By: Whitbeck Bennett
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The Impact of Gains and Losses
When a client reaches the end of the road in a divorce proceeding, their desire for finality and certainty is entirely understandable. A necessary component to the equitable distribution process is the division of the parties’ accounts, to include the assessment of any “marital share” – or the portion of the account that either grew, accrued or was contributed during the marriage.
Oftentimes, clients may view each and every account that their former spouse possesses as fair game for distribution; however, that is not always the case. The Court will customarily identify the “marital share” of an account by assessing whether an account was opened prior to, during, or after the marriage—if an account was opened prior to the marriage, the Court will examine to what extent contributions were made into an account, as opposed to an account’s growth due to passive increase (to include interest accrual, rises in stock price and value, or reallocation of investments into different funds without new contributions).
Once the marital portion of an account is identified, parties commonly assume that this “marital share” figure will be the defined amount for which distribution may be eligible. However, most marital settlement agreements and court orders include an operative and critical phrase: that an account should be distributed as of the value on a certain date (most often the date of separation), “plus or minus any gains or losses.” These seven words can have a considerable impact.
Essentially, from the Court’s perspective, once an account has been examined to determine the marital share, the Court conceives of that amount as if, upon the date of separation (or whichever date is selected to determine and establish the appropriate value for distribution), it was placed into a separate account akin to escrow, and allowed to remain there on the normal rate of return. Thus, if an account was opened during the marriage, and no contributions were made after the date of separation, then any return or growth in the account’s investment would be deemed to be part of the “gains and losses” of that account since the date of separation. This can form a startling realization to a client, either good or bad.
The Court’s view is that, in equity, it is only fair that if the money ultimately owed to a former spouse gained value and interest through no effort or contribution of the account holding spouse, the recipient of the account’s distribution should be eligible from that benefit, as the initial act of opening an account or contributing its marital share occurred during the marriage, and thus constitutes a marital act.
The concept of “gains and losses” can feel foreign to a client who has not been exposed to family law or the distribution of financial accounts, as the “date of separation” is often emphasized as a critical determinative date to establish the value of assets. However, factoring in the “gains and losses” of an account since the determinative date can lead to significant additional monies owed, or possibly a significant hit taken from the money a party thought they would receive.
The complex nature of equitable distribution, and finding ways to protect against deviations from the expected outcome of divorce are some of the many ways that a seasoned family law attorney can be of assistance. Additionally, understanding the ways in which you may have a right to an account’s allocation is benefited by experienced counsel. Should you have any need for an attorney to assist you through this process, the Law Firm of WhitbeckBennett PLLC is here to help and walk with you through this process.