Divorce and Assets…50/50 is Often Anything But.
As the song goes “Breaking up is hard to do”. This can be especially true when accumulated assets are involved. Unfortunately, most enduring a divorce are typically immersed in a sea of emotions, prompting them to rely on legal counsel to advocate on their behalf in this area. That said, to insure you and your attorney are on the same page, here are 7 things to keep in mind.
- MARITAL ASSETS
While opposing counsel will attempt to argue all assets should be up for consideration, that’s not necessarily the case. If for instance, you began contributing to your 401K before you walked down the isle, those assets should be considered pre-marital. The only portion your soon to be ex should be entitled to is that which accumulated after you tied the knot. Note: As each case is unique, always seek assistance from skilled matrimonial counsel.
- COMMUNITY PROPERTY vs EQUITABLE DISTRIBUTION
Once you’ve determined the amount to be divided, the question remains…how much? Should you reside in one of the 9 community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) the courts make it simple….you retain half. Alaska gives you the option to “opt-in” to community property. Outside of that, your accumulated wealth will be subject to a fair and equitable distribution. Simply put, this means that while the courts begin on the 50 yard line, assuming assets should be divided equally, the judge can deviate if doing so would be fair or equitable given the particular circumstances of your marriage.
- HOME SWEET HOME
While there’s typically a desire by one party to retain the home in an effort to maintain a sense of normalcy – especially when children are involved – be careful. While home equity is usually a significant component of the combined accumulated assets, remember it’s a phantom value. Anyone that endured a divorce at the height of the market in 2007 can attest to how quickly that equity evaporated in 2008. That said, be leery of attempts to utilize this intangible, and in most cases illiquid value, to offset your rightful claim to more tangible liquid assets such as stocks, bonds or cash. Lastly, remember that while it may be home sweet home, the cost of insurance, taxes, structural and yard maintenance should be considered as well.
- WHICH ASSETS?
As we just discussed, not all assets are created equal. That holds for liquid assets as well. While cash is cash, stocks, bonds and mutual funds can be another story. This could be the subject of an entire post. However, because I’ve seen numerous cases of inequitable distribution due to an unsuspecting party, I wanted to touch on it briefly. Careful scrutiny should be placed on attempts to transfer securities with bad valuations, inconsistent dividend history, and tax consequences upon eventual liquidation, while the releasing party retains more favorable assets. Again, be careful.
- QUALIFIED DOMESTIC RELATIONS ORDER (QDRO)
Better known as “Quad- roe”. This is the component of your separation agreement that specifically addresses your retirement assets. While for the most part they’re usually boiler plate in fashion, be sure it’s spelled out exactly as you agreed based on percentages rather than dollar amounts. While it may appear I’m a stickler here – I usually am by the way – here’s the reason. October 2007 to March 2009.
Why is that significant? Consider this. You agreed on this component of your divorce in late 2007, yet because of the drawn out nature of the proceedings, the actual division of assets didn’t take place until early 2009… after a 51% stock market decline. Had your spouse’s attorney indicated they would retain $500,000 of the $1 Million 401(k), (2007 value) instead of stipulating 50%…rather than receiving your rightful share…you’d get $0.
- RETIREMENT ASSETS WITHOUT 10% PENALTY
In most cases, should you access retirement assets prior to age 591/2, you’ll endure a 10% penalty on top of your normal income tax. Divorce however is one exception. While I don’t advocate a premature drawdown of your retirement assets, in some cases after a divorce it’s necessary to bridge the gap. Fortunately the IRS understands this, and therefore allows for a penalty free distribution as long as the following are true;
- The assets must be in an ERISA endorsed plan such as a 401k.
- A Qualified Domestic Relations Order must be in place.
- The funds are paid to an alternate payee, such as the spouse of the account owner.
- EXCESS SPOUSAL SOCIAL SECURITY BENEFIT
While social security is not addressed specifically within the formal proceedings, I find this to be one of the most overlooked, misunderstood, and therefore underutilized benefits. While a recent Congressional budget deal will eliminate certain social security claiming strategies, this appears to be in tact….for now.
Simply put, if your marriage lasted for at least 10 years, you are entitled to a benefit equal to 50% of your ex spouse’s anticipated benefit…even if they’ve remarried. Should you remarry however, this option is unavailable. While you may already know this, here’s where the misunderstanding arises. Many feel since they’ll be receiving a benefit based on their own earnings, they’re excluded from this…not so. Here’s why.
Should 50% of your ex spouses anticipated benefit be greater than your anticipated benefit, you’re entitled to the difference. As an example – if 50% of your ex spouse’s anticipated monthly benefit will be $1000, and your monthly benefit will be $700, you’re entitled to an additional $300 each month. ($1000 – $700 = $300.) As simple as it is, the vast majority will leave money that’s rightfully theirs largely unclaimed.
In addition to having assisted many in this area for almost 30 years, I’ve also endured a divorce myself. As such, I can attest first hand to how important it is to retain skilled matrimonial counsel, rather than a general practitioner. While the difference may seem slight, the results can be worlds apart. That said, it’s equally important to obtain competent financial counsel as well. Not just any should do…but one that will act as a fiduciary to protect your interests long after the divorce is complete…insuring 50/50 is just that.
While the above is meant to be an informative guide, it should not be considered exhaustive. Should you have further questions, I can be reached at firstname.lastname@example.org.
ABOUT THE AUTHOR:
Mark D Kinney, is a board Certified Financial Planner (CFP), Fiduciary, and the Founding Partner of Toole Kinney & Co., a Massachusetts based wealth management firm specifically catering to conservative investors with accumulated assets experiencing life transitions. As someone who’s not only endured a divorce after 16 years of marriage, but helped countless others in this area for almost 30 years as a financial advisor, he brings unique insight to those seeking assistance with divorce settlements. Mark has been cited nationally on CNN, FOX Business, NBC, ABC, CBS News and more…
“Having endured a divorce myself, let me assure you…you’re going to be OK. However, you must take the necessary steps now, to insure you’ll be OK in the years ahead.”
Mark D Kinney, CFP