Robertson Stephens Wealth Management and Divorce Planning of Austin work with clients to execute the division of joint or individual brokerage accounts, IRAs, Roth IRAs, SEP, pensions, and other retirement accounts.
When asked to execute a division as described in a divorce settlement agreement, the instructions to the custodian of the account (Fidelity, Schwab etc.) need to be crystal clear regarding the division. Here are some examples of the issues we’ve encountered:
- Accounts are divided in the settlement agreement, but there are no instructions for the division of each investment
The custodian will need to know which specific investments are to be moved from joint or other accounts. The distribution can be made pro rata from each investment leaving each party with identical holdings according to their share. However, pro rata separation may not be the best financial move unless each party will be in a similar tax situation post-divorce. If post-divorce income discrepancies exist, the parties may benefit from a tax optimization strategy in lieu of a pro rata transfer.
- Investments are sold before the division
Holders of taxable accounts (joint or individual brokerage accounts) may want to minimize sale transactions (preferring to transfer in kind) especially if the funds are not going to be needed for near term living expenses. Selling these investments may trigger undesirable tax consequences, or result in unnecessary transaction fees.
If the account is a non-taxable retirement account such as an IRA, the account holder can sell investments inside the IRA without an immediate tax consequence and then transfer cash to the intended spouse’s IRA account per decree instructions.
In either case, Robertson Stephens and Divorce Planning of Austin will advise on the best means of division for each client.
- When to use percentage allocations and when to use dollar allocations
We are often confronted with either dollar or percentage allocations. In our view, dollar allocations are best for clients that do not want market risk beyond mediation. For example, the settlement agreement could say that one spouse gets a flat $550,000 of the couple’s $1 million joint investment account pro rata from all investments at the time the account is divided. The other spouse would be allocated the remainder of the account, without a percentage or dollar amount listed. If instead, the husband is awarded $450,000 the custodian will send back the application for clarification.
If both clients accept market risk from the date of mediation until the account is moved, percentage allocation avoids confusion.
- Market volatility can make a dollar allocation problematic for the clients
If the decree awards each spouse a flat dollar amount of an account, stock market volatility creates another all-too-common undesirable outcome. For example: One spouse is allocated $550,000 from a $1 million account and the other spouse receives $450,000. In between the time the mediation occurs and post-settlement division, this account will likely experiences gains, losses, income distributions, and even unexpected contributions or withdrawals for expenses in the account. Unless the account remains stable from mediation through division the custodian will send back the application for clarification. Who gets the excess over $1million? How is the loss to be allocated if the account drops below $1M? You can imagine that the greater the volatility, the more problematic this becomes.
Documentation Needed to Divide Investment and (some) Retirements Accounts
Our firm has experience working with a number of brokerage firms/custodians during asset division. While the documentation requirements are similar, each custodian has a unique procedure to follow. Understanding the information the custodians need, the format they require and the little nuances of each firm can lead to a more expedient transfer of assets without any unintended tax consequences.
Company administered 401k plans or pension plans need a Qualified Domestic Relations Order (QDRO) which may be specific to that plan. You’ll need to contact the plan administrator for instructions and procedures. The process of a QDRO divisions can be very lengthy, so it is imperative that each party understands what they are getting and what market risk they are assuming.
Robertson Stephens Wealth Management and Divorce Planning of Austin work with clients and their attorneys to help insure that financial accounts are divided in the most efficient manner possible. Please contact Pam Friedman, CFP®, CDFA™ at firstname.lastname@example.org
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. This material is for general informational purposes only and is not tailored to the needs of any specific individual. Any discussion of U.S. tax matters should not be construed as tax-related advice. Please consult your personal tax advisor for more information. © 2020 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.