will function over time, rather than reacting to short-term market changes and fear.

Stock Market Volatility in a Seattle Divorce

There are several ways to address stock market volatility in a Washington state divorce. Which approach divorcing spouses use generally depends on the unique facts of the case and each party’s goals.

In some situations, investment accounts will be divided so each person receives a portion. This allows both people to remain exposed to the same market movement after the divorce, whether values increase or decrease, or they may choose to divest themselves of the securities in question and trade for another type. 

In other cases, the parties may agree on a division of assets in which one spouse takes a larger dollar amount of the more volatile investments and assets while the other takes a lower dollar amount in conservative investments and assets. Every approach presents a different level of risk.

Do Both Spouses Have to Share Investment Risk After Divorce?

Almost never. The goal is typically to separate the spouses’ financial interests so they are not required to remain connected after the divorce. Once the divorce is finalized, each spouse generally has control over the securities awarded to them and can decide whether to keep or sell them.

If they were formerly part of a shared investment account or an account in the other spouse’s name, arrangements are made to transfer the securities awarded to you to your name. An exception to this is certain types of security-based pensions which cannot be divided until some future date. However, a 401(k) account is an example of an asset composed of securities in which the non-contributing spouse can have the portion awarded to them transferred without penalty to a new 401(k) in their name or cash out and receive their designated share minus taxes immediately rather than waiting until retirement age.  

Speak With a Seattle Family Law Attorney About How Stock Market Volatility May Affect Your Washington State Divorce

Stock market volatility does not change the requirement that assets be divided in a Washington state divorce. It does, however, affect what decisions are prudent for you. Questions of what an asset is worth on paper, the risk tied to that asset, and what division of assets is best for your financial circumstances are best answered after speaking with an experienced Seattle family law attorney

At Elise Buie Family Law, our team of Seattle family law attorneys can help you approach these decisions with a clearer understanding of the character of assets you and your spouse own and how they will be treated in a dissolution. Call us today or schedule a convenient time to speak.

FAQs About Stock Market Volatility in a Washington State Divorce

Below are some of the most commonly asked questions about how stock market volatility can affect a Washington state divorce.

How are stocks divided in a Washington state divorce?

Stocks get divided as part of the overall property division. A King County court and courts around Washington state will consider whether the asset is community or separate property and then divide the property in a way that is just and equitable.

What happens if the market drops during my divorce?

If the stock market drops, the value of investment accounts may decrease before your divorce is finalized. This can affect how you decide you want your assets divided when it comes time to conclude the case.

Can we use a specific date to value investment accounts?

Yes. Many couples agree to use a set valuation date. This creates certainty, even though the market may change after that date.

Do both spouses have to share market risk after divorce?

Almost never. One goal of the court is to not leave the parties entangled in business together. Once the divorce is concluded, the securities awarded to you are yours to keep or to sell as you deem fit.