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What Happens to Investment Accounts During a Divorce?

Under California's community property laws, marital assets, including investment accounts, are typically divided equally between spouses. However, couples can negotiate their own agreement on dividing their property and submit it to the court for approval. Generally, as long as the agreement is equitable, the courts will approve it.

The distinctions between property types in a divorce are as follows:

  • Marital Property: Generally, any assets acquired during the marriage, including those in investment accounts, are considered marital property and are subject to division.
  • Separate Property: Assets owned by one spouse before the marriage or acquired by gift or inheritance during the marriage are typically classified as separate property.
  • Commingled Property: When separate and marital assets are mixed, they become commingled property. In such cases, it can be challenging to determine which portions are subject to division.

Dividing Property Equally

Dividing investments during a divorce is a common point of confusion and contention. For couples in California, the division of these types of accounts will be guided by California's community property laws. In particular, the classification of the assets as either marital property or separate property and whether any accounts were commingled dictates which investment assets are subject to division.

Common investment accounts married couples own:

  • 401(k) and Other Retirement Accounts
  • Brokerage Accounts
  • Mutual Funds
  • Stocks and Bonds
  • Real Estate Investments

Investment Earnings During the Marriage

Another complex aspect of dividing investment accounts concerns the earnings accrued on investments made before the marriage. While investments made before marriage are generally considered separate property, income earned from those investments may be classified as marital property under some circumstances.

How investments made before or during a marriage are generally classified during a divorce:

  • Investments made before marriage: Generally considered separate property.
  • Investments made during the marriage: Typically considered marital property unless explicitly defined as separate property through a prenuptial agreement or by other means.
  • Earnings during the marriage: Any earnings or growth on these investments during the marriage are sometimes considered marital property, depending on how the accounts are structured and whether earnings are commingled with shared assets.
  • Re-invested earnings: Earnings from pre-marriage investments reinvested during the marriage may be considered marital property if not explicitly kept separate.

If you accrued significant gains on investments made prior to your marriage, it’s crucial to understand how these will be treated under California divorce laws. Clear documentation can help prove that the original investments were separate property and can help with financial tracking to identify what parts of commingled assets must be shared with a spouse.

What About Retirement Accounts?

Many investment accounts couples own are retirement accounts, such as 401(k) plans, IRAs, and pension plans, which have specific rules for how and when they can be divided and dispersed. Consequently, addressing these accounts often involves navigating regulations unique to retirement funds, such as obtaining a Qualified Domestic Relations Order (QDRO).

QRDOs are legal orders used to divide certain types of retirement accounts during a divorce. They are used explicitly for employer-sponsored retirement plans like 401(k)s and pensions to legally grant a spouse their share without incurring early withdrawal penalties or tax consequences.

How Legal Guidance Can Benefit You

Dividing investment accounts during a divorce can be complex, especially under California's community property laws. If you're facing a divorce and unsure how your investment accounts will be divided, consider seeking professional legal advice from an experienced law firm like The Law Office of David A. Martin & Associates. Our Sacramento law firm is here to guide you through this complex process with the aim of protecting your financial future.

Interested in learning more about how we can assist you? Contact us today to schedule a consultation.