The first concern that most of my clients have had during this pandemic is for their kids. Where are they going to be? What should they do about child care if schools are closed? What if someone gets sick? Did you have those questions too? However, now that some of us have settled into the new normal of working from home (me!) and social distancing, the question has turned to: will the Coronavirus affect your property division? And if so, how?
The thought for this article came to me yesterday. Like many of you, I am now working from home, trying to keep some sense of normalcy by continuing to serve my clients. As Queen famously sang, the show must go on. Right?
Where I practice, you need to file a statement listing the assets and liabilities of the marital estate in order to get a hearing on property division. As I was working on one of these statements, it occurred to me that the numbers I was working with were already stale. What will this person’s 401(k) be worth a month from now? What if they don’t have a job? Will people still be buying homes? What about stock prices? In short, how will this Coronavirus affect their property division?
So I figured that if I had these questions, you probably did too. This is a time of uncertainty and fear, for your health and your money. And if you’ve read this blog before, I’m all about getting rid of the uncertainty of the divorce process for you. So in this article I’m going to discuss how the Coronavirus may affect your property division for the following items:
- 401(k) and other retirement assets;
- Stock and brokerage accounts;
- Marital home; and
- Job loss resulting in loss of income and/or health insurance.
The fluctuating values of your 401(k) and other retirement assets because of the Coronavirus will affect your property division.
Retirement accounts (like 401(k)s) and IRAs) are often the largest assets available for property division. Is this true in your case? But how are the values of these accounts being affected by the current state of the world? What do you do when the values are changing daily because the market is in a state of flux?
Never fear, my suggestions are here!
The most important thing you can do is not panic. Don’t withdraw the money out of your retirement accounts in hopes of stopping the loss of value. Retirement is supposed to be a long term investment, subject to highs and lows. Withdrawing funds will likely result in taxes and penalties, something that you could have avoided if you left your money in place.
So, hopefully you are saying, okay Liz, I got it, I’ll leave my money where it is. Good. Glad you are with me. With that in mind, here are my tips about how the Coronavirus may affect the property division of your retirement assets.
I’ll first talk about the best ways to divide these accounts given the current financial climate. Then I’ll talk about what to do if you, despite what I said above, need to take the money out now.
Dividing your retirement assets in the age of the Coronavirus.
There are two options for dividing your retirement assets while the values are in flux. Both will make sure that both parties receive what they are owed. In other words, you and your spouse rise and fall together.
The first option is to divide your retirement accounts based on percentages and not dollar values.
Not sure what I mean? Let me explain. For example, say you want to divide your retirement assets such that you and your partner each get 50% of the total value of the retirement accounts. Instead of using the balances of the accounts as of the date of your agreement, you can agree that you will identify the values of the accounts as of the date of distribution (i.e. the date that you are going to do the dividing) and then simply divide them by a certain percentage, i.e. 50/50.
This way your agreement is not based on a certain flat amount of money being transferred to one party. The danger of that is if the market rises or falls, that flat amount may no longer be 50% of the total value. It could be more, it could be less. Tying your agreement to a percentage rather than a dollar figure will make your division more equitable and likely more consistent with your intentions.
The second option is to identify a flat amount but then allow for adjustments based on “investment experience.”
You may be saying, what the $%$%$% is investment experience? I get it. It’s a weird term. Let me explain how that would work. Sometimes you don’t want to divide an account by percentages, particularly if you are offsetting the values of the retirement assets with non-retirement assets (i.e. your home or a checking account). In those cases, you would want to identify a dollar amount (i.e. $100,000) and then add the phrase “plus or minus investment experience from the date of the agreement until the date of distribution.”
So why is this phrase so important? Again, let me explain.
You can’t transfer retirement assets with a click of a button. As such, there is always a lag time from when an agreement is signed to when the money is distributed, sometimes several weeks. This way, if the market goes up or down during the time that you signed the agreement to when the money is transferred, that fluctuation is being considered. Again, as you can see from the language, it is plus or minus. Remember when I said you rise and fall together? This language covers that.
What if you need to access your retirement assets now?
Again, I can’t stress enough that you should leave your retirement assets in place. However, what if you are going through a “Gray Divorce” such that you can/need to access these assets now? Or, what if you had intended to withdraw monies from these accounts to pay off marital debt or purchase a new home after your divorce is finalized?
Again, while you may not be subject to the early withdrawals and penalties if you are over a certain age, I would still suggest letting your money stay in your retirement account as long as possible. Instead of withdrawing the money, move your money to safer investments within the account so that they are less likely to be affected by the dramatic ups and downs of the Dow. While you may earn less interest this way, you will have more assurance that the money will be there when you need it.
If your plan was to withdraw retirement funds to purchase a house after your divorce, you may want to rethink this step. What if you lose your job because the economy takes a downturn due to the Coronavirus? What if you incur debt to stay afloat and need the money to pay those bills? If possible, I would suggest holding off on making any large purchases or money moves until the pandemic has passed. Operating from a place of fear is never a good financial position.
Coronavirus may affect your property division and how stock and brokerage accounts are divided.
You can’t turn on the news without hearing about how the Coronavirus is affecting the dow. It’s up, it’s down, it’s up again? Maybe? While most experts don’t advise that investors focus on the daily fluctuations of the market, it’s really hard to do that when we are in such unprecedented times.
So, how do you deal with the ever-changing values of your stock assets if you are trying to finalize your property division during the Coronavirus? Again, as I said with the retirement assets, it is best to craft your resolution on percentages rather than values of accounts.
What do I mean? Let me explain. Don’t include the dollar value of a stock account in determining the value of your marital estate. Rather, do an in-kind distribution of the actual shares. That way, the value of the share on the date of distribution doesn’t matter.
So, what does this look like?
Let’s say you and your spouse own 50 shares of Amazon. Instead of valuing the stock as a whole and using that figure in your property division, it would be better for you and your spouse to each take 50% or 25 shares of stock. This way the value of the stock, whether it is worth $1.00 or $1,000.00 doesn’t matter. You both get the same and the daily fluctuations in value are irrelevant.
Coronavirus may affect your property division as it is unclear as to whether it will now be hard to sell your home.
Is part of your property division selling your marital home and dividing the proceeds? It may be too soon to tell if house sales will be affected by the Coronavirus, though at least one expert in my area thinks that it will. Here are some things to think about when addressing the sale of your former marital residence during this time:
- Will people put off buying because they are afraid that they won’t have a job in a month?
- Will there be a delay in new home builds because of a pause in work due to the virus?
- Would a construction delay drive down supply and thus up demand (and prices) for older homes?
- Are people afraid to go to open houses or individual house tours because they don’t want to get the Coronavirus?
I’m sorry to say I don’t have the answers to these questions. It’s just too soon. However, there are some things you can do to protect yourself:
- If you are still a few months away from resolution, it may be best to have your house reappraised to see if the value has gone down because of the market changes.
- Similar to my advice on retirement assets, don’t assume a value for your house in your property division. That value may simply just not be there anymore. Instead, agree to divide the sale proceeds by percentages.
- Consider what you will do if the house sits on the market for a long period of time. How will the carrying costs be divided? Will you reduce the price at a certain point? How is that decided? Work that out now to avoid issues later.
Job loss due to the Coronavirus may affect your property division.
Right now there are a lot of small businesses being forced to close and workers being laid off as a result. While I hope that many of these lost jobs are temporary, some may not be. What if one of those jobs is yours?
In many states, how the marital estate is divided is based on the financial circumstances of the parties at the time of division. Therefore if you no longer have a job and thus, no income or access to health insurance, you may receive a larger share of the property division.
Are you worried that your job may be lost due to the Coronavirus? If so, I would suggest holding off on finalizing your property division right now. While you may be agreeable to a certain settlement today, that same division may not be appropriate in a few months.
So what can you do if the Coronavirus affects your property division?
I’m not going to sugarcoat it, this is all tough stuff. We can’t predict what is going to happen. Things are changing daily. In reality, there may be even more financial considerations that we haven’t even considered yet. However, I ask that you consider how the Coronavirus may affect your property division by doing the following:
- Make sure you account for fluctuations in value when dividing your 401(k) and other retirement assets;
- When possible, do an “in-kind” distribution of stock and brokerage accounts;
- Consider how a delay in selling your marital residence may affect your distribution; and
- Wait to divide your assets if you are concerned that you may lose your job and health insurance because of the Coronavirus.
There is nothing wrong with taking a few weeks to see how everything plays out. Take a breath. Protect yourself and your finances so that when this passes, you can live your best post divorce life!
What’s next on the blog about the Coronavirus and beyond?
Did you miss my article about how the Coronavirus is affecting child custody issues? If so, you can check it out here. Next week I’ll continue my look at how the Coronavirus is affecting the divorce world when I share my thoughts on whether this pandemic will cause a spike in divorces resulting in another Divorce Month. Will spending hours trapped in your house result in more breakups? Don’t miss my thoughts on the blog next week!
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