Archives for September 2020

Dividing Annuity Assets in Divorce

September 29, 2020 By Denise French, CVA, MAFF, CDFA, CRPC

Dividing community property, or property jointly owned by a married couple, can often be a complicated process, with your financial options dictated by potential tax implications. While some things may be easy to divide, others are not. Some belongings are sentimental, while others — such as annuities — involve complicated financial calculations. Annuities not only involve moving ownership from one person to the other or joint title to single title, they often also involve moving or potentially deleting critical living benefits, guarantees and/or death benefits as well as surrender penalties on top of potential tax liabilities. That is a lot! Annuities in divorce are complex to say the least. We will attempt to unravel the complexities of annuities as they relate to divorce or at least guide you on what questions to ask.

Annuity Phase

While there are multiple types of annuities (fixed, fixed index, variable, immediate and deferred) all types of annuities are typically in either the accumulation phase or the distribution phase. The different phases will determine how value and divide the annuity in a divorce situation.

Accumulation Phase

If an annuity is in the accumulation phase, it is growing. The annuity may be growing by a simple fixed rate – aka a fixed annuity or by a variety of factors in the fixed index or variable space. The key take-away is there is only growth in this phase. Income has not yet started. This is a critical factor in divorce negotiations. In the accumulation phase the annuity can have three main parts – the actual cash value, the guaranteed benefit amount and the death benefit.

Cash Value

This is the actual cash value. This is real money and should be the value on the marital inventory. This value may have a surrender charge affiliated with it which should also be reflected on the marital inventory. If you do not see a surrender charge on the statement, it is wise to call the carrier and confirm no surrender fee exists. Also, if the contract is still under surrender charge penalties, ask the carrier if they will waive the surrender charge in the case of a divorce where the account is divided between the spouses. We have found quite often they do not waive any fees even though the division is pursuant to a divorce.

Guaranteed Value or Living Benefit Amount

In the accumulation phase, this is the living benefit amount. Many contracts offer a certain amount of guaranteed growth for future income. For example, some annuities may guarantee 7% growth, compounded annually with possibly even a high-water mark (meaning the annuity will capture the highest day of market gains in the annuity contract that year plus add the 7% guaranteed growth on top of this value). Sound too good to be true? What is the catch? This amount is not real money – it cannot be withdrawal in a lump sum. It is the value for which a future income stream is derived. In our same example, let’s say the contract grows by 7% guaranteed compounded annually, and when the client is age 65 a 5% income stream can be taken, guaranteed for life off the 7% compounded number. (In some cases, the income stream will also double for long term care needs for a certain amount of time.) In divorce, the guaranteed amount is often erased if the annuity is divided. This can cost the overall estate hundreds of thousands of dollars.

Know if there is a living benefit and if so, what happens if the annuity is divided between the spouses? The living benefit number is often quite higher than the actual account value, but this is not the number to be listed on the marital inventory. It is a phantom number used to derive a set amount of income at a future date. However, because there is an account value it is the actual cash value which is listed on the estate spreadsheet. The annuities are designed to deplete the cash value over time when the income begins if you live long enough, so this number is not listed on the inventory when the annuity is still in the accumulation phase.

Death Benefit

Sometimes annuities have stand alone death benefits or death benefits attached to the living benefits. This means a certain amount is guaranteed at the death of the annuitant. In some cases, the death benefit is the reason an annuity is sold as life insurance was not an option or was too expensive. It is important to know if an enhanced death benefit exists and if so, know this and other relevant facts. Who is the annuitant? What is the death benefit exactly? What happens in the case of divorce if the contract is divided or moved to the non-annuitant spouse? Now that the couples are divorcing, is the death benefit still relevant or should other options be considered? The death benefit should be on the latest annuity contract statement. However, it is not listed as an asset on the marital inventory as it will only be pain in the event of the annuitant’s death.

Income Phase

If an annuity is in the income phase, it is in distribution. The distribution may be a systematic withdrawal stream on a guaranteed basis, a systematic withdrawal on a non-guaranteed basis or annuitized. This set of facts is vital to know in the case of a divorce.

Systematic Withdrawal – Guaranteed Basis

This should be the most common situation with an annuity. The income from the living benefit has been triggered. In the example above, the 5% income stream at age 65 has begun off the 7% compounded annual growth the annuity provided. If this is the case, the annuity may not be divisible without significantly hurting the amount of income the annuity provides on a guaranteed basis. Contact the carrier to determine how, if at all, the annuity can be divided, and the income stream kept intact. The income stream however may be divisible. The division of this works much like a pension on the estate spreadsheet where a net present value of the future income stream is calculated, and this is the number on the marital inventory.

You can also forego a net present value calculation of the income on the marital inventory and split the income 50/50. We recommend contacting the annuity carrier to determine if division can occur at the carrier level so there is little, if any, interaction between the parties. You will also want to ask the annuity carrier what happens if the annuitant dies. The wife may not receive any payout if the annuity is based only on the husband’s life and he dies or vice versa. Some payouts are based on joint life and some are on single life which were determined at the income stream’s inception. It is vital to understand what happens in the event of one spouse’s death.

Systematic Withdrawal – Nonguaranteed Basis

If this is the case, you can likely divide this annuity. It may not be attached to a living benefit guarantee. This is the least likely to exists and rarely seen, but it is a possibility. It is important to call the carrier and determine your options if this set of facts exists with your annuity. The issue will be mainly surrender charge penalties when this annuity is divided if it is still in the penalty period. We would also ask if there are any issues with the annuitant – is it joint annuitant or single annuitant and will this be possible if you change to the spouse who wants the asset or if you divide the contract in half.

Annuitized

If this is the case, the annuity cash value no longer exists – it is only an income stream. Older contracts typically have this. Most newer contracts do not require annuitization because the contract corpus is gone – it belongs to the annuity company. The valuation of this is now just like the valuation of a pension plan. The carrier may have the income based on joint life or single life. They may divide the income in half but when one spouse dies, the income stream may cease for all. The carrier must be contacted to determine what happens at the death of the owner and/or the death of the annuitant. These facts are important to know as they relate to the income stream after one spouse dies. If you do not want to divide the income, one can calculate a Net Present Value of the future income stream as one would a pension and this number should be indicated on the marital inventory as an asset to be offset with other assets.

Owners and Annuitants

Aside from the issues we stated above in valuing and dividing annuities in the accumulation and the income phases, the named owner and named annuitant could alter the course of the annuity division. It is vital to know who the owner is and who the annuitant is (they may not be the same). These set of facts may determine what happens to the contract when this is divided to the non-owner and/or non-annuitant. Some contracts are jointly owned the with joint annuitants or jointly owned with single annuitants – and each carrier can handle dividing these differently. A simple call to the carrier and a discussion with a member of client services advanced team should straighten out these issues, we just want you to know what to ask for.

Summary

We highly encourage you to reach out to a professional who not only understands annuities, but also understands divorce laws in your area. A Certified Divorce Financial Analyst is the perfect person to have on your team if you or your spouse own an annuity and you are walking through a divorce. We at Divorce Strategies Group understand annuities and divorce finance and can help as well. Contact us for your 30-minute free consultation today.

What does Divorce Mediation Involve?

September 15, 2020 By Denise French, CVA, MAFF, CDFA, CRPC

In Texas, divorce mediation is a confidential process where a neutral third person (the mediator) helps divorcing couples reach a divorce settlement. The mediator facilitates communication between the parties to promote settlement and understanding between them. Mediation addresses child custody, child support, visitation, spousal support, and property division. The mediator does not act as a judge, attorney, or financial advisor, but assists the spouses in reaching a voluntary agreement.

Denise French founded Divorce Strategies Group, LLC in 2014 and since that time we have continuously guided clients through the divorce and mediation process. We believe mediation is an excellent tool for divorcing couples, especially when there are contentious issues. Our goal is to help you reach a satisfactory agreement with your spouse, without having to endure a lengthy, costly trial. Save time! Save money! Get on with your life.

How does Mediation work in a Texas Divorce?

The goal of mediation is to work through all the issues of your estate and the issues with minor children. An attempt at mediation is strongly recommended and often even required in many Texas counties. In mediation, you will most likely be in separate rooms while your mediator(s) walk in between the rooms. Sometimes, the parties will be in the same room, if they wish to be and it is productive. Without minor children, expect to mediate for a half day. When minor children’s issues are involved, expect to spend an entire day in mediation. At the end of mediation if agreements have been reached a binding, legal document called a Mediated Settlement Agreement or MSA will be signed by everyone. This document is irrevocable and binds your agreements legally. The fight is, in essence, over at this point which typically brings much peace and relief. The MSA is also a tool used to push your agreements through the court system as a judge cannot typically overturn a property drafted MSA.

After the MSA is completed a divorce decree will be drafted by an attorney which reflects the agreements you made in mediation. The divorce decree (which you will review and also need to sign) along with the MSA are presented to the judge in court (or remotely due to COVID-19) and used to finalize your divorce. The mediation document is usually 6 – 10 pages long while your actual divorce decree is 30 – 50 pages long.

Why Should I Use Mediation to Settle our Divorce Conflict?

Mediation is flexible – While we have a process, we acknowledge every family and every divorce is different.
Mediation is future oriented – We are going to focus on where you are headed, not where you have been. Everyone in divorce has some type of pain or fear. We understand and we are happy to listen and help you heal. However, in mediation we will focus on the future.
Mediation works – Mediation has a high success rate, especially when both spouses are open to compromise.
Your information is protected – Mediation is confidential.
You and your spouse are in control of the outcome – Your future in not the hands of a judge hearing only a tiny fraction of your life story.

What sets our firm apart?

The founder of Divorce Strategies Group, LLC, Denise French, has been divorced herself and understands what you are going through! Her divorce was costly and long. Sadly, it was also damaging to her family, her finances and her children. She strives to help litigants avoid the heartache her family endured. This is personal for her. Denise is not a lawyer. She is a financial expert in litigation and fully understands divorce finance in Texas.

Denise works alongside several family law attorney mediators. These mediators, along with Denise, will walk you through every aspect of your child issues and your financial issues to help you achieve a win-win solution for your family. Our partner attorney mediators are Denise Khoury of Guajardo, Khoury Family Law and Manny Caiati of Caiati Law & Mediation.

Denise is a Credentialed Advanced Mediator through the Texas Mediator Credentialing Association with hundreds of cases both as a mediator and as a financial expert in mediation.

The decisions you make in mediation will have lasting, lifelong ramifications for your children and/or your lifestyle and financial wellbeing. We have a proven, 7 step process which involves the help of a financial expert and a family lawyer – both of whom are also mediators. Together, this is a place where you can work through all the child custody issues as well as the financial issues without the fight in court and with proper guidance.

Contact Divorce Strategies Group today!

Before you contact a divorce lawyer, call us. Need more information about divorce and mediation? We invite you to contact our office for a complimentary consultation. We are here to help you in every way possible!

Divorce and Retirement Accounts

September 5, 2020 By Denise French, CVA, MAFF, CDFA, CRPC

The valuation and division of retirement accounts in divorce is more complex than most divorcing couples expect. We frequently see people after the fact who wish they had known better before they signed papers to finalize their estate division. The details are important. Below are four common items to know about before you sign on the dotted line.

1. Does a retirement account only belong to the person whose name is on the title?

What if only one spouse worked for most of the marriage while the other was the primary caretaker for the home and children? If that’s the case, most of the retirement assets are likely only in one spouse’s name. Despite the titling, these retirement assets acquired during the marriage belong to the community estate and are fully subject to division in a divorce. It is common for clients who own retirement accounts to believe they are entitled to the entire account since it’s in their name. However, money earned during the marriage is a marital asset and subject to division in a divorce within a community property state like Texas.

In contrast, retirement assets earned prior to the marriage are typically considered separate assets and not subject to division in the divorce. In addition, the growth on those separate assets during the marriage is considered separate property (but not the income, yes, it gets confusing). For an accurate appraisal of what portion of a retirement account is separate versus and what portion is marital, a separate property accounting must be conducted. The burden of proof is on the person making the separate property claim. All assets, no matter what the title says, belong to each spouse equally if the asset was acquired during the marriage, except for those assets which were inherited or gifted during the marriage or came from a personal injury suit.

2. How will we be taxed if we divide a retirement account?

You are not necessarily taxed on the division of a retirement account. Taxation happens only if you distribute the retirement account outside of the retirement vehicle. For example, if your spouse has a large 401(k) and you divide it during the divorce, no problem. You can move these funds into an IRA for yourself without paying any tax and let it continue to grow tax deferred. The same rules apply if you are dividing an IRA. You only acquire a tax liability when you redeem the funds from the retirement chassy and put them into your bank account or a non-retirement brokerage account.

3. Which retirement assets are best to keep in a divorce?

Not all retirement assets are equal as far as the IRS is concerned, which means what you get to keep in your pocket differs – sometimes substantially- between different retirement accounts! This is a synopsis of the different types of retirement assets we commonly see with divorcing couples in our office. We also provide a discussion of liquidity as having liquid, available cash is king in a divorce.

Pension Plans

Pension plans typically rate lowest on the list of assets to obtain because those funds are not liquid today (unless you are at retirement age). Further, each plan has its own rules surrounding availability of the pension funds to the ex-spouse. Some funds mandate you wait for your ex-spouse to retire while others will let you retire on your own timeline after you have reached a certain age which can be anywhere from 50 to 65. Pension plans may also offer a lump sum option at retirement – it just depends on the company or entity offering the plan. There is also the issue of company solvency – will this pension plan even exist when you are retirement age? It is also important to know if you are entitled to assets if your spouse dies before the pension plan begins – some entities don’t pay you at all if your spouse dies before the payout has started, even with a divorce decree.

It is wise to involve a Certified Divorce Financial Analyst or CDFA in cases with a pension as they can help you understand your options and make those phone calls for or with you. Know the rules of your potential pension plan before you sign any binding documents

Traditional IRAs

IRA’s typically rank lower on the scale of available, liquid assets because withdrawals are usually taxed at the owner’s highest marginal tax rate and incur a 10 percent penalty until age 59.5 (barring the exceptions of substantially equal periodic payments for those typically 50 and over, death and disability). There are no divorce exceptions to the penalty as there are in a 401(k) which is why we prefer our clients are awarded the 401(k) assets rather than the IRA assets if there is a choice.

401(k), Profit Sharing Plans and other ERISA-Regulated Plans

ERISA regulated plans (such as 401k’s and Profit Sharing Plans) are one step above the Traditional IRA regarding assets available for liquidity as you can redeem cash from your ex-spouses 401k plan without paying the 10% penalty, but you still must pay taxes. That is a big savings – especially in larger plans. You can save thousands in fees by just taking the 401(k) over the IRA if you are in need of cash from the retirement assets.

The down side is a federally mandated 20% withholding on all cash distributions. For example, if you want $80,000 in cash from your ex-spouses 401k, you’ll need to withdrawal $100,000 as 20% ($20,000 in this example) will automatically be forwarded to the IRS. You are not losing that money – you’d owe it in taxes anyway you are just forced to pre-pay your taxes. If you do not owe the full 20% at tax time you will receive a refund or if you owe more, they will certainly let you know when you complete your taxes the following year. The other negative is 401(k)’s can only be awarded via a Qualified Domestic Relations Order or QDRO. QDRO’s cost an additional fee of $500 – $1,500 and they take time and work to finalize.

ROTH IRAs

ROTH IRA’s are the most advantageous retirement asset for liquidity needs during or after divorce. The principal put into a ROTH IRA can be withdrawn tax and penalty-free at any time for any reason. The earnings on the ROTH IRA are different. The earnings can be subject to taxation and the 10% early withdrawal penalty (before age 59.5) but you are able to take all of the principal before touching the earnings. For example, if you have a ROTH IRA worth $40,000 today which you originally invested 15,000 in; the $15,000 is principal and the other $25,000 is earnings. In this example, you can redeem the $15,000 with zero penalty and zero taxation while the rest can be left alone to grow.

4. Should you consider the value of retirement accounts after taxes when dividing assets in a divorce?

Many attorneys will “tax effect” retirement plans (discounting the account by the recipient’s marginal or effective tax bracket). Left unchecked, the spouse receiving more of the retirement accounts may benefit (possibly unfairly) in negotiations from this practice. However, if your spouse is not playing fairly and trying to stick you with all the retirement accounts while they take all the cash, a tax effecting is in order. Tax effecting can be as simple as taking 20% – 28% off the value of the retirement account and dividing that. Or, it can be as complex as determining your effective tax rate and considering what assets will actually have to be used and tax effecting just those by the actual amount of tax you will pay this year (and possibly projecting out to the next few years). By preparing financial projections, a CDFA can assess the amount and timing of the recipient’s anticipated withdrawals and tax liabilities from retirement accounts.

Questions About Divorce and Retirement Accounts? Let us help. Retirement accounts are complicated, especially in divorce. Understanding tax implications and liquidity are critical in divorce negotiations. You only have one shot to get this right. Ensure you are receiving the settlement that’s best for you by having the right people on your team. Contact Divorce Strategies Group for a complimentary 30 minute phone consultation to discuss your specific needs.

Three Divorce Mistakes to Avoid

September 1, 2020 By Denise French, CVA, MAFF, CDFA, CRPC

When you are facing divorce life can see overwhelming. To make matters worse, in the midst of emotional turmoil you are asked to make life altering financial decisions. This is tough!! We STRONGLY encourage you to hire a divorce team with experts in each area of needed expertise. An experienced, knowledgeable attorney is critical. Next, if you have financial concerns, it makes sense to hire someone to help you with the financial questions and issues in your divorce. A Certified Divorce Financial Analyst or someone trained and experienced specifically in the areas of divorce finance and tax can save you thousands of dollars in your overall settlement.

We have seen many people come into our offices after the divorce details are finalized only to discover they could have done better or they will lose 30% of what they were awarded to taxes. We don’t want this to happen to those still in the divorce process. Be informed! The following are mistakes we see repeatedly when it comes to divorce.

3. The settlement doesn’t take taxes into effect.

If the old saying, “death and taxes are the only sure thing we have in life” holds true, why would you settle divorce negotiations without knowing the tax implications of your settlement. You are going to be taxed, just know what those taxes will be!

What people often find is the tax burden on their half of the marital assets is significantly higher than their spouse’s. This means their “half” of the assets are worth significantly less than they thought! It’s also important to consider when you will be using the assets you were awarded. For example, what’s worth more – $100,000 in an IRA account or $80,000 in a savings account? Well, it depends! What is your tax bracket and how much cash do you need today? If you need cash now, you are better off taking the $80,000 in a savings account. The $100,000 in an IRA is going to have taxes and possibly penalties taken from it so in the end the $100,000 is probably only worth about $65,000 or $75,000. If you don’t need this money for years, the $100,000 in an IRA will probably be better as it will grow tax deferred for many years and will be able to compound on itself quicker than a taxable $80,000 in savings.

2. Pensions are split 50/50 but no one knows what that really means.

Over and over and over I see divorce decrees that order pensions split 50/50 but no one has any idea what will actually happen. When do you start collecting? How much money can you collect when the pension begins? Is there an option to take a lump sum?

Did you inquire about a separate interest Qualified Domestic Relations Order (QDRO) where you can take the funds on your own timeline? Are you subject to your ex-spouses retirement wants or do you have a say in when the funds begin? Will there be a cost of living increase each year? What if you or your spouse dies before you start collecting? Will it still pay you?

Pensions are complex financial tools with variables many do not consider. In addition, the devil is in the details with the pension plans. Know what you are getting and your options!! If you have a pension you really need a financial expert on your team who understands pensions and QDRO’s so you can make informed decisions.

1. The biggest mistake – keeping a house you can’t afford.

As a woman I understand becoming emotionally attached to a home – this is where my kids have grown up and where we made many happy memories. This spot on the stairs or the place by the front door is where we took pictures every year on the first day of school. This is where I want my kids to come home to when they are grown with their own children. I get it!! It’s tough to leave the marital home if you have such strong emotional ties. However, time and time again my older divorcing couples are told by their adult children – don’t stay in the house!! We don’t care. We just want you to be financially healthy and strong.

As a financial expert, the first thing I’m going to ask my divorcees to do is create a monthly budget. What does it cost to live in this house? I have witnessed where one or two years down the road the spouse who “won the house” has run out of cash and realized that they can’t sell a window to put food on the table, they can’t refinance because now they don’t have enough income, and they have no choice but to sell. Further, the selling costs are about 8% of the sale – all of which could have been split 50/50 with a spouse if the house had been sold during the pendency of the divorce.

The sum this up, please realize you don’t know what you don’t know. Bring in the right experts for your divorce to make sure you are smart, you are informed, and you make the best decisions you can with all the information! Don’t go this alone. As we say at Divorce Strategies Group, “You only have one chance to get it right!” Let us help. Call today for a complimentary consultation to discuss your situation and let us help you start on the right path.