Splitting Assets in a Divorce

March 30, 2010

Splitting Assets in a Divorce

All marital assets are not equal! Even if the goal is to try to “split down the middle”, asset valuation prior to making a final division is critical. If for example the family home and a pension/retirement plan are both worth $400,000 today, the home is a non-liquid asset requiring cash-flow to support it, while a retirement account grows tax deferred with no cash input required. Retirement assets can be reallocated with changing economic factors, and thus can more easily rebound from market fluctuations.

Before waiving rights to a retirement plan that is a marital asset, be certain you will be able meet your own retirement needs. When assets are tied up in the equity in the family home, the only way to access that equity is with an equity line (interest is charged to access your money/equity) or by selling your home. The tax liability should be understood beforehand, and you will still need housing!

Taxable accounts differ from a tax-sheltered account for the same reasons, as earnings will be taxable each year. The age of the couple at the time of the division (ie, the number of years to rebuild retirement assets) must be weighed. An experienced financial planner and a CPA can determine the true value of marital assets, and suggest the best possible long term strategy for you. Thinking beyond today’s value is extremely important in reaching a fair settlement.

Earnings Potential: One spouse often earns a lesser percentage of the household income, or has minimized a career in order to raise children. In this situation, they may need help to pay for additional career training or education, as well as to meet the children’s needs during the time that additional training or education is being obtained. A house cleaning service or childcare may be needed for this to be realistic and successful. Short term assistance may result in greater long-term financial independence. Providing the financial means for the spouse who now needs to boost their earnings, or return to the workforce, for career counseling, or personal and career coaching, may help move the family along the path of healthy divorce recovery. Think of it as similar to career outplacement services in the corporate world. Facilitating a smooth and successful transition ultimately financially stabilizes and benefits both the children as well as both former spouses.

QDRO: A spouse who receives part of his or her spouse’s qualified retirement accounts will need a court order called a “Qualified Domestic Relations Order.”(QDRO). Your attorney should be made aware of ALL retirement accounts and the QDRO rules are for each plan. To expedite the QDRO, your attorney needs to obtain pre-approval from each plan before the settlement is final. The court must sign the order before an account can be divided. Be sure the order is sent to the retirement plan sponsor and is approved early in the divorce process. If not completed before the divorce is final, you will have to return to court later, incurring more legal expenses and risking the loss of assets in the account. Include survivor benefits in the QDRO. If you will be receiving retirement benefits from your former spouse’s pension, be sure the QDRO includes survivor’s benefits, if the plan allows them. Otherwise, those benefits could stop if your spouse dies before you do.

Also, understand your Social Security benefits. If your spouse earns more money than you do and you were married ten years or more, you will be eligible for Social Security benefits based on your spouse’s work history. That may mean higher benefits than if you have to rely on your own work history, and does not impact the benefits of the ex-spouse at their retirement time.

Tax Implications: Access to expert tax advice plays a critical role in determining the structure of a property settlement. Say it’s proposed that one spouse keeps a $150,000 individual retirement account and the other keeps a $150,000 taxable investment account. Sounds fair, but it’s not. A traditional IRA grows tax-free, and is then taxed when their money is withdrawn, while the non-retirement account is taxed on annual earnings along the way. So the two accounts are not truly equal in value, and sound assumptions of the projected net values are needed. Also, be sure the parties taking tax benefits are clearly spelled out, as well as how taxes will be filed and paid, for any partial year of marriage.

Life Insurance: If you rely on an ex-spouse for child support, retirement benefits, spousal support, or other financial benefits such as a commitment to pay for the children’s college education, purchase a life insurance policy on your spouse to ensure the money will be there. You should own the policy, and purchase it before the settlement is final so you know whether your spouse is insurable.

Sometimes people fail to consider the financial impact of the death of a non-working or part-time employed parent who is caring for children. The cost to replace all the contributions of that individual in order that the surviving parent may continue with job security and income production needs to be calculated and also covered in a life insurance plan. Some estimates are as high as $160,000 a year to outsource the services that custodial parents provide. The option to continue existing coverage and transferring those responsibilities along with updated beneficiary forms should be explored. This includes any current coverage of minor children.

Protecting Your Own Credit: When it comes to your credit, both spouses are liable for debt incurred on jointly held loans and credit cards during a marriage. Even when the divorce decree states that one spouse should pay certain bills and the second spouse pay others, both spouses are legally responsible, and creditors will pursue both parties in debt collection. It is important to request duplicate statements from creditors, close jointly held accounts, and immediately begin establishing credit in your own name. Working collaboratively on establishing separate credit is advised as during the time you are doing so, both parties’ credit scores are impacted by all of the joint credit and debt from the marriage. This can delay approvals and impact credit limits approved, as well as the ability of the individuals to refinance mortgages and car loans. Order and review reports from the primary credit monitoring agencies. This is recommended prior to finalizing the asset allocation agreement because there may be errors that need to be identified and addressed by the divorcing couple jointly. Re-check credit reports before signing final documents to be sure there are no “hidden”, new, or forgotten debts that may surface after the divorce is final.

With the emotional strain and financial complexities of divorce, a comprehensive, integrated, and coordinated approach is the best way to assure a fair and equitable distribution of assets. Everyone benefits when both parties have the support, guidance and means to move forward with their lives and children are the biggest winners when parents work together for their benefit.

If you’re contemplating a divorce and have specific questions about what you might be entitled to as part of a divorce settlement, please don’t hesitate to contact me for a free confidential initial consultation.

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