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Transmutation of Assets in a High Net Worth Divorce

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By Joshua Stern, Divorce and Family Law Attorney

There is an adage that tells us it’s not what we earn that matters, it’s what we save. Unfortunately, in the world of divorce, the adage gets a bit more complicated. It’s not what you earn that matters, it’s how you save. The structure and titling of investments will have a substantial impact on any divorce settlement, including determining whether someone gets to keep their non-marital money.

I have a hypothetical client who brought substantial wealth into his marriage via his ownership of Apple stock. The client got married five years ago and brought 10,000 shares of Apple stock into the marriage. After his marriage, he began trading the Apple stock, including adding more money to the brokerage account to acquire new investments.

A year ago, his wife asked for a divorce. The hypothetical client now wants to protect his non-marital investments. However, his trading activity has made it extremely complicated to determine what belonged solely to him and what was part of the marital estate when he filed for divorce.

This issue comes up frequently in divorce. Whether it’s stocks, assets or property, dividing wealth brought into a marriage—and then built upon during marriage—can be very complex.

As an attorney specializing in high net worth divorce, I’m here to support clients as they navigate nuanced situations such as this one. So let’s break it down.

What happens to pre-marital investments?

The marital estate is comprised of the debts and assets acquired during the marriage, but excluding gifts, inheritance, and premarital property. If you bought a stock during the marriage and it wasn’t purchased with money that was pre-marital, gifted, or inherited, then the stock is a part of the marital estate.

Alternatively, if you owned Apple stock and brought it into the marriage, that stock is presumed to be non-marital (because it was acquired prior to the marriage).

The issue for investments is determining how and when the asset was acquired. Where marital and non-marital assets are mixed to acquire a new asset, the non-marital contribution may be clawed back, provided the non-marital contribution can be substantiated with clear and convincing evidence. In other words, if you claim that you contributed non-marital money, you may be able to get that non-marital money back, provided you can trace it clearly.

Let’s discuss the hypothetical client who brought 10,000 shares of Apple stock into the marriage. Following the marriage, the client decides tech is a promising sector and he wants to invest more heavily in it.

In year 1 of the marriage, he sells half of the Apple stock and buys IBM.

In year 2 of the marriage, he deposits marital money into the account and buys Microsoft.

In year 3 of the marriage, he sells the IBM and Microsoft stock and buys Samsung stock.

In year 4, he sells half of the Samsung stock and buys Facebook.

In year 5, his wife asks for a divorce and he wants to determine what is marital and non-marital property.

The determination of what is and is not marital is ultimately up to the Court, but there is at least one safe bet in the above example: half of the Apple stock he brought into the marriage was never sold. It is clearly traceable as his pre-marital/non-marital property. The client can expect to keep all of his non-marital property.

Unfortunately, the Facebook stock is not as secure. The issue is that the client transacted in the Apple stock and acquired new property. That new property is not clearly traceable to his non-marital estate as the Facebook stock was purchased with cash and the gains on marital and non-marital asses.

Illinois law tells us that “If marital and non-marital property are commingled into newly acquired property resulting in a loss of identity of the contributing estates, the commingled property shall be deemed transmuted to marital property…” Here, the Facebook stock is newly acquired, following several transactions in which the contributing estates lost their identity. As such, it is very likely that the Facebook stock will be deemed marital property.

Though my client had brought his Apple shares into his marriage—and was buying and trading stocks with the assumption that they were his alone—the commingling and subsequent transmutation of assets deemed all Facebook shares part of the marital estate. Rather than receiving 100% of the Facebook shares in divorce, they were split equitably between him and his former wife.

I owned a house before I was married. Who gets it in the divorce?

The same challenge this client faced with his stocks applies to other assets you may bring into a marriage. For example, I’ve had clients who owned a house before marriage and then must determine who it belongs to when they get divorced.

In some situations, it’s very clear who owns the house. If you added your spouse’s name to the title, then the house is almost certainly presumed to be marital property. If you never put your spouse’s name on the title and make no adjustments to the house during marriage (such as redoing the kitchen or finishing the basement), then it remains non-marital property.

However, if there are monetary contributions to the house during marriage, it can become more complicated. If the marital estate contributes to the non-marital asset, it is entitled to reimbursement, provided the contribution is traceable. The same rule applies if the spouse who does not own the home makes a financial contribution. If the contributed money was not intended as a gift and be traced, it may be reimbursed. Of course, there are more extenuating factors than can be included here and not all contributions to real estate are reimbursed dollar for dollar.

How do I keep my pre-marital assets?

If you have substantial wealth and assets, I recommend creating a prenuptial or postnuptial agreement. These agreements allow couples to protect any property they want to remain separate and non-marital.

Pre- and postnuptial agreements prevent the commingling of wealth by clearly defining each partner’s property and assets. I recommend that anyone bringing substantial assets or property into a marriage work with a high net worth divorce attorney in order to protect their wealth. These provisions allow you to avoid the complex challenges my clients have recently faced with the stocks and home they brought into their respective marriages.

Contact Our High Net Worth Divorce Lawyers in Evanston, Chicago and Lake Forest

If you brought significant wealth into your marriage, Stern Perkoski Mendez can help you carefully determine the assets you should receive in divorce. We can also help you create a prenuptial or postnuptial agreement.

Request a free consultation online or call us at (847) 868-9584. We will happily meet with you in our offices in Evanston, Chicago and Lake Forest or at another location.

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For a free consultation, call Stern Perkoski Mendez at (847) 868-9584 or contact us.