Dividing up assets in a divorce is hard enough already. Now, it’s getting tougher to count the money.
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.
When it comes to splitting assets during a divorce in Cobb County, the house and retirement funds are usually the biggest. As the housing market tumbles, retirement assets are taking center stage.
But deciding who gets what and how much when the Golden Years roll around can be tricky.
“That old saying that ‘the devil is in the details’ is especially true when it comes to dividing up retirement assets in a divorce,” said Martin Shenkman, a lawyer in New Jersey. “After all the trauma of a divorce, people don’t want to do the detailed paperwork, but you need to.”
Retirement funds accrued during the marriage, are considered marital assets and are hard to get excluded from a divorce settlement. “It is generally up to the person claiming a different designation to prove it in court,” said Maury Beaulier, an attorney based in Minneapolis, Minn.
What Your Ex-Spouse is Entitled to
Your marriage could have ended more than 20 years ago, but your ex-spouse may still be entitled to part of your retirement.
If a marriage laster longer than 10 years, your ex can claim Social Security at a rate of spouse contribution. Social Security is not usually addressed during a divorce, but it’s good to know that they can be entitled to part of it.
“An unmarried, divorced spouse is entitled to 50% of [her/his] former spouse’s Social Security starting at age 62,” said Clay Caldwell, a certified financial divorce practitioner.
The law sees marriage like a contract or starting a business partnership, Beaulier said.
“When two people get together, each owns 50% of a business–even if one sits at home–so the theory is the efforts of a homemaker to marriage is just as much as the person in the workforce,” said Beaulier.
The type of fund doesn’t matter: Whether it’s a pension, 401(k) or profit-sharing agreement, it will most likely be split up in your divorce settlement.
The best way to split up qualified accounts like 401(k)s and ESOPs is to use a Qualified Domestic Relations Order [QDRO] in your settlement. A QDRO establishes what each party is entitled to designates the amount of tax each party pays on the account.
Choosing not to use a QDRO is risky and can leave you paying taxes on money distributed to your ex.
Splitting your retirement can be as complicated as splitting hairs, and making a wrong decision could cause a financial disaster in your vintage years. Here are five ways to protect your retirement nest egg:
Track Your Assets
The best way to preserve your assets is to have clearly defined agreements relating to those assets, Beaulier said. A prenuptial agreement that fully discloses all the assets and liabilities of each party before the union and an agreement for how the assets will be handled if a divorce occurs is crucial
Because retirement benefits are considered marital assets, you have to determine the present value of each plan.
“Retaining records of what each person has when they enter into marriage can save thousands of dollars in a divorce,” Beaulier said.
It is also a good idea to keep quarterly reports of retirement records and the interest they accrue during the marriage.
Create the Right Account
When money is distributed from a qualified plan, it will have to be put into an IRA, since most plans don’t allow you to take a portion of someone else’s 401(k) and add it to your 401(k).
Once an agreement over who is entitled to what is reached, you want to make sure you have the money transferred to an account where it won’t be taxed.
If you decide to take the distribution from the fund right away, you are going to pay taxes on it, Caldwell said. But if you choose to defer payment, place the money into a qualified plan like an IRA.
Revaluate and Diversify your Funds
Reworking your retirement investment strategy is a step most people overlook after a divorce, said Shenkman.
“Most people do exactly the opposite,” Shenkman said. “A divorce wreaks havoc on investment planning and people, but you need to keep a diverse portfolio. Most of the time both people are left with disjointed portfolios.”
Shenkman recommends sitting down with a financial planner to look at your new financial life. Decide where you are, where you want to go and determine how you are going to reach your financial goals.
Familiarize Yourself with your Spouse’s Benefits
One of the biggest mistakes Caldwell sees people make is not knowing to what they are entitled under their spouse’s plan. Many plans are complicated, he said, and include a lot of stipulations and requirements.
“Once you know what [your spouse’s] benefits are, you can have them valued if you want an immediate distribution,” Caldwell said. He suggested that you know “when your spouse was enrolled in the benefit program, how long they worked, any retirement incentives, survivor benefits and cost of living increases.”
Change Your Beneficiary
As soon as the divorce is final be sure to sign new beneficiary designations. If you don’t, your ex could get your plan.
Often these forms are online and can be mailed to the sponsor. “So many banks keep getting bought out and then the stuff gets lost and sent to merger-merger never-land,” Shenkman said. Be sure to send it through certified mail and save the receipt to prove you changed beneficiary, he said.
SOURCE: FOXBusiness by Kathryn Vasel
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
A Qualified Domestic Relations Order (QDRO) is a legal document that directs the administrator of a pension plan to give a certain amount of an employee’s pension to his/her non-employee ex-spouse after the divorce is final. Here are the top four mistakes people make when it comes to QDROs.
Consider this scenario: husband and wife happily sign the divorce decree, relieved that the divorce proceedings are finally over. The settlement agreement states, "All retirement assets will be equally divided between the parties."
Fast-forward three months. The parties jointly retain a Qualified Domestic Relations Order (QDRO) expert to draft the documents dividing up the retirement plans. Uh oh. His pension is a non-qualified plan and can’t be divided. Her 401(k) has dropped in value by $50,000 — what was the official division date? The divorce decree doesn’t say. Are supplements, temporary benefits, and cost-of-living adjustments on both parties’ pensions to be included or excluded? The divorce decree doesn’t say.
Sadly, this is an all-too-common situation. It’s common because there is much confusion in the legal community regarding pension and retirement plans in general and, more specifically, QDROs. QDROs have only been in existence since 1984. Exposure to increased liability has increased steadily amongst family-law practitioners as attorneys struggle with untangling the pension maze. This article attempts to shed some light on the most common mistakes and ways to avoid them.
There is no single best way to divide pension benefits in a QDRO. What will be best in a specific case will depend on many factors, including the type of pension plan, the nature of the participant’s pension benefits, and why the parties are seeking to divide those benefits.
In deciding how to divide a participant’s pension benefits in a QDRO, it is also important to consider two aspects of a participant’s pension benefits: the benefit payable under the plan directly to the participant for retirement purposes (referred to here as the retirement benefit), and any benefit that is payable under the plan on behalf of the participant to someone else after the participant dies (referred to here as the survivor benefit). These two aspects of a participant’s pension benefits are discussed separately in this booklet only in order to emphasize the importance of considering how best to divide pension benefits.
A QDRO can give an alternate payee any part or all of the pension benefits payable with respect to a participant under a pension plan. However, the QDRO cannot require the plan to provide increased benefits (determined on the basis of actuarial value); nor can a QDRO require a plan to provide a type or form of benefit, or any option, not otherwise provided under the plan. The QDRO also cannot require the payment of benefits to an alternate payee that are required to be paid to another alternate payee under another QDRO already recognized by the plan.
Reference: ERISA §§ 206(d)(3)(B)(i)(I), 206(d)(3)(D), 206(d)(3)(E); IRC §§ 414(p)(1)(A)(i), 414(p)(3), 414(p)(4)
Generally, QDROs are used either to provide support payments (temporary or permanent) to the alternate payee (who may be the spouse, former spouse or a child or other dependent of the participant) or to divide marital property in the course of dissolving a marriage. These differing goals often result in different choices in drafting a QDRO. This answer describes two common different approaches in drafting QDROs for these two different purposes.
One approach that is used in some orders is to split the actual benefit payments made with respect to a participant under the plan to give the alternate payee part of each payment. This approach to dividing retirement benefits is often called the shared payment approach. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status. This approach is often used when a support order is being drafted after a participant has already begun to receive a stream of payments from the plan (such as a life annuity).
An order providing for shared payments, like any other QDRO, must specify the amount or percentage of the participant’s benefit payments that is assigned to the alternate payee (or the manner in which such amount or percentage is to be determined). It must also specify the number of payments or period to which it applies. This is particularly important in the shared payment QDRO, which must specify when the alternate payee’s right to share the payments begins and ends. For example, when a state authority seeks to provide support to a child of a participant, an order might require payments to the alternate payee to begin as soon as possible after the order is determined to be a QDRO and to continue until the alternate payee reaches maturity. Alternatively, when support is being provided to a former spouse, the order might state that payments to the alternate payee will end when the former spouse remarries. If payments are to end upon the occurrence of an event, notice and reasonable substantiation that the event has occurred must be provided for the plan to be able to comply with the terms of the QDRO.
A qualified domestic relation order is a domestic relations order that creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a pension plan, and that includes certain information and meets certain other requirements.
Reference: ERISA § 206(d)(3)(B)(i); IRC § 414(p)(1)(A)
A domestic relations order is a judgment, decree, or order (including the approval of a property settlement) that is made pursuant to state domestic relations law (including community property law) and that relates to the provision of child support, alimony payments, or marital property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.
A state authority, generally a court, must actually issue a judgment, order, or decree or otherwise formally approve a property settlement agreement before it can be a domestic relations order under ERISA. The mere fact that a property settlement is agreed to and signed by the parties will not, in and of itself, cause the agreement to be a domestic relations order.
There is no requirement that both parties to a marital proceeding sign or otherwise endorse or approve an order. It is also not necessary that the pension plan be brought into state court or made a party to a domestic relations proceeding for an order issued in that proceeding to be a domestic relations order or a qualified domestic relations order. Indeed, because state law is generally preempted to the extent that it relates to pension plans, the Department takes the position that pension plans cannot be joined as a party in a domestic relations proceeding pursuant to state law. Moreover, pension plans are neither permitted nor required to follow the terms of domestic relations orders purporting to assign pension benefits unless they are QDROs.
Reference: ERISA §§ 206(d)(3)(B)(ii), 514(a), 514(b)(7); IRC § 414(p)(1)(B)