Dividing Securities-backed Loans in Divorce

Bucks County CDFA on securities-backed loans and equitable distribution

For couples facing divorce, one of the more daunting aspects is division of assets. When couples have financed or invested in highly valuable assets, the process can become complicated. One particular form of lending known as “securities-backed loans” provide some difficulty for divorcing couples. Dividing securities-backed loans in divorce can be simplified with the right divorce lawyer and guidance from wealth management professionals.

Paul T. Murray is a Bucks County CDFA who advises couples on how to manage dividing securities –backed loans during divorce and how to manage assets during equitable distribution. To first understand this type of financing, Paul describes the loans as, “essentially interest-only lines of credit that may be used for a variety of purposes, such as buying a vacation property or helping to finance college, and which are secured by an investment portfolio.”

Where it varies from traditional lending involves the establishment of a “pledge account”. An individual or a couple’s portfolio of investments (non-retirement) are transferred into this account. This can include mutual funds or stocks, generally irrespective of a single stock position. Once those funds are in the pledge account, a firm can lend a certain amount at their interest rate.

But once you buy something with the funds from that loan, how do you go about dividing securities-backed loans, or whatever was purchased with them, during divorce?

Equitable distribution in Pennsylvania divorce cases is the process of determining of who funded an asset and who should have a greater or lesser stake in its value after divorce. These loans present challenges when it comes to understanding § 3502(7), "the contribution or dissipation of each party in the acquisition, preservation, depreciation or appreciation of the marital property".

To explain how this would work, Mr. Murray uses the example of Jim and Nancy. Before ever discussing divorce, Jim and Nancy pledged $1 million of their joint account investments at a major brokerage firm to establish a line of credit of $600,000. With that line of credit, the two of them purchased a vacation property which was intended to be used by them and their family for many years – until they decided to file for divorce.

With the help of their divorce lawyers and wealth management professional, Jim and Nancy decided that Jim become the sole owner of the home. The home, valued at $600,000, would be Jim’s and Nancy would receive $600,000 of their joint account investments. The remaining assets would be divided equally. This would have been simple if not for dividing the securities-backed loan.

To maintain that line of credit, Jim and Nancy need to keep all of the $1 million in the pledged account.

Unless replaced with cash, or more investments, Jim would have to qualify for his own mortgage in order to retain the property as sole owner. Jim would then use the mortgage to pay the firm for the $600,000 loan and then the entirety of the joint account investments could be divided.

The stipulation that requires liquid assets in the pledged account allows lenders a larger pool of eligible borrowers and gives borrowers a chance to get large lines of credit without all the hassle and paperwork of a mortgage. Unfortunately, dividing securities-backed loans can mean an inevitable requirement for that mortgage as in the case of Jim and Nancy. It was fortunate that Jim was able to get a mortgage in Mr. Murray’s example; however, this may not always be the case.

Jim and Nancy made the right choice by seeking professional advice of both financial professionals and a divorce lawyer. To learn more about Paul T. Murray, ChFC, CDFA and President of PTM Wealth Management, LLC in Bucks County, PA, visit: visit http://ptmwealth.com/.

To schedule a consultation with an experienced Doylestown divorce attorney, call the Law Offices of Michael Kuldiner, P.C. at (215) 693-6191 or complete the online inquiry form and a member of our team will contact you shortly.