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Divorce Strategies Group

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Denise French

  • Divorce Mediation
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mid-life divorce

Divorce and Retirement Accounts

September 5, 2020 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

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.

Filed Under: Divorce Finance Tagged With: #divorce recovery group, #divorcesupport, alimony, attorney, child support, divorce, divorce attorney, divorce lawyer, divorce mediation, grey divorce, mid-life divorce

Common Ways to Hide Assets in Divorce

September 30, 2019 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

Have you ever wondered if the opposing party in a divorce case has actually disclosed all the assets of an estate?  Do you feel like your spouse might hide assets in divorce?  

Common Ways to Hide Assets in Divorce

This article covers creative ways people have hidden assets in divorce and conversely, ways we have found those assets.  We feel like the best way to talk through a divorce is with integrity and dignity without lying about assets.  Often, doing so could backfire on you.  However, if you feel your spouse is lying about money, here are a few places to look.

Excess ATM Cash Withdrawals

Excess cash withdrawals from ATM’s are fairly common.  One spouse will start taking small withdrawals on a regular basis from ATM machines.  Instead of using the cash for legitimate purposes, they stockpile it and forget to mention this as an asset when walking through the estate valuation.  They claim they have spent all the money and have no cash on hand when in reality they have a lot of cash on hand.   We often are able to track exactly how much cash was spent, on average, in normal conditions and then compare that to the months leading up to the divorce and in the divorce months.

Stealing Hard Assets

Some people will literally “hide” assets.   For example, imagine if a couple has a lot of jewelry that’s been accumulated over the years from various sources. Prior to inventorying, one party takes a few select items from the jewelry box and hopes the other party doesn’t notice anything is missing.

This can also be in the form of hiding items in safety deposit boxes whether they be straight issue bonds in coupon form, stocks in issue form.

hide assets in divorce

Another form of stealing cash is having cosmetic surgery or taking an expensive lavish trip soon before requesting the divorce.

Overpaying Debt Instruments & the IRS

One way to having a cushy safety net is by overpaying the IRS.  An unethical spouse can change their W2 withholdings if you are employed by a firm.  Doing this creates an account you know will be refunded when you do your taxes the next year and it lowers your spendable income today for purposes of child support and negotiation.   If you are self-employed your ability to overpay the IRS can be in the form of quarterly payments from company distributions or again, increasing your W2 withholdings if you pay yourself.

If a credit card is overpaid and the credit balance sits for a while, the credit card company will refund the overpayment, usually in the form of a check. The party that overpaid the credit card can then take that check and cash it. To the other party, particularly those who aren’t close to the household finances, it just looks like credit card debt was paid.

hide asset in divorce

Self-Employed Financial Games

Self-employed parties have many ways to attempt to hide income and assets in their business. Income can be hidden by increasing expenses or by paying a large expense that must be done but wasn’t budgeting for a few more years. For example, buying a huge piece of equipment you had originally planned to buy in a few years will lower your income which could lower the value of your business.

Self-employed people can overpay taxes with increases to their W2’s or increase their quarterly payments to the IRS.  Self-employed people can also delay being paid and sit on a large amount of account receivable until after the divorce.

In Texas and many other states, personal goodwill is not a community asset. Games can be played here to try to increase personal interest and personal involvement in business as to decrease the value of the business in the community estate.

If you are considering divorce, it’s important that you have the right professionals involved. A Master Analyst in Financial Forensics ® (MAFF®) and a Certified Divorce Financial Analyst® (CDFA®) has the training to help uncover shady acts like the ones listed above. And here at Divorce Strategies Group, we have both the hearts and minds to help make sure your financial outcomes in divorce leave you feeling confident. It’s all about having the right people on your team. If you are concerned your partner will hide assets in divorce or need some professional divorce help contact us today.

Filed Under: Divorce Finance, Dividing Property Tagged With: divorce, finances, mid-life divorce, resources

Mid-Life Divorce: 4 Things to Consider

September 23, 2019 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

Divorce comes with financial implications at any age, but a mid-life divorce can be even more complicated.

Most middle-aged couples have a home, retirement accounts, several vehicles, and investments. You may also have debt in the form of credit card bills, car loans, a mortgage, and potentially even student loans, for yourself or your grown children.

Mid-Life Divorce: 4 Things to Consider

If your finances are complicated, it’s likely your divorce will be as well. Consider the following to lessen the impact of your mid-life divorce on your long-term financial situation.

Consider Your Monthly Income

Divorce can wreak havoc on your finances in general, but for women that have relied on their spouse’s income, the damage can be much worse. A 2017 study found that U.S. women in their 60s that went through a divorce have a poverty rate of 27%, significantly higher than any other demographic in that age range (including widows).

Take the time to inventory your monthly income and personal expenses. Consider your most basic short-term needs, including:

  • Housing costs, including utilities
  • Food
  • Personal care
  • Internet
  • Health care
  • Transportation

Above and beyond those short-term needs, you may want to determine your long-term goals.

  • Do you plan to retire at 60? At 65?
  • Will you continue to make contributions to investment or retirement accounts? If so, how much?
  • Do you intend to increase your emergency accounts?

When you have the estimate of your monthly expenses, you’ll know exactly how much income you need and will be able to negotiate spousal support accordingly.

mid-life divorce | investments

Consider Your Retirement Accounts and Assets

The division of retirement accounts and assets is a complicated one that requires special care to minimize tax implications. Private-sector retirement plans, such as a pension or 401(k) will require court approval through a Qualified Domestic Relations Order (QDRO) for the division of those assets.

If your marriage lasted ten years or more, then Social Security should be considered as well. If you remain unmarried, are age 62 or older, and your spouse is entitled to Social Security retirement or disability benefits, then you may be able to receive the greater of 50% of your spouse’s benefits or 100% of your own.  This is not something that will be discussed, usually, in the divorce proceedings, but it is a financial issue that should be addressed when planning for your life after the divorce is over.

Each situation is different, so take the time to discuss your specific needs with a financial professional.

Consider Your Home

Your home comes with memories – raising children, hosting gatherings, and more – and it can also provide a feeling of security. When it comes to mid-life divorce, many spouses allow their emotions to cloud their judgment with regard to keeping the family home. With only one income, maintenance costs, property taxes, and the house payment can quickly exhaust your financial resources, so it’s essential to weigh the costs ahead of time.  If you choose to sell, you’ll need to have a value on the spreadsheet of the house.  You can either agree on a value, use comparable house sales (comps), use tax records for the county or get an appraisal done, which is the most accurate.   When you know how much the home is worth, your divorce financial negotiations will be more accurate from the start.

Divorce and 401k

Consider Your Investments and Additional Property

Property division laws vary from state to state, so you’ll need a lawyer on your team that knows the local laws. Texas is a community property state.  Each county, and even each court, can have a different approach to how the estate is viewed in light of each family’s circumstances.    A just and right division of the estate can mean different things with different family situations and different courts.  It’s important to have an experienced family law attorney who knows your court and your judge.

Financial assets, including stocks, bonds, and cash, can often be divided straightforwardly. Complications tend to arise when stock options, real estate, vacation homes, and collectibles enter the scene and separate appraisals for each of those will likely be necessary. If you own a business, you’ll likely need to have that business valuated and it goes on the community spreadsheet as an asset.

Ideally, the goal is to eliminate joint ownership of all of the marital assets. Get independent valuations from industry professionals to ensure a fair value buyout and to lessen the likelihood of conflict between you and your ex.

Professional Assistance for Mid-Life Divorce

No matter what your financial situation, the process of divorce will impact you emotionally, socially, legally, and financially. Contact Divorce Strategies Group today, and we’ll help you clarify your options, create a plan for transitioning into the next phase of your life, and connect you with the resources you’ll need throughout the process. Protect your future – call us today.

Filed Under: Divorce Finance Tagged With: divorce, grey divorce, mid-life divorce

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