As of the writing of this article, the stock market has been relatively stable for at least a few weeks in comparison to the wild days of late February and March, when the Dow Jones Industrial average lost approximately 35% of its value in a matter of weeks before making a limited recovery. Even today, the market is in the range of 20% off of its all-time highs in mid-February. Well-respected business prognosticators are giving radically divergent forecasts for the future of the markets over the coming months and years, with some predicting a steady recovery and others suggesting we haven’t seen anything yet when it comes to the negative market consequences of the COVID-19 pandemic.
In short, while markets are always uncertain to a degree, the level of uncertainty that people have with respect to their retirement assets and other investment holdings right now is higher than most of us have ever known in our lifetimes. And if you are in the process of obtaining a divorce during this time, there are certain issues you will want to keep in mind as you work with your attorney and the other party to finalize your financial issues in the divorce.
Dividing Up Retirement Assets in a Divorce
In California, retirement assets and any other investment holdings are subject to the same principles of community property as other property. Regardless of which spouse’s efforts resulted in the accumulation of the assets, the law is that the portion of the assets that were earned and/or accumulated from earnings during the marriage (measured from wedding date to the date of separation) is considered community property and will be split 50/50 between the parties.
This means that if a 401(k) account or brokerage account was opened by one spouse before the marriage, there is a high likelihood that that account will contain both separate property (the property belonging to one spouse solely) and community property which is, again, split between the parties. Dividing the separate property from the community property may be relatively straightforward, but in some cases may require the assistance of a forensic accountant.
Add to this that certain types of requirement assets, e.g. an employee-sponsored 401(k) plan, have legal restrictions which prevent the parties from simply dividing the assets into two separate accounts. In such cases, it may be necessary to join the plan in the divorce and have what is called a Qualified Domestic Relations Order (“QDRO”) drawn up which allows the non-employee spouse to receive his or her community property portion over time.
Which is all a lead-up to say that, when the stock market is fluctuating wildly during the time that the parties are negotiating or perhaps litigating how to divide up the retirement and other investment assets, special care should be taken to ensure that it is clear what each party is receiving. If you believe you are getting $200,000 because that represents 50% of the retirement assets at a given time, and you agreed to receive 50% of the assets, you could be in for a rude awakening when 50% of the assets turns out to be $125,000 due to market swings.
You will want to discuss with your attorney what you actually intend to receive with respect to assets, and how to best achieve that in a settlement. For example, perhaps having $200,000 in guaranteed cash is more important to you than receiving 50% of a retirement asset, or perhaps the exact opposite is true. In any case, you will want to have a clear picture of the assets, what you are receiving, and how market fluctuations can affect what you receive when the distribution is actually finalized.
Market Fluctuations and Support Payments
Frequently, determining child support and/or spousal support payments are aspects of a California divorce. When both parties have steady income levels (even if one those income levels is steadily zero), this determination can be straightforward based on other factors. But many people have fluctuating incomes based on market circumstances, and which may even include income directly tied to the markets, such as stock options.
Parties do have the ability to go back to court to modify spousal support and child support payments when non-guaranteed “bonus” income is either higher or lower than expected, but obviously that is not ideal given the expense and other costs of repeatedly trying to negotiate and/or litigate matters. In California, however, parties can choose, as part of their divorce settlement, to include what are called “Ostler Smith” (or often “Smith Ostler”) tables to address the issue of unpredictable income. These tables provide for increased spousal support and child support payments as a range of percentages matching with the amount of income over a certain base level. By incorporating an “Ostler Smith” table into your divorce or custody order, both parties can gain assurance that support numbers will correspond with bonus income.
Guidance on Your California Family Law Questions From a Westlake Village Family Law Attorney
If you would like to learn more about how our office can provide guidance on any California family law issues you are facing in Ventura County or Los Angeles County, contact the Zonder Family Law Group office today at (805) 777-7740 or (818) 877-0001, or schedule your strategy session using easy-to-use online form here.