Proper Definition of Active Asset Appreciation of Separate Property with Stocks?

[marriedwithfear]

What is the name of your state (only U.S. law)? California

I have stock in a company I acquired prior to getting married. I did not ask my partner to sign a pre-nup. I'm considering selling my stock (post-marriage) and looking to buy other securities. I'm thinking I may do this every other year or maybe a few times a year. My understanding is that separate property stays separate property... unless there's active appreciation. My understanding of active appreciation is when one spouse puts in "work" or "marital time" to enhance the value of the property versus passive appreciation where it stays as is without "hands on" work to appreciation (real estate that gains in value as an example).

However, I'm struggling to realize what is active appreciation when it comes to stocks? There's a case in Florida I ready where the husband traded 700 times over the course of 4-6 years. In addition, the benchmark was using the S&P 500 to see if if his efforts in beating the market measured. in which the judge decided all of the appreciation was marital (Mathers v. Brown, Florida).

My question is, how many times does one trade before it becomes maritial? Is 100 trades per year "safe"? Is 50? Is 10? I realize it's hard to quantify and completely up to the court or bench judge or jury to decide. If my stock 'beats' the SP 500, is it at risk then?

 

[HRZ]

Laymans suggestion...find / focus on CA decisions...

I'd be real concerned about getting answers before I "actively " managed / churned my passive assets .
I'd be real concerned about getting answers before using any marital assets to pay any tax obligations generated by my trades and or using any marital assets to secure any market activity or even clearing any funds thru any marital accounts .

I suspect there is a lot of CA material on CA points ...stick to those..not Fl or NY ......

 

[LdiJ]

What is the name of your state (only U.S. law)? California

I have stock in a company I acquired prior to getting married. I did not ask my partner to sign a pre-nup. I'm considering selling my stock (post-marriage) and looking to buy other securities. I'm thinking I may do this every other year or maybe a few times a year. My understanding is that separate property stays separate property... unless there's active appreciation. My understanding of active appreciation is when one spouse puts in "work" or "marital time" to enhance the value of the property versus passive appreciation where it stays as is without "hands on" work to appreciation (real estate that gains in value as an example).

However, I'm struggling to realize what is active appreciation when it comes to stocks? There's a case in Florida I ready where the husband traded 700 times over the course of 4-6 years. In addition, the benchmark was using the S&P 500 to see if if his efforts in beating the market measured. in which the judge decided all of the appreciation was marital (Mathers v. Brown, Florida).

My question is, how many times does one trade before it becomes maritial? Is 100 trades per year "safe"? Is 50? Is 10? I realize it's hard to quantify and completely up to the court or bench judge or jury to decide. If my stock 'beats' the SP 500, is it at risk then?

Its not really passive vs active. Its more along the lines of whether or not you spending marital income (income earned during the marriage) to support or maintain the asset.

A stock account, where you add no additional marital income to the account, arguably could remain a separate asset. I do think however that the fact that you intend to sell the stocks to buy others (and it appears that you intend to be active in those sales) will cause you to realize income that you will control will make things a little murkier. That realized income could be considered to be marital income.

I really think that you are going to need to run this by a local attorney. However, until you get an answer from one you need to just leave the stock alone unless its more dangerous to leave it alone than sell it.

 

[marriedwithfear]

Its not really passive vs active. Its more along the lines of whether or not you spending marital income (income earned during the marriage) to support or maintain the asset.

A stock account, where you add no additional marital income to the account, arguably could remain a separate asset. I do think however that the fact that you intend to sell the stocks to buy others (and it appears that you intend to be active in those sales) will cause you to realize income that you will control will make things a little murkier. That realized income could be considered to be marital income.

I really think that you are going to need to run this by a local attorney. However, until you get an answer from one you need to just leave the stock alone unless its more dangerous to leave it alone than sell it.

Thanks for the answer. Do you think any local attorney specializing in divorces/family law can answer here or do I need one that specializes in asset appreciation, particularly around investments/stocks?

 

[LdiJ]

Thanks for the answer. Do you think any local attorney specializing in divorces/family law can answer here or do I need one that specializes in asset appreciation, particularly around investments/stocks?

You want to consult with a family law attorney.

 

[HRZ]

OP ..you raised a related new question about moving funds into a 529 plan....that is not an easy question as 529 s are a rather odd duck with separate donor , owner, and beneficiary issues and some very special rules about what can be done to change beneficary and ownership or distribute funds in other manners and some of the rules vary by state where the plan is domociled ...there is at least one forum devoted to 529 matters and one tax forum that gets frequent commentary by a well known tax attorney .

I have no doubt that with careful attention to the 529 rules you can move some pretty decent sums into a each 529 plan ...but there are some tax penalities involved on the gain if/ when the plan owner seeks to make a distribution for other than a qualified education purpose ( which just got expanded to cover k-12 )

The ROI on some of the plans I personally use has been very impressive ...but you need a good understanding of some of the special rules that apply as to how to move and control and use the funds . C My state offers a bit of a tax incentive to use such plans and provides a rather helpful exclusion of such plans from an otherwise nasty state nheritance tax...I do not know if your state has any special incentives )

If your goal is to keep separate funds separate ...with attention to the rules, a 529 may well do that, but whether it is a good place to invest funds and given some use limitations it may not be a good tool for the purpose .

BTW ..if you liquidate the stock you addressed earlier...approximately what $ net is expected ?

 

[marriedwithfear]

OP ..you raised a related new question about moving funds into a 529 plan....that is not an easy question as 529 s are a rather odd duck with separate donor , owner, and beneficiary issues and some very special rules about what can be done to change beneficary and ownership or distribute funds in other manners and some of the rules vary by state where the plan is domociled ...there is at least one forum devoted to 529 matters and one tax forum that gets frequent commentary by a well known tax attorney .

I have no doubt that with careful attention to the 529 rules you can move some pretty decent sums into a each 529 plan ...but there are some tax penalities involved on the gain if/ when the plan owner seeks to make a distribution for other than a qualified education purpose ( which just got expanded to cover k-12 )

The ROI on some of the plans I personally use has been very impressive ...but you need a good understanding of some of the special rules that apply as to how to move and control and use the funds . C My state offers a bit of a tax incentive to use such plans and provides a rather helpful exclusion of such plans from an otherwise nasty state nheritance tax...I do not know if your state has any special incentives )

If your goal is to keep separate funds separate ...with attention to the rules, a 529 may well do that, but whether it is a good place to invest funds and given some use limitations it may not be a good tool for the purpose .

BTW ..if you liquidate the stock you addressed earlier...approximately what $ net is expected ?

The goal for 529 was for future kids, I understand how that investment vehicle works (i.e. gains not taxable and distributions meant ONLY for education expenses)... I'm in CA, there's no state deduction for investing in 529 plans. The state pretty much sucks tax wise, but the location/environment (I feel) make it worth living here. The plan here was to put some money aside for future kids education expenses, but keep it separate property.

I guess I have two goals here as it pertains to the overall question: 1) How can I keep my separate property separate while making investments (buying/selling stock) and 2) can I invest in a 529 fund with some small separate property, and keep the 529 fund separate? For the latter, does merely 'opening' a 529 make it marital property even if its in my name only?

Regarding your last question: $300-$400K in gains.

 

[HRZ]

YOu cannot directly fund a 529 for an unborn beneficiary ..but you you may be able to fund other branches of familly tree and make changes later

BTW if your marriage is on shaky ground I might have other priorities than a 529 or adding children . YOur multiple posts raise that cloud?

And if I did use a 529 I might make sure I don't own it and it's not domociled in my state.

AS an aside , for a big gain like you post, I would lay out some tax math as to spreading out the gain over several years unless I did a careful roll to a IRA or 401(k) if Plan rules permit same .

 

[Ohiogal]

YOu cannot directly fund a 529 for an unborn beneficiary ..but you you may be able to fund other branches of familly tree and make changes later

BTW if your marriage is on shaky ground I might have other priorities than a 529 or adding children . YOur multiple posts raise that cloud?

And if I did use a 529 I might make sure I don't own it and it's not domociled in my state.

AS an aside , for a big gain like you post, I would lay out some tax math as to spreading out the gain over several years unless I did a careful roll to a IRA or 401(k) if Plan rules permit same .

I believe that was a new change added in the GOP TaxScamBill

 

[HRZ]

I read some of the new bill and the only change to 529s I saw was the provision to allow distribution for education k-12 up to $10,000 per year to count as qualified .....including charter and home school.

 

[HRZ]

I take that back....the wacky proposed provision to allow designation of 529 beneficiary en utero may be in there..I don't have a handy way to check backwards .

I doubt that's relevant to OP.

In theory that triggers an administrative need for SSNs or TINs for the unborn in my state ...oh such fun!

 

[marriedwithfear]

I take that back....the wacky proposed provision to allow designation of 529 beneficiary en utero may be in there..I don't have a handy way to check backwards .

I doubt that's relevant to OP.

In theory that triggers an administrative need for SSNs or TINs for the unborn in my state ...oh such fun!

Regarding 529s, I looked this up, you can have yourself be the beneficiary. It's always existed that way and when a newborn comes, put it in their SSN.

I guess I am wondering, does merely creating or opening an account, since I'm married mean that my wife is entitled to it? Even though the funds would be separate property.

 

[HRZ]

NO..that's only partially smart...a transfer down a generation of large sums triggers gift tax issues.

one can move some rather hefty sums in 529s with attention to the rules . ...several hundred thousand...

Your quest to keep such sums out of any marital pot debate downstream is a different quest ..I am not a lawyer and it's been a while since I dug thru the details of 429s .. ...let's just say 529s are odd legal creature and lend themselves to some steps to prevent it being accessed or counted by others .

Were I seeking to create an insulated pot I might pay attention to other design eissues .

 

[latigo]

What is the name of your state (only U.S. law)? California

I have stock in a company I acquired prior to getting married. I did not ask my partner to sign a pre-nup. I'm considering selling my stock (post-marriage) and looking to buy other securities. I'm thinking I may do this every other year or maybe a few times a year. My understanding is that separate property stays separate property... unless there's active appreciation. My understanding of active appreciation is when one spouse puts in "work" or "marital time" to enhance the value of the property versus passive appreciation where it stays as is without "hands on" work to appreciation (real estate that gains in value as an example).

However, I'm struggling to realize what is active appreciation when it comes to stocks? There's a case in Florida I ready where the husband traded 700 times over the course of 4-6 years. In addition, the benchmark was using the S&P 500 to see if if his efforts in beating the market measured. in which the judge decided all of the appreciation was marital (Mathers v. Brown, Florida).

My question is, how many times does one trade before it becomes maritial? Is 100 trades per year "safe"? Is 50? Is 10? I realize it's hard to quantify and completely up to the court or bench judge or jury to decide. If my stock 'beats' the SP 500, is it at risk then?

For openers Florida is an equitable division state whereas yours is community property state.

Secondly the decision in Mathers v. Brown is governed by a Florida statute that defines a marital asset as: "the enhancement in value and appreciation of nonmarital assets resulting . . . . from the efforts of either party during the marriage . . . " (F. S. Section 61.0785 (6) (b).

California does not have a comparable statute. There the statute simply states that a spouse's separate property includes the rents, issues and profits from that that spouse's separate property.

Also, I'll bet you were unable to find a California court decision treating with the appreciated value of a spouse's separate stock portfolio.

Furthermore, and taking for granted that the community estate does include active appreciation of a spouses separate property, the facts in the Mathers case provide perhaps stronger evidence of the title holder's labor and skill contributing to that increased value than in your instance. As it wasn't so much the number of trades of the husband's portfolio, but the variety of the investments and different species, foreign stocks, money markets, etc., that influenced the decision in Mathers. Plus, the husband conceded that his active and skillful efforts in managing the portfolio largely contributed to its appreciation. (Notable that increase was awarded 64% to the husband.)

Additionally, under Florida law once the appreciation in value was established, it become the burden of the husband to prove that it was due to market conditions alone. This he failed to do and it was so found by the trial court and affirmed on the appeal.

Also as far as I know there is a dearth of California decisions on this issue. And I recall reading such in a rather exhaustive treatise sometime back. Perhaps someone in here can lead us to a specific case in California. Until persuaded otherwise I lean towards placing the burden of proof on the non titled spouse.

Lastly with regard to the S&P index. Any discussion of the index in Mathers is pure dictum because it was not a factor in the decision. Other than that the husband was unable to connect his constantantly evolving folio with it or any recognized dependable such index.

 

[Ohiogal]

I take that back....the wacky proposed provision to allow designation of 529 beneficiary en utero may be in there..I don't have a handy way to check backwards .

I doubt that's relevant to OP.

In theory that triggers an administrative need for SSNs or TINs for the unborn in my state ...oh such fun!

https://www.politico.com/story/2017/11/02/gop-tax-bill-abortion-rights-college-savings-244486