The "Hot Stock Problem": When One Investment Dominates your Divorce

One stock can quietly take over your entire financial life and divorce forces you to make a decision before you feel ready. When a concentrated stock position grows out of employer equity, a hot tip, or a long run of gains, it can look like the easiest asset on the spreadsheet. We see the opposite: it can be the riskiest, most emotional, and most misunderstood part of the divorce settlement.

We walk through why concentration risk matters more during divorce than almost any other life moment. Diversification is not just an investing buzzword here, it is protection against extreme volatility exposure and bad timing. We also dig into the practical fight that shows up at the table: one spouse wants to hold for future growth while the other wants stability now, and neither view is “wrong” until you run the numbers against real life cash flow needs.

Then we get specific about the money details that change outcomes, especially cost basis and capital gains taxes. A large stock position with a low cost basis can carry a big tax bill under the surface, so a million dollar asset may not be a million dollars after tax. From there, we lay out three settlement paths: sell and split the cash, divide shares in kind, or let one spouse keep the stock while the other takes offsetting assets, as long as risk and taxes are properly considered.

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Transcript

Welcome And Sponsor Message

SPEAKER_01 0:08

Welcome to the Divorce Rich Podcast. I'm your host, Jackie Ressler. I've been a certified divorce financial analyst for 28 years, helping clients and their attorneys navigate the often complex and confusing financial issues in divorce. If you're in the process of or considering divorce, now is the time for you to take a deep breath and give yourself permission to find clarity on the financial issues you're facing. Rich means many things to many people. I believe the best definition of being rich is someone who has access to many resources. Along with my guests on this podcast, I will be bringing you a wide variety of information so that you can make sound and informed financial decisions for your financial future. Hey, if you're recently divorced or still in the middle of it, you already know life can feel like it's been turned upside down. And let's be honest, the financial part is overwhelming, confusing, and often the last thing that you want to deal with. That's why I want to tell you about the independent wealth management team at the Center for Financial Planning. Their team of certified financial planners specializes in helping people just like you navigate life changes with confidence. Whether it's assessing your new financial circumstances, creating or updating your retirement plan, or helping you adjust to the new normal, they'll work with you to get a clear, customized plan to feel in control and move forward with confidence. So if you're interested in working with a financial planner you can trust to have your best interest in mind, and you're ready to take the next step, visit centerfinplan.com. That's centerfinplan.com and schedule a conversation. Center for Financial Planning.

Why One Stock Is Showing Up

SPEAKER_02 2:12

Live your plan. Disclosure. Securities offered through Raymond James Financial Services Inc., member FINRA, SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker dealer and is independent of Raymond James Financial Services. Center for Financial Planning was a sponsor of the Divorce Rich Podcast. The Center for Financial Planning and Raymond James are not affiliated with or endorsed by the Divorce Rich Podcast.

Stock Concentration And Real Risk

A Case Study With One Dominant Stock

The Cost Basis Tax Trap

Three Ways To Divide The Stock

SPEAKER_01 2:48

Hi everyone, and welcome back to the Divorce Rich Podcast. This is Jackie Restler, and I'm doing a solo episode today. We are going to talk about a topic that I have been seeing in my practice more and more. I have had many cases in the last six months where a large percentage of my client's portfolio is tied up in one stock in a very high concentrated position. What sounds like a slam dunk on paper in a divorce setting can get really tricky really fast. So we are going to cover that today and talk a little bit about why this is happening and how it can become problematic in a divorce case. Stay tuned. I've been seeing more and more cases where one stock dominates a huge portion of a couple's wealth, often from a tip from an employer. Hi, everyone, and welcome back to the Divorce Rich Podcast. I'm going to talk about a topic today that I am seeing more and more of in my practice, and it's an unusual problem that I have not noticed before in the past, which is always a surprise to me when that happens because I've been doing this for 30 years. So I kind of feel like I've seen it all. But this is a newer phenomenon, and it's happening more frequently in cases. And what I'm seeing more and more of are cases where one individual's stock, which could be from a tip from an employee from a friend, um could be employer stock, employer equity, has grown to a huge portion of a couple's wealth. On paper, it looks like a win. In divorce, it becomes a very complicated problem. And that's what we're going to talk about today. What do we do with it? Do we divide it? Do we sell it? Or do we trust that it just keeps going up and up? That's what we're going to be covering. So what is a stock concentration? Let's start there. When one position makes up an outsized percentage of someone's net worth, sometimes 30%, 50%, even I've seen 80% of a person a couple's wealth is tied up in one individual stock. It oftentimes feels really safe for clients to do that. If it's performed well, there might be an emotional attachment to it and that feeling of either one, it's tied to my employer, who I really believe strongly in, or two, hey, we made a really good decision. This was a win. We got it right. But why is it actually risky? One, lack of diversification. Two, extreme volatility exposure. And three, timing risk during the divorce. So when we talk about the ideal portfolio from a financial advisor standpoint, we always talk about diversifying your assets, not putting all your eggs into one basket. So whatever portion of your portfolio is invested in the stock market, we like to see a balance amongst different types of investments. So stocks, bonds, and cash, whatever portion is in stocks, we'd like to see some percentage of small cap stocks, some percentage of mid-sized companies, large cap stocks, foreign stocks, international stocks, certain sectors. We want some healthcare, we want some entertainment, we want some, we want to have some companies that are going to perform in a way that is complementary to each other. And so that if one of those companies takes a hit, the rest of your portfolio can be still be maintained. We don't really like to see this much heavy concentration in one particular stock. So I'm going to walk you through an actual case study. Of course, I've changed the facts of the particular case study, but I want to read to you a real case pattern. So this is a marital estate. It's between three and five million dollars. 70% of the estate is tied up in one stock. The origin of the stock is employer equity. There was, um they invested early. Hi everyone, and welcome back to the Divorce Ridge podcast. Today is a solo episode, and I'm going to be talking about a phenomenon that I have seen in my cases recently. Now, I have been doing this for 30 years, and I have this feeling that I've seen it all. I've seen everything. But this is new, and this is something that I have not noticed in the past. And so, but it's come up enough times that I can say in my practice anyway, it's actually becoming a trend. And the trend that I'm seeing is I've got more and more cases where my client's wealth is tied up in one individual stock. Again, that is has been a surprise to me. The first time I ran across it, I thought, okay, this is unusual. The second, the third, the fourth, the fifth. And there are several reasons for it. A lot of times it can be because somebody invested in a stock early and it's just taken off and grown and it's suddenly become a large part of their portfolio. It can also be company stock that they were investing in their employer stock through work and it just kept growing and it's taken over their portfolio size. It could also be that somebody got a hot tip and now it has increased in value. And on paper, it looks like a real win. When it comes to divorce, though, it can make things really tricky. So what we're going to be covering is when do we keep it? When do we sell it? And how do we know if it's the right timing to do either of those things? Hey everyone, and welcome back to the Divorce Ridge Podcast. Today is a solo episode, and I am going to cover a topic that I am seeing more and more of in my practice. Now, I've been a CDFA for 30 years, and I feel like I've seen everything, but this is a new phenomenon and it surprises me. But what I'm seeing more and more of are cases where one stock, just one, often from a hot tip, something that was invested in early or an employer stack, has grown to represent a huge portion of a couple's wealth. On paper, this looks like a slam dunk. In divorce, it becomes a complicated problem. Do we divide it? Do we sell it? Do we trust that it's just going to keep going up and up forever? That's what we're going to be talking about in today's episode. So, what would be a heavy concentration in stocks? When one position makes up an outsized percentage of net worth, sometimes that could be 30%, 50%, 80% of someone's wealth, that is an outsized concentration in one particular stock. It can feel really safe to the client. It can feel safe because there might be an emotional attachment to having picked a winner. It can feel safe because it's been going up and up. It's performed well. But why it's actually risky is that there's a complete lack of diversification in the portfolio, which means if that stock goes up or down, you've got a lot of volatility exposure. Also, what makes it really complicated if you're getting divorced is the timing. Maybe the couple hadn't really, maybe that one stock grew to such a large percentage quickly and they hadn't really decided what they were going to do about it. Well, divorce now puts everything into a sharpened context, and now a decision needs to be made. I'm going to give you a real life case study. I've changed the details, of course, but this is based on an actual case that I have had in the past year. In my case, my client's spouse, the husband, he had been managing their portfolio throughout the marriage. And she really didn't know what was inside of their investment accounts, their brokerage accounts. So we took a look at the statements, and I was really shocked to see that let's say 80% of their entire net worth, including their home equity, retirement accounts, even assets for the children, 80% of their assets were invested in a company called Palantir Technologies. So the position started off relatively small. It was an early stock that they invested in. It had a great narrative, a great story, and it just kept growing. And over time, without really making any active decision, it became one of the dominant pieces of their entire financial picture. So again, on paper, this looks like a huge win. Their net worth is so much higher because of this one stock. But when you step into a divorce context, it creates a very specific set of problems, like it did in this case. First, there's a disagreement about what this asset actually represents. One spouse sees it as a continued growth opportunity, a way to retire early. The company's just getting started. The other spouse sees it as a huge risk. This is too much of our life tied up in one place. Now, second, there's a tax issue that's underneath the surface, bubbling up. Because the position has appreciated so much, there's a very low cost basis. So while it might show up as, say, a million-dollar asset on a balance sheet, that's not what you'd walk away with if you actually sold it. There's a price tag that goes along with it. If I were to buy a stock at$10 a share and sell it at$100 a share, that would be a big capital gain. And I would have to pay capital gains taxes on that$90 increase. Well, multiply this exponentially when we have a million-dollar position that is up 50%. If a million dollar position is up 50%, that means that out of the million dollars,$500,000 is subject to capital gains taxes. If we assume the capital gains taxes in this situation are going to be 20%, now we're talking about a$100,000 tax bill associated with this asset. And then the biggest issue associated with it, who's going to bear that risk going forward? Because if one person keeps the stock and the other person takes more stable assets, we're not just dividing value today, we're dividing uncertainty. One person is exposed to whatever happens next with that company, up or down. And the other person is essentially locking in their outcome today. So why is that a problem if they're gonna, if the person wants to just take it and lock in their value today and give the other person the stock? That is actually when these cases get tricky because we're negotiating using today's numbers, but the reality is those numbers could look very different in a year, or let's be honest, even in a few months. So it looks like a straightforward asset on a spreadsheet is actually one of the most complex pieces of the entire settlement. So the core issues that we have to address are the valuation versus the reality. The settlement value is going to be based on today's price, but that value is not guaranteed tomorrow. You're negotiating, negotiating on a number that can change dramatically before the ink is even dry. So what are our options here? In my case, there were three options. My client's case. One, option A, sell it all and divide the cash. This is the cleanest option. It's the easiest because we eliminate future risk for both parties. It also would trigger taxes immediately, which certainly the person who has invested all of this mental energy into is not going to want to do. I mean, that's what happened in my case. But for a high conflict divorce case and for one of if one of or both of the clients are risk averse, this is the best solution. Let's sell it now and let's take the hit and the taxes. If one person wants to reinvest in that asset, they take their share and they go forward with it. Or they keep half of it and the other half is actually liquidated and sold today. This is clean. They can pay for the taxes on their joint taxes. If they're not going to be filing joint taxes for this tax year, that's okay. We can build into the settlement that they would split any taxes owed on this particular asset and we can get the wording right so that we can handle it that way. So in my case, as you could probably guess, my client's spouse did not want to even consider this option. This option was left out the door. So the second option is we would divide the shares in kind so that each person would get 50% of the shares and 50% of the tax associated with selling those shares. So 50% of the appreciation. So there, the pros of that, there's absolutely no tax consequences today. The negatives of that, they both remain exposed to equal risk with that asset going forward. In my case, I really wanted my client to not take her portion of that risk. My client was a novice investor, but it had been drilled into her. This stock is the key to our future success. Now, again, whenever there is a huge potential for growth in a stock, that means that there's also a huge potential for risk in losing it. So there's always a correlation in any investment between risk and rate of return. The higher the risk an asset is, the higher rate of return you can anticipate. The lower the risk, the lower rate of return you can anticipate. So this stock for this couple had quadrupled since they purchased it. So it has already gone up substantially, which is fabulous and they have that increase in their wealth. But I was really worried about my client who was going to end up with a fixed portfolio and not a lot of ability to earn an income going forward. And if this stock takes a hit, she's got a lot of exposure there because she doesn't have the ability to replenish those assets based on her earnings. So what would be and what was an option? So my suggestion in this case was that my client's spouse keep the stock and that she take an offsetting asset. She would get cash, retirement, real estate investments. This only works if we could properly discount it for risk and taxes, according to on the other side. Well, my client had a lot of concerns about doing it this way because she really felt like, again, that it had been programmed into her that this was the reason that they were had been generating so much wealth and they were going to um, you know, any cash in uh in of this stock was going to really risk her financial future. Um, so it really isn't just an investment decision, it's a life stability decision. So we're not managing a portfolio anymore. When you're taking on, you know, as an investment advisor or a financial advisor, you're kind of rebuilding that financial foundation and that concentration risk might have built the wealth, but it can just as quickly destabilize that person's next chapter. So what I did in this situation was I showed my client what her financial future would look like in five years, 10 years, and 20 years based on her current living expenses, current rate of inflation, current income, what she could expect to receive in child support and spousal support. If she got half the stock and it continued to grow at the same rate it's been growing at, and she looked great. And if she got that same, that same settlement, but the stock took a nosedive and went down in the short term. And she did not look good in that scenario. Um a need to dip into those assets to supplement her cash flow deficit. And if she needed to do that when that stock was down, that would be a really big problem for her. Whereas her husband might have time to wait out that portfolio risk and wait out that downturn for maybe the stock to rebound. I won't tell you what happened in that situation because I've seen it, I've had, I've seen it end up both ways. I've argued really hard for a client to give up a very risky position and they have agreed and they have decided to take on more stability in their portfolio. And I've also had the opposite happen where a client was so tied to that stock that it almost felt like monopoly money to them or plain money that they couldn't liquidate it, that they were not allowed to actually touch it and reposition it into a more stable portfolio. All I can say is the best advice that I can give is that if you're dealing with a concentrated stock position right now, this is the most important areas for you to get right. Does that mean that you might need to involve a CDFA to help analyze it or a financial advisor, your investment advisor? I would say yes. If a very large percentage of your total wealth is concentrated in one stock position and you're not quite sure what the risks are to you, you're really, this is a really important opportunity for you to reach out to someone who can help you analyze it and take the emotional aspect out of it and really just look at the numbers. Thank you for listening to this episode. We have our mailbag segment coming up. So don't tune off the the show just yet. Our mailbag is currently being sponsored by Dawn Divorce Association for divorce attorneys, excuse me, for women. And they are sponsoring our mailbag segment, which is a really great episode coming up, so you don't want to miss it.

Stress Testing A Post Divorce Plan

SPEAKER_00 21:31

When you're facing divorce, you deserve an advocate who understands what you're going through and who's dedicated to protecting your future. At Dawn, Divorce Attorneys for Women. Our mission is simple to help women move forward with clarity, confidence, and strong legal guidance. Whether you're just starting the process or feeling overwhelmed by what comes next, our team is here to support you every step of the way. Schedule a free consultation today and learn how we can help. You take back control of your life. Visit women's rights.com/slash free consultation video to get started.

Mailbag Question About Mediation

Facilitative Mediation What To Expect

End Stage Mediation And The Record

Final Advice And Listener Next Steps

SPEAKER_01 22:16

Hi, and welcome back to today's divorce rich mailbag segment. Today we've got a great question, and it comes from Lisa, who is who wrote to us from Michigan. Lisa is in the middle of a process, the process of her divorce, and she wants to understand what the process looks like. She feels like she is, she knows that she's about to head into mediation and she doesn't know what to expect. So she has written in asking really a legal question, but a question that we can answer pretty easily from a fit in the financial context of things. Of course, I'm not a lawyer. I can't give anybody legal advice, but I can give out information based on my experience. And I've been to mediation many times, so I can explain a little bit about what the process looks like, especially from a financial standpoint. So there are two kinds of different kinds of mediation in general. There are probably significantly more than two, but let's narrow it down to two. There is facilitative mediation, and there is end stage mediation. Now, during facilitative mediation, the parties might be in one room together or what it can be virtually in one Zoom appointment together. And they have a neutral mediator who might be a lawyer, a financial person, it might be a mental health professional that helps them come to a mutually agreeable resolution on their financial issues. Now, facilitative mediation, it will happen earlier on in the divorce process. And it's a pretty deliberate choice that people are making to go to a facilitative mediator. They're deciding that they want to mediate their case rather than take it through the traditional litigated route. Now, less than 2% of all cases in Michigan actually go to trial. So when I say litigated, I mean more of just the traditional legal route of involving the court immediately filing the case, serving the other party, and then be getting along a regular trajectory that a litigated case takes. Again, going back to facilitative mediation. So if you live in Washina County, if you live in the Ann Arbor area in Michigan and you're listening, a lot of cases in Ann Arbor settle using facilitative mediation. In fact, a lot of the facilitative mediation in the country got its start from some of the pioneers in Washtena County that started it many years ago. So facilitative mediation is very popular in Washington County and it's popular, it's becoming more popular in other counties. So it can be a one-time mediation. Usually facilitative mediation is more than one session. And sometimes, again, the couple can be together in one room or one virtual screen, or they can be in separate rooms. They can be in breakout rooms in a virtual setting, or they can be in actual different rooms. And that's called shuttle mediation when the mediator is going to go back and forth. It's also sometimes referred to as caucusing, but it's the same thing where you don't have to actually sit in the same room as your spouse. My personal opinion, as after having gone through facilitative mediation training, and I do uh a decent amount of mediation cases, is that it's so much easier when both parties are in the same room. It actually seems like it would be a lot more stressful to confront each other in the same room, but getting all of those feelings out on the table in one room together is a really powerful experience and it makes it so much easier to settle cases. That being said, certainly a lot of people can choose facilitated mediation that is caucus style or in separate rooms. And again, the mediator is going to go back and forth between the parties or all together in one room and work through the issues that you have one by one. And they'll talk through those issues and guide you through making decisions on each one of those issues, whether it's parenting time, related to keeping the marital home, spousal support, child support, all of those issues are going to be addressed inside of the mediation. And then the mediator, when you reach an agreement, will write a memorandum or write up a summary of all of the points that you've agreed to. If your mediator is a lawyer, if your facilitating mediator is a lawyer, they will usually draft the document for you and your spouse. Most facilitating mediators are going to recommend that before you sign it, that you take that document to your own individual attorney to review it to make sure that it is in your best interest. Because again, the neutral facilitator is in fact neutral and not your advocate. And you still want to have someone who's just looking out for you to review that document before you sign it and make sure that it has everything in it that needs to to protect you. It's also a really good opportunity to have your own attorney tell you your advice that you might not be getting in a room with everyone sitting in it. They're going to tell you what your best maybe and your worst case scenario, if you were to go in front of a judge on a specific issue so that you know when you go back to mediation, you've got that more information behind behind whatever your position is to back it up. So that is facilitated mediation. The other kind of mediation that happens pretty frequently in Michigan is what I would refer to or what can be referred to as end stage mediation. End stage mediation happens, as you could probably guess, in the final stages of a divorce. All cases in Michigan have to go to mediation before they go to trial. So as part of the traditional litigated process, the judge is going to be checking in with you and your spouse throughout the case to see where things stand. And if you haven't reached an agreement by a certain point in the case after the case has been filed, the judge is going to say, okay, it's time to go to mediation. And in that end stage mediation, typically what happens is both attorneys will submit a mediation summary, which gives a little bit of background about the case to the mediator and maybe puts forward a specific position. And sometimes it can be pretty vague in terms of what you're looking for. The mediator will read both summaries from both sides before the mediation happens and to give them an idea of what the issues are going into the case. Once you sit down with the mediator, typically what I see is that there is that shuttle mediation or that caucusing in an end stage mediation. So you're not going to be in a room with your spouse. You're going to be in a separate room, and the mediator is going to go back and forth. And sometimes when you're in mediation, you might be sitting in the room for hours thinking, what is going on in that other room? Maybe the mediator is having a harder time with the other side. So usually a mediation at that end stage might last a half of a day or a full day. And at the end of that day, you have a decision on whether or not you want to come back for part two, gathering more information, maybe, or if you want to end after one mediation session. When you do finally reach an agreement, the mediator will want to put it, quote, on the record. And they will make a recording of all of the terms with everyone sitting in the same room together. Both attorneys will be there, you will be there, your spouse will be there. And this is to put everything on the official record. And you'll have a transcript that one of the attorneys will take that transcript out of that mediation session, and they will take that transcript and they will write up your judgment of divorce or your settlement agreement that's going to go along with the judgment of divorce to be entered. So you don't have to agree to anything, whether it's facilitated mediation or end stage mediation. The mediator does not have any power or control over making a decision about anything financial or any of the decisions in your case. Their role is to facilitate or get you to a point where you can both agree on a settlement that makes sense for both of you. Now, does that mean that you're going to win on everything? Absolutely not. If you think you're going to walk out of mediation winning everything that you wanted, you're going to walk out and you're going to be sorely disappointed. A mediation is going to be what you can live with and what your spouse can live with. And settling at mediation is always going to be preferable to going in front of a judge that doesn't know anything about your case and having a judge make a decision that's going to impact the rest of your life. So it's always better if you can settle a mediation. So I hope that answered the question. If you have any other questions, we would love to answer them on a future mailbag segment. Please send them to us at divorcerichpod at gmail.com. Thanks for listening. Thank you so much for taking time out of your day to listen to Divorce Rich Podcast. If you like this podcast, please follow us on Apple or anywhere that you download podcasts and share this link with any friends or family that you think might benefit from this information.