The popularity of hedge funds, stock-option grants and other investments that can be tricky to value is giving warring spouses something new to fight over. At the same time, the IRS is keeping a sharp lookout for cases where two separate taxpayers both claim the kids as dependents, a big no-no.
The list of potential blunders facing splitting spouses is head-spinning: Dividing a stock portfolio the wrong way can trigger vastly unequal capital-gains-tax hits. Overlooking the mysterious QDRO form (pronounced "KWA-dro") can make a mess of dividing a 401(k).
All of this is proving to be a boon to the nascent industry of "certified divorce financial analysts." For fees of $150 to $250 or so an hour, these advisers help to navigate the economic aspects of divorce, as opposed to the legal issues like custody that are the domain of divorce lawyers.
In recent years, about 2,500 of these divorce specialists have been trained, according to the Institute for Divorce Financial Analysts, with new registrants increasing about 25% a year. Financial-services giants including Merrill Lynch & Co., Morgan Stanley and Ameriprise Financial Inc. have them on staff as well. Many are listed at www.institutedfa.com.
They offer to watch out for tax snafus, help clients obtain health insurance after a split, and demystify tough-to-value private-equity or hedge-fund investments. They also advise clients on which assets to fight for, and which to skip.
Some common blunders: Dividing a stock portfolio down the middle without checking for losses or gains — which can trigger either a tax break or a big capital-gains tax hit.
Janet Drobinske, of Littleton, Colo., recently went through a divorce after 20 years of marriage. When it came to dividing up the assets, "it was easy enough to say, ‘let’s split this equally,’ " says Ms. Drobinske, 45 years old. But after a divorce analyst they hired figured out how much the different assets, including a 401(k) plan, their house and other investments, might be worth years from now, the asset division that looked even at first, eventually seemed less so. "I couldn’t have anticipated that," says Ms. Drobinske.
The declining housing market in many parts of the country is creating new headaches for divorcing couples. Sandra Stuerke of Longmont, Colo., had her house appraised nine months before her divorce was finalized. During that time, its value dropped by about $20,000. As a result Ms. Stuerke, 48 years old and a dog trainer, received less money from her ex-husband’s other assets in the divorce settlement.
There are steps you can take to avoid house-related tax hits. If you keep the house and retitle it in your name, but end up selling it after the split, you may be able to shield only as much as $250,000 of the gains from capital-gains taxes. Consider selling the house while you’re still married, or include specific provisions for the sale of the house in the divorce decree, to shield as much as $500,000 from capital-gains taxes.
The QDRO — short for Qualified Domestic Relations Order — is a court order that spells out who gets what in an employer-sponsored retirement plan such as a pension or a 401(k). QDROs must be approved by both the employer’s retirement-plan administrator and the divorce-court judge.
The document lets you make transfers to an Individual Retirement Account, or make early fund withdrawals from the plan without paying the usual 10% IRS penalty if you’re under age 59½. (You’ll still have to pay income taxes on withdrawals.)
Try to complete the QDRO before the divorce is finalized. Otherwise, if your ex should die, remarry or leave the company, it may be tough to receive any retirement money.
Adding to the confusion, IRAs don’t require QDROs. If you write it in your divorce agreement, you can split an IRA by transferring the funds directly into other IRAs without being subject to penalties or taxes.
If you’re paying alimony, you can claim the payments as a deduction. But if you receive alimony payments, they count as taxable income. Child-support payments are neither deductible nor taxable.
"People screw up the deductibility and taxation of alimony and that can make a tremendous difference to a settlement," says Gaetano Ferro, president of the American Academy of Matrimonial Lawyers.
Other tips: Take out a term life-insurance policy on the alimony-paying spouse. And update wills, trusts and beneficiary designations on retirement plans and insurance policies, so that your ex doesn’t end up inheriting an unintended windfall.
"With all the clients I’ve followed up on, when I ask ‘Have you done your new wills?’ the answer probably 95% of the time is ‘uh, no,’ " says Natalie Nelson, a Denver divorce financial analyst.