Carried interest and fund economics in divorce.
For private equity, venture capital, real estate and hedge fund professionals, a large part of household wealth may sit in carried interest that has not paid out and may never pay out. This guide explains why carry is difficult in a divorce and what information usually matters. It is general information, not advice about any fund.
What carried interest is
Carried interest is a share of a fund's profits allocated to the fund's sponsor, usually through a general partner entity, and then to individual investment professionals. Its value depends on the fund's distribution terms, often called the waterfall. Common features include:
- A preferred return that investors must receive before carry is paid
- Vesting schedules for individual professionals, with forfeiture if they leave
- Clawback or giveback obligations if earlier carry distributions turn out to have been too high
- Escrow or holdback of part of each carry distribution
- Separate co-investment or general partner commitment capital, which is a different asset from the carry itself
Property, expectancy, marital or separate
Colorado divides marital property and presumes that property acquired during the marriage is marital (C.R.S. § 14-10-113(1) to (3)). Colorado courts distinguish property, which rests on an enforceable right, from a mere expectancy. The Colorado Supreme Court applied that distinction to employee stock options in In re Marriage of Balanson, 25 P.3d 28 (Colo. 2001), looking to the terms of the grant contract rather than to whether the options had vested.
No single rule decides every carry allocation. The questions usually include what rights the professional holds under the partnership agreements on the valuation date, which funds and investments were made during the marriage, how vesting and forfeiture work, and how much of the future payout depends on work still to be done.
Valuation and division
Unrealized carry is hard to value because it depends on future exits, the timing of distributions and clawback risk. Common approaches mirror those used for other deferred compensation:
- Present valuation and offset, using fund models and an expert's assumptions, with the other spouse receiving other assets.
- Sharing distributions as received under a defined formula, with agreed terms for clawback, escrow, information rights and taxes.
- A mix, treating mature funds one way and early funds another.
Partnership agreements frequently prohibit transfer of an interest without consent, so a sharing approach usually leaves the interest with the professional, who holds the other spouse's share and reports on it. Federal tax treatment of carried interest can depend on how long assets were held and on other rules, so after-tax value should be modeled by a tax professional. Carry and fee income can also matter to maintenance and child support calculations.
Confidentiality. Fund documents are usually subject to confidentiality obligations to the fund and its investors. Disclosure in a divorce is commonly handled through protective orders or agreed confidentiality terms, and sensitive financial detail can often be kept out of public filings where court rules allow.
Documents to gather
- Fund limited partnership agreements and general partner or carry vehicle agreements
- Individual carry allocation letters, points schedules and vesting terms
- Capital account statements, distribution history, escrow and clawback reserves
- Fund-level reports showing invested capital, realized and unrealized value
- K-1 forms and personal tax returns
- Employment, compensation and separation terms with the sponsor
Sources
Statute text: C.R.S. § 14-10-113, Colorado Revised Statutes 2026, Title 14, published by the Colorado Office of Legislative Legal Services (Title 14 text; 2026 C.R.S. titles on leg.colorado.gov).
In re Marriage of Balanson, No. 99SC811, 25 P.3d 28 (Colo. May 29, 2001), modified on denial of rehearing June 25, 2001. Opinion text from the Colorado Judicial Branch: coloradojudicial.gov opinion file 99SC811.
This page is general information about Colorado law as of October 2026. It is not legal, tax or financial advice, and it does not predict the outcome of any case.