Divorcing couples often have after-tax brokerage accounts, but sometimes attorneys might not recognize that there may be a wrong way to divide these accounts.

What I’ve found in my practice is that a good attorney will review the parties’ current brokerage account statements to determine the account value and legal title. I often hear, “There’s $150,000 in this account. We’re going to divide the account 50/50. She get’s $75,000, and he gets $75,000.”

As a divorce financial advisor, attorneys hire me to review the same statements but with an eye to gathering additional information.

First, what type of investments are in the account, and are they suitable for the client’s post-divorce needs?
Next, what is the cost basis of the investments?
Last, can we confirm that all the assets are divisible without surrender charges and/or penalties?

Let’s take the case of Mrs. Smith. The parties’ joint brokerage account was primarily invested in high-risk assets, many with back-end loads. It’s likely that these positions won’t suit Mrs. Smith after the divorce. Her primary post-divorce investment goal is to receive income from her portfolio along with moderate growth within the confines of her low-risk tolerance. While Mr. Smith will likely maintain his current investment strategy, what will the cost be to Mrs. Smith if she has to reposition?

Her attorney says, “She gets half the account and half the capital gains….isn’t that fair?”

Surprisingly, the answer is, “Not necessarily.”

If, for example, Google shares were purchased at $20/share and sold at $100/share, capital gains taxes on the profit would be owed, based on the party’s tax bracket and how long the asset was held. On the other hand, if Mrs. Smith left the entire position with Mr. Smith, perhaps he would retain it until he had enough capital losses to offset the gains, or maybe he would sell in retirement when he was in a lower tax bracket and capital gains taxes wouldn’t be assessed. In any case, tax liabilities should be incorporated in negotiations.

Looking deeper, many of the account holdings in the Smiths’ account raised red flags. They owned back-end load funds which carry a penalty for early withdrawal. Mr. Smith won’t be repositioning his assets soon (after all, he was the decision-maker), so he won’t pay the penalty. However, Mrs. Smith wants to reposition immediately and would therefore incur a penalty. In addition, other assets such as private equity positions and real estate trusts were not divisible without cashing them in. How would that be fairly addressed when the divorce is final?

Should these hidden costs and suitability concerns be addressed within the divorce process? While attorneys aren’t responsible for giving clients the investment answers, they are responsible for raising the following question:

“What is the right 50% of the investments for my client’s post-divorce financial health, and then how do I advocate for that position?”

Attorneys who are not financial experts should communicate with the existing financial advisor or call in a third party regarding which assets are best for each client. Remember, for some clients, there is a wrong “50%” of the assets.

There are two main reasons not to use QDRO models: Technical limitations and QDROs that don’t comply with the intent of the parties.

While some companies do self-administer their qualified retirement plans, an ever-increasing number have chosen to turn over administration to an outside third-party. In fact, quite often, the task of reviewing and accepting or rejecting Qualified Domestic Relations Orders (QDROs) falls within the exclusive domain of the outside administrator. To save on internal costs associated with training a large staff in QDRO administration, many large third-party administrators are encouraging the use of model QDRO forms and online generation of QDROs.

It’s clear why administrators want clients to use a cookie-cutter form or online generation: it saves them tremendous funds in QDRO training.

What’s in it for the client, though?

The federal government says when it comes to defined contribution plans, administrators can pass along a reasonable portion of administrative fees (i.e. training and staff costs) to the parties. Our idea of what is reasonable could be quite different than the plan administrator, but that’s a topic for another blog!

Administrators have found that by charging a hefty QDRO review fee and then offering a discount to use their model or online generation tools, clients are tempted to bypass hiring an expert and take the “cookie-cutter QDRO” route.

Aside from saving an upfront fee, this is generally not in anyone’s best interest, whether they are the plan participant or the alternate payee. For example, on a certain nameless “F” website, lawyers or clients can create a QDRO by entering the basic information, answering a series of questions and with a click, a QDRO is generated.

What are the technical limitations?

Plan administrator “F”’s web-generated QDROs include a clause that holds “F” harmless for any errors or mistakes they made. Uh oh. What if the client doesn’t understand the choices offered and picked the wrong one? It is not “F’s” fault. They also do not include signature lines for the parties, which disqualifies them from being entered by most family law courts. Any editing or deviation from the generated form, however, disqualifies the client from receiving the discounted administration fee.

Other administrators will send out a model QDRO, rather than relying on a website, to be completed by filling in the blanks.

Why can’t I just use a fill-in-the-blank QDRO model instead of hiring an expert?

There are a few reasons we do not recommend using QDRO models or online-generation websites. The biggest reason is because most of the forms don’t present all the choices available for all the terms negotiated – or all of the choices that clients are entitled to receive based on what the divorce judgment says.

For example, in order to streamline and simplify things, these forms might only offer the ability to assign a percentage or a dollar amount of a 401(k) to the non-employee spouse. However, what if, as in many cases, that person is awarded 50% of the account plus an additional sum to offset other assets, cover legal fees, etc.? Similarly, what if on a defined benefit plan, the form doesn’t offer the specific survivor option choice that the parties agreed to (and the plan actually allows) or the assignment of benefits using a coverture fraction? What if the alternate payee ends up with an unintended windfall that disinherits the participant’s second spouse? What if the parties meant to exclude loan balances in the assigned amount, but because the form is so confusing, they end up accidentally including them?

In fact, some of the model QDROs we’ve seen actually benefit the non-employee spouse in ways that are significantly detrimental to the participant. Remember, the model benefits the plan administrator; not necessarily the participant or the alternate payee.

In the long run, clients save time and money using an expert who knows the pitfalls to look for, and how to avoid falling into them. Work with an expert from the start, or you may have to start over!

In our office, every Qualified Domestic Relations Order (QDRO) request that comes in our door is treated as a time sensitive “hot-potato.” If the owner of the retirement account dies, remarries or retires, the ex-spouse could receive significantly limited (or no) benefits, regardless of what their Judgment of Divorce (JOD) awarded.

Look at this example:

Jane has a 401k account through her employment. Her ex-husband was awarded 50% of the account balance via their JOD. They put off getting a QDRO prepared; their legal fees were more than they expected; they have other short-term bills to pay; or maybe they forgot. If Jane were to die or retire before the QDRO gets entered and approved, John could end up forfeiting his share.

How can this happen?

Regardless of what Jane and John’s JOD indicated, it’s not binding on a third party, such as the 401k’s Plan Administrator. If Jane changed her account beneficiary and died before entry of a QDRO, her 401k would be transferred to her designated beneficiary. Then, John’s only recourse would be to file a claim against Jane’s estate.

QDRO processing time is critical:

Many years ago, we encountered a situation that emphasized the importance of timing. The wife had planned to begin drawing money from her half of her husband’s qualified retirement accounts immediately following divorce. She had two small children and planned to stay at home for a few years before returning to work. The JOD had assigned her the responsibility to initiate the QDRO drafting process, but under-estimating the significance, she put it off for a few months.

Tragically, her ex-spouse committed suicide, and his accounts were transferred to his mother, per his beneficiary designations. The wife contacted the Plan Administrator and argued that her JOD had awarded her half the accounts. Unfortunately, the wife did not understand her attorney’s previous explanation that beneficiary designations always take precedence over a party’s JOD.

When an individual is married, their spouse is automatically entitled to beneficiary rights on qualified retirement accounts. In fact, a spouse can’t be disinherited unless they sign a waiver. The day after a marriage ends, however, their spousal rights are extinguished. The only document that gives an ex-spouse any right to plan benefits is a QDRO.

Since no one can predict the future, we ALWAYS recommend attorneys enter the QDROs simultaneously with the JOD. To clients, paying for a QDRO can seem like an unnecessary hassle when they’re still dealing with custody issues, alimony or refinancing a home. However, clients need to be reminded, for their sake as well as their attorney’s, a QDRO is not just another legal expense. Timing is critical.

According to Aristotle, “education is the best provision for life’s journey.”

Most would agree that a college education is a required stop on the path to financial security. However, most states don’t factor costs for higher education into Child Support formulas. In general, support continues until the children reach the legal age of majority or slightly longer if the children are still in high school.

Unless you live in New Jersey…

Reported widely in the the national press, the New Jersey case of 21-year-old Caitlyn Ritchie, who won a lawsuit against her divorced parents to enforce payment of $16,000 per year towards her out-of-state college tuition, has sparked controversy.

Should divorced parents who can afford it, be forced to pay for their children’s college costs?

Although the details of the Ritchie matter can be critiqued and analyzed, the larger theoretical issues it raises may significantly impact the finances of divorcing couples.

Why should children of divorced couples have more rights than those of married couples?

Married couples are not required by law to pay college tuition. This is the crux of the argument against the Ritchie ruling. The judge in the Ritchie matter cited a 1982 case, Newburgh v. Arrigo (88 N.J. 529) in which the Court ruled, relative to a divorce that a “financially capable parent should contribute to the higher education of children who are qualified students.” What isn’t addressed in Newburgh is how the Courts should define who is financially qualified? Will income and expenses be taken into consideration and if so, what expenses are legitimate?

Often times, children of divorced parents don’t qualify for financial aid because their parents’ incomes are too high. Of course, this can also be the case for children of married couples. However, divorce situations can sadly lead to more contention over who will pay for college, especially if there is a new family to support. This raises questions for divorcing couples about long-term implications of who claims tax dependency exemptions for minor children. It raises even bigger philosophical questions about the legal age of majority in our country. As any parent of a 19-year-old can attest, “self-supporting adult” is not the first term that comes to mind when describing their teenager.

For divorcing couples who live in States that don’t address college tuition, they can stipulate how college will be funded within their Judgment of Divorce. Although the Judgment is a legal document enforceable between the parents, there are numerous cases in which children have been able to enforce college provisions. Other options include earmarking dollars today into 529 accounts for the children, with the hopes funds can be used to support college costs. However, this may also hinder the child’s ability to receive financial aid in the future.

Parting words of advice; A) this topic isn’t going away anytime soon and B) think twice before moving to New Jersey.

What are your thoughts? Is college a luxury or necessity? Should it be addressed within the context of Family Law Courts?

Qualified Domestic Relations Order (QDRO) preparation is a confusing and stressful process for clients. At Divorce Solutions, we want to make things simpler. Your clients can get answers to all their questions at our new “First Friday QDRO Clinics.”

“First Friday QDRO Clinics”

On the first Friday of every month, Divorce Solutions hosts a 40 minute clinic on QDROs in our office in Southfield, MI. This workshop is completely free for any client that uses our firm for QDRO drafting. A registration fee of $10 is required for non-clients.

In this engaging clinic, Jacki and Dave will explain in simple terms the steps of the QDRO process. We will assist with form completion and give direction on any additional paperwork your client needs to collect. Most importantly, we’ll answer your client’s pressing questions, such as:

• Why do I need a QDRO preparer?
• Why do I still need my attorney?
• What if my ex-spouse won’t pay or sign the document?
• Why is timing critical? (i.e. what happens if my ex-spouse dies, remarries or retires?)
• When will I get my money?
• What are the tax implications of my transfer?

Have you referred your client to a QDRO preparer? Help your clients learn everything they need to know in 40 minutes. Call us at (248) 354-0495

We’re often asked, “Why do we need an outside expert to prepare a QDRO?” A Qualified Domestic Relations Order is the legal document required to divide qualified retirement accounts between ex-spouses pursuant to their divorce.

Most family law attorneys don’t prepare QDROs because pension plan components vary widely from plan to plan and require specific knowledge and experience. Hiring a third party is often the easiest way for a lawyer to help clients resolve the difficult issue of dividing retirement accounts and pensions. Significant monetary savings come in the flat rate we charge, as compared to the billable hours an attorney would spend researching and preparing the Order. Whether the case takes us 1 hour or 10, our flat fee stays the same.

In addition to financial benefits, an outside preparer, who speaks the language of retirement plan administrators, knows how to expedite what can often be a lengthy process for clients. Furthermore, clients can be confident that the subtle nuances of pension division have been addressed within the Order, for their best interest.

Divorce Solutions works to partner with attorneys to make the QDRO process easier for clients. To that end, we’ve developed an innovative tool to help attorneys better serve their clients: The “QDRO Kit On A Stick” provides all of the necessary documents for the attorney relative to the parties’ retirement account division, on a handy USB memory stick. The most important piece on the QDRO Kit On A Stick is the sample judgment language.

There are numerous ways to divide up retirement assets and our QDRO Kit On A Stick will help attorneys pinpoint the right one for the case at hand. Instead of urgent calls to professionals like Divorce Solutions in the midst of a mediation, they can often pop the Kit into their computer and have all the choices in front of them.

According to IRS Code Section 1041, in order for alimony/spousal support to be tax deductible for the payor, the parties may not be members of the same household. Consider the following case study.

Brad and Heather are getting divorced after 18 years of marriage. They have 3 small children and they owe far more on their mortgage than their house is worth. However, they agree to sell the house and pay off any amount owed out of joint funds. Brad’s income is substantially higher than Heather’s therefore, the settlement they’re contemplating includes a provision for temporary spousal support. They agree to live in the marital home together until the house sells. They sign on the dotted line and are officially divorced.

Fast forward three years. The house still hasn’t sold and Brad and Heather have been maintaining a pleasant co-existence in it. However, Brad has been paying Heather what he assumed was tax deductible spousal support and Heather has been paying income tax on the payments as well! This is clear violation of IRS Code Section 1041. Even though the parties have not been filing a joint return, they are still members of the same household.

This is becomming a common scenario in Michigan as the housing market remains challenging and couples are attempting to find creative solutions when they can’t sell the marital home. What is the answer to this growing problem? As always, we recommend that clients sit down with a qualified tax preparer to discuss the tax deductibility of spousal support. If parties are currently in the same situation as Brad and Heather, they should contact their attorney immediately to discuss revising their divorce decree and any other possible options.

As I sit writing this article in late October, 2008, to say that the economy in Michigan is experiencing a bumpy ride seems an understatement of the obvious. The housing market, although in stabilization mode, continues to be impeded by tougher lending qualification standards and fear about liquidity amongst homeowners. The workforce continues to get crunched as most recently illustrated by Chrysler LLC’s announcement that it intends to lay-off 25% of their salaried workforce within the next several months and the whispers heard around town that the federal government is considering loaning part of the money needed to fund a General Motors-Chrysler merger. Clients who are invested in the stock market (either inside or outside) of their retirement accounts are experiencing short-term turbulence that they likely have never seen before.

The real question for family law attorneys practicing in Michigan however is not whether or not their client’s finances seem to be in trouble, but how (if at all) it should affect the way that their divorce is handled by their attorney.

Negotiating the Marital Home
Let’s take a look at the situation Joe and Jill find themselves in. They, like many others bought a house they could barely afford 5 years ago, with a sales price of $250,000. They took out what was called a non-standard adjustable rate loan in the amount of $225,000. Their lender assured them they’d be able to re-finance it with no problem when the rate was set to ratchet up in five years. Today, they find themselves in the midst of a divorce, unable to re-finance their loan and saddled with a problem. Their house has been appraised at $175,000 ($50,000 less than the outstanding loan) and their mortgage payment has increased from $1,000/mo to $1700/mo. Sound familiar? Should Jill’s attorney’s advice today be any different relative to the home that it would have been had Jill been her client 5 years ago?

Suppose that Jill wants to retain the home as its sole owner, her first step should be to contact a mortgage specialist to see if she can qualify to re-finance the home into her own name. Five years ago, perhaps she could have obtained a sub-prime loan with little to no income verification. However, one of the outcomes of the recent housing and financial crisis has been stricter standards to underwrite loans amongst lenders and the complete elimination of the sub-prime market. It would me most unfortunate if Jill agreed to keep the home and then found out after she signed her Judgment that she was unable to re-finance the current loan (with ever increasing monthly payments).

Suppose on the other hand that Joe and Jill decide to put the home up for sale. How likely is it to sell before the divorce is final or even relatively soon thereafter? More importantly how do they come up with the money to make up the difference between the amount they owe on the loan and the significantly lower sales price?

There are no easy answers unfortunately. The most important advice Jill’s (and Joe’s) attorney can give is to analyze all the options thoroughly before agreeing to any settlement. If either party wants to keep the home and plans to re-finance, they need to make sure they will qualify. If the parties want to put the house up for sale, Joe and Jill need to understand what will happen to their financial obligations if the house doesn’t sell within an allotted period of time. If one or both parties can afford to hold onto the home until the market rebounds, that may be the best scenario for all concerned. In one case our office advised on, the wife wanted the house but the husband believed the appraisal to be grossly undervalued. As a compromise, they agreed to stipulate to the appraised value, however, they also agreed that if the house was sold within 2 years for a value more than the stipulated amount, they would split the increase after deducting the closing costs and any principal payments made by the wife.

Of course, it never hurts to involve a financial advisor when couples are weighing options for how to handle the house. Difficult financial situations call for creative solutions and often, financial experts trained in divorce issues can be of particular assistance and may relieve attorneys of potential liability exposure.

Investment Account Swings
What has always passed for good sense with regard to investing is the same today as it is in a flat or expanding stock market. For those with short term investment horizons—i.e. those who need access to their money for whatever reason, short term dollars should be invested in secure positions. Plainly, if you needed to withdraw $10,000 from your investments for your child’s tuition next year, that money should be sitting in a CD, money market or cash position. Yes, you might miss out on a short term increase if the market were to soar forward during that time frame. However, you wouldn’t lose anything either. To put money earmarked for short term needs into the stock market isn’t investing—it’s gambling.

To extrapolate that to divorce cases today, if either your client or his/her spouse may need to access investment or retirement account funds (via a QDRO and subsequent distribution) shortly after the divorce, that money should be moved to secure positions today. In fact, even if your client doesn’t need to access those funds in the near future, the question of whether or not to move funds into secure positions during a divorce must be raised.

Consider this fact pattern. A husband and wife are getting a divorce. The husband earns $250,000 plus in salary and wife has been a stay-at-home mom who has minimal income earning potential. The marital estate is worth $2 million. Husband’s million dollar share can easily remain invested in the market as he doesn’t plan to retire for 15 years (a long term investment goal). However, wife will likely want to reposition her accounts to take into consideration her new and drastically different investment goals and need for cash. In this situation, it also would seem to be prudent to advise the parties to move their assets into secure positions pending the divorce action.

In another case, the husband and wife are trading the house for the retirement accounts. They’ve agreed that the wife will retain the marital home and the husband will keep the retirement account, both of which were of equal value as of September, 2008. Now, however, the retirement account has lost 30% of its value and the husband wants the wife to take out a mortgage to make up the difference. This too was a situation in which it would have made sense to liquidate the retirement account to cash positions.

Should the repositioning of dollars in a marital estate while a divorce is pending be considered capitulating to market panic? I believe most financial experts would offer an adamant “no”. The backlash against a well-known market guru for stating that money needed over the next five years should be moved immediately out of the stock market is aimed at investors with long term investment goals. In the financial planning world, it’s always been widely accepted by rationale advisors that money needed within a short time frame should never be invested in stocks.

The “million dollar” question is “How should attorneys advise their clients”? The answer is a simple one. Attorneys need to educate their clients about the potential risks of leaving their money invested in non-secure assets pending a divorce while advising them of the potential pitfalls of selling funds to cash. The negatives include the lost opportunity cost of missing out on short term market gains. They also include (for investments outside of retirement accounts), potential transaction costs and possible tax consequences (capital gain/loss) issues related to sales. However, in many cases the negatives will be outweighed by the positives. To go one step further, if attorneys advise their clients to move their money into secure positions and they fail to do so, it might be wise to send out a letter stating that the advice was given and not followed at the client’s choice.

For those that feel this might be an over-reaction to the situation at hand, it might be helpful to keep in mind that one of the largest malpractice cases ever filed on behalf of a single party was filed in 2004 in Michigan against a family law attorney who was accused of not protecting his client’s marital estate from stock market declines. The client did not prevail; however, regardless of the size of the marital estate, it seems prudent for all attorneys to raise this issue with their clients.

In conclusion
Of course, there are no real absolutes. Every divorcing couple shouldn’t aim to keep the marital home intact. Similarly, there are cases when it still doesn’t make financial sense to move investment holdings into cash. The main issue for attorneys is to initiate a dialogue about how this market may be affecting each of their open cases with their clients and with opposing counsel to protect themselves and their clients interests.

Often times, the judgment of divorce will state that the non-working spouse will take advantage of health insurance coverage through their ex-spouse’s employer. This coverage is available through The Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”). COBRA is only available if the employer has more than 20 employees.

As a divorced spouse, you are entitled to obtain COBRA coverage for up to thirty-six months. While taking COBRA is often the right decision, there are a few potential pitfalls to consider.
At the end of the 36-month period, the employer has no legal obligation to continue the policy. I had a client who went on COBRA (in perfect health) and developed a heart condition during the three year period. After COBRA ended, her new policy excluded coverage for her heart condition which cost her considerably in out-of-pocket expenses. In fact, a good portion of her divorce settlement went to paying for her health care costs when COBRA ran out.

Sometimes, it’s best to purchase your own individual policy at the time of the divorce (when you’re still healthy) since the carrier can’t drop you as long as you make the premium payments. It may even cost less per month to get an individual policy versus COBRA. As always, seek professional assistance before making any decision and make sure that you keep COBRA in place until you are sure the new policy is in force.