Impact of Market Volatility on Divorce Agreements

Following more than a year of stock market euphoria, February 2018 is thus far a month serving as a harsh reminder of the concept of market volatility. For spouses contemplating or in the midst of a divorce, the takeaway transcends mere numbers on a balance sheet.In divorce cases, litigants have the option to take their case to trial or reach a settlement agreement. When litigants opt for the latter, their rights and obligations concerning issues of property allocation, spousal and child support, and the like are outlined in a Marital Settlement Agreement (“MSA”). The Illinois Marriage and Dissolution of Marriage Act (“IMDMA”) vests courts with the discretion to value assets and

liabilities for purposes of property division as of the date of trial, or such other date as agreed upon by the parties or order by the court. 750 ILCS 5/503(f). Generally speaking, when litigants reach a settlement of their case, they use the date of divorce or one very close thereto as a valuation date.

Allocating Pro Rata Marketing Gains and Losses

For better or worse, the value of investment, retirement, and other assets consisting of securities is subject to change with virtually each passing minute. With many investment and retirement asset allocation, the physical transfer of funds generally does not happen within minutes, hours, or in some cases, even days of the finalization of a divorce case. Thus, where investment or retirement assets are not split equally between the litigants, it is crucial to account for and allocate market gains and losses in the time period between divorce and the execution of allocation.

To divide a qualified retirement plan (e.g. 401(k), 403(b), SEP-IRA, Traditional IRA), the Court must enter a Qualified Domestic Relations Order (“QDRO”) directing the plan administrator to effectuate the transfer of funds from the plan participant (employee) to the alternate payee (non-employee). With some plans, it may take at least 30 to 60 days from the date of divorce to process a QDRO and complete the transfer of funds from one spouse to the other. To put this time period in perspective, on January 17, 2018, the Dow Jones Industrial Average (“DJIA”) closed at 26,115.65. Approximately 30 days later, the DJIA closed 24,893.49—a swing of over 1,222 points or almost 5%. In the first several days of February alone, the market entered a correction (defined as a decline of 10% of greater).