One of the issues that arises in a lot of divorces is that the value of assets usually changes during the course of the divorce process. When this happens, the courts look to whether those assets have experienced passive or active gains or losses when deciding how much each party receives. This video explains the differences between passive and active gains, and why it matters.

What follows is a transcript of the above-video:

“Hi, everybody. I hope you’re doing well. I wanted to do a video today on the difference between passive and active gains and why it’s important to your divorce, and let me just tell you very briefly where it comes into play, okay? Because a lot of people struggle with this concept, but it’s really critical to understand. If you have, for example, a stock account what’s going to happen is you’re going to file for divorce on a certain date, but you’re not going to actually get divorced for a long period of time after that, sometimes a year, sometimes even two years. And during that time, the value of that account is going to fluctuate, and the question is always well, wait a minute. How do we determine who gets what? Because what the general rule is, is when you file for divorce, the date that you file the complaint is what is controlling for the purposes of equitable distribution.

In other words, the date you file the complaint, you kind of take a snapshot of the assets and what assets you have, that’s what gets divided up. And so if you add more assets after that, well, that’s considered really post marital, okay? But the problem you’re going to have is that your stock account, for example, and there are other examples of other assets, but this is where the issue comes up most commonly. Your account is going to fluctuate in value, and it might be just to use easy numbers that on the date you file for divorce, your jointly held marital stock account has for example, $100,000 in it, and then two years later it’s got $130,000 in it. Then the question becomes well, wait a minute. I thought, when we filed for divorce, that’s when we take the snapshot. What about this other $30,000, who gets the benefit of that? And the answer is it depends.

It’s not as simple as always just dividing it up. If it is a passive gain or a passive loss, it gets divided up. If it’s an active gain or an active loss, then we have to decide how is it actually active or not? And here’s what I mean, a passive gain or loss is when the money is just sitting there, okay? So you’ve got $100,000 in your brokerage account. Nobody really touches it. By just sheer force of the market, it goes up or down. Okay. Well, when it goes from $100,000 to whatever, $130,000, then you guys will both evenly divide the extra $15,000. That’s no problem, okay? When it goes from $100,000 to $70,000, you guys both bear the loss of that extra $30,000, and so you’d both get correspondingly $15,000 less.

But let’s say in that same account, one of the parties is actively day trading, and because they’re day trading, the day trading causes the value of the account to go up. Well, the person who’s doing that is going to argue that the account went up because of what they were doing, okay? And therefore, they should be entitled to a greater share of it. All right? But the opposite true also that if by virtue of day trading, they’re losing money, okay? Especially against market performance, well then the other argument’s going to be they should be solely responsible for that loss.

And it’s a lot more complicated than you think because a lot of times you’ll see these cases where someone is not really day trading. I had a situation one time where there was an account had like a million dollars in it, and I represented the husband and the wife was saying, “Well, yes, it had a million dollars in it. The market went up 15%, so it should have been $1.15 million. But because I “day traded”, it went up to $1.2 million.” Well, her idea of day trading was that she had gone one time to her broker and they switched investment strategies. Well, is that really active trading or not? And I think it’s kind of a tougher argument when it’s just one thing.

And the other argument is well, wait a minute, this was a jointly held marital asset, okay? You didn’t have the right to go do this without me. I basically tacitly agreed to letting you do this, therefore, I should bear in the active gain as well. And so what necessarily constitutes an active gain versus a passive gain is really something that has to be decided on a case by case basis. Going a broker one time is probably not it. If you’re day trading, that’s closer to being very active. If you’re doing it once a month, once a week, again, these are all kind of judgment calls, and keep in mind also, very few day traders actually wind up exceeding the gains of the S&P 500. So it’s quite possible that by trading you’re causing the account to grow, but you’re also causing it to grow by less than what it would have grown if the money was just passively invested in the stock market, or passively invested in whatever passive investment you previously had coming into the marriage.

Where this gets even more complicated is if you’re talking not so much about stock, but about the value of a business, because the business is going to have a value that’s ascertainable, or close to it anyway, on the date of the filing of the divorce complaint, but then the value of that business is probably going to change over the next year or two. And the question is well, who’s contributing what to that business? And again, that’s going to be very, very fact sensitive. All right? If it’s something that’s run just by the husband, for example, well, then he’s going to get the benefit of it, and the detriment also. If it’s something where they’re both jointly running, you’re going to have to kind of factor in a lot of different things, what they’re really contributing to it and how. And honestly, there’s sort of this weird rule in family law, and it’s kind of unwritten, but the more complicated things get the more judges like to just go with simple answers, which is to say a lot of times, it’s just easiest to divide things 50/50.

So anyway, there’s certain things in divorce that you can do by yourself. If you have a very simple marriage, you maybe don’t even need a lawyer’s advice that much. If you’re talking about you had a one year marriage, no assets, no child support, no kids, no children, no spousal support, no real debts, you pay a lawyer a few bucks and you get it done right. But if you’re at the point where you have assets that necessitate this sort of analysis, where you have concerns about whether certain gains are passive or active, if you’re talking about a brokerage account, or especially if you’re talking about business valuation, this is definitely beyond the scope of something that you can do yourself, and you’re really going to need to hire an attorney. And on top of that, you’re probably going to also have to hire expert witnesses if you’re going to want testimony as to what the value was and what the value should be today and what it is today.

So that’s a really complicated area of the law. I’m almost reluctant even to put this video out because I don’t want people thinking that this is the kind of thing you can watch the video and you understand it and now do it yourself. But I’m hopeful at least it gives you an idea of how complex it is and how if this is the kind of situation that you’re facing, then this is definitely the sort of divorce … Excuse me, where you definitely need a lawyer. All right? If that’s the case, go ahead and give me a call. I’m always happy to do a 15 minute or so free consultation to talk about the situation that you’re facing and what you can reasonably expect going forward. I also encourage you to check out the other videos on this playlist, especially divorce, a general overview, which gives you a good idea of the divorce process in general. And like I said, give me a call if you need anything, I’ll see what I can do to help you. All right, guys. Good luck. Take care.”