Posted on

A qualified domestic relations order (QDRO) is not to be confused with a divorce decree or property settlement agreement. A QDRO specifically recognizes a spouse, former spouse, child, or other dependents’ right to receive a predefined portion of a qualified ERISA-sponsored retirement plan. A QDRO must be issued by a state court or authority.

To “qualify” as a QDRO under the Employee Retirement Income Security Act (ERISA), a QDRO must have (or not):

  • The name and last known mailing address of the participant and each alternate payee;
  • The name of each plan to which the order applies;
  • The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee;
  • The number of payments or time period to which the order applies;
  • The order must not require a plan to provide an alternate payee or participant with any type or form of benefit, or any option, not otherwise provided under the Plan;
  • The order must not require a plan to provide for increased benefits (determined on the basis of actuarial value);
  • The order must not require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO; and
  • The order must not require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.

With that, a QDRO must also “qualify” under the terms and conditions of the specific retirement plan. All retirement plan is different, and some have unique terms and conditions such as annual vs. daily valuations dates, ROTH contributions, frozen benefits, vesting requirements, shared vs. independent options, survivors benefits, and timing requirements.  Each retirement plan is required to have written QDRO procedures and model language available to Participants upon request but watch out! The model language is designed to protect the interests of the Plan, not the Participant, and never an Alternate Payee.  It is suggested you understand the terms and conditions for each account along with the ERISA requirements above, prior to any agreements or the decree language being drafted.

It should also be noted that QDROs are not specific to divorce.  A QDRO can be used in several other circumstances including child support, past-due arrears, or even in other court jurisdictions where the circumstances may warrant a non-taxable transfer to a spouse, former spouse, child, or dependent.  As long as a state Judge or court commissioner will sign the QDRO, it must be deemed “qualified” under the terms of the plan assuming it meets all of the requirements above.

It can be well worth the time and money to consult with a retirement plan specialist as soon as you identify the need for a Qualified Domestic Relations Order.  For more QDRO tips continue to follow our blog or contact Michelle Leisen at Divorce Smart anytime.

Michelle founded Wealth Planning Group, LLC after 22 years of experience in the Financial Services Industry. Michelle graduated from the University of Minnesota,Tewin Cities and attended William Mitchell School of Law in St. Paul, Minnesota. Born and raised in Minnesota, Michelle lives in Eden Prairie with her two children Katie and Nick. Michelle enjoys volunteering and family and running races.

Divorce Financial Professional/Mediator
Divorce Smart LLC
michelle@wealthplanninggroupmn.com | 612-419-9956
www.wpgdivorcesmart.com

 

Posted on

If you are going through a divorce, you might be feeling anxious about how to deal with spousal maintenance. Spousal maintenance, also known as alimony, is a payment that one spouse makes to the other after the divorce to help them maintain a similar standard of living as they had during the marriage. The amount and duration of spousal maintenance depend on various factors, such as the length of the marriage, the income and assets of each spouse, the age and health of each spouse, and the earning potential of each spouse.

The stereotypical spousal maintenance case is where one spouse stayed home with the kids while the other spent a decade or more advancing their career and now that there is a divorce the stay-at-home parent is going to fall off a financial cliff (because they have little or no income potential) unless the career spouse helps them out financially.

While it may be tempting to rush through negotiations and reach a quick agreement, taking a methodical approach to budgeting and comparing incomes and expenses can save you time, money, and potential regrets down the line, especially when figuring out spousal maintenance.

The Pitfalls of Cutting Corners:

When faced with the daunting prospect of divorce negotiations, it’s only natural to want to expedite the process. However, hastily reaching an agreement without delving into the intricacies of your financial situation can prove to be penny wise and pound foolish. By avoiding the necessary work and disregarding a comprehensive assessment of incomes and expenses, you risk making uninformed decisions that may later backfire.

Fear as a Driving Force:

One of the main reasons individuals may be inclined to cut corners is the fear of what their spouse might ask for in terms of spousal maintenance. This fear often leads to a desire for a quick resolution, even if it means sacrificing a thorough understanding of your or their financial situation. However, succumbing to this fear can be counterproductive and end up costing you more time, money, and emotional energy in the long run.

The Benefits of Methodical Budgeting:

Who wants to create a budget?  Hardly anyone!  But ask any Family Law Attorney and they will tell you that budgets are the key to figuring out spousal maintenance.  Engaging in methodical budgeting and comparing incomes and expenses can yield numerous advantages during divorce negotiations.

Let’s take a closer look at some of the key benefits:

  1. Informed Decision-Making: By thoroughly understanding your financial circumstances, you gain the ability to make informed decisions regarding spousal maintenance. This ensures that any agreement reached is fair and reasonable, taking into account both parties’ needs and financial capabilities.
  2. Transparency and Trust: Demonstrating a commitment to a methodical approach fosters an atmosphere of transparency and trust during negotiations. By openly discussing and analyzing the financial aspects of the divorce, both parties are more likely to feel heard and respected, leading to a higher likelihood of reaching an amicable agreement.
  3. Long-Term Financial Stability: Rushing through negotiations without a comprehensive understanding of your financial situation may result in an unsustainable spousal maintenance arrangement. Taking the time to carefully evaluate incomes, expenses, and future financial prospects enables you to create a plan that promotes long-term financial stability for both parties involved.
  4. Minimized Legal Costs: While investing time and effort in methodical budgeting may seem time-consuming at first, it can significantly reduce overall legal costs. By proactively addressing financial concerns during negotiations, you reduce the need for repeated revisions and potentially costly legal interventions down the line.

Divorce negotiations are rarely easy, but by embracing a methodical approach to budgeting and comparing incomes and expenses, you can pave the way for a smoother and more satisfactory resolution. Rather than succumbing to the fear of what your spouse may ask for in spousal maintenance, investing the time and effort to fully understand the financial landscape can lead to a fair and reasonable agreement that benefits both parties in the long run. So, take a deep breath, roll up your sleeves, and embark on the journey towards a well-informed and amicable divorce settlement. Your future financial stability is worth the extra effort.

You should consult with a lawyer who can advise you on your legal rights and obligations regarding spousal maintenance. You should also consider working with a financial planner or Certified Divorce Financial Analyst (CDFA) who can help you create a realistic budget and plan for your future. You should also seek emotional support from your friends, family, or a therapist who can help you cope with the stress and anxiety of the divorce process.

By making informed and rational decisions about spousal maintenance, you can achieve a fair and reasonable outcome that respects both your and your spouse’s interests. You can also avoid unnecessary conflicts and drama that can prolong and complicate the divorce process. And most importantly, you can protect your well-being and happiness after the divorce.  Remember, being penny wise and pound foolish rarely pays off in the complex realm of divorce negotiations.

Carl Arnold is an experienced family law attorney and mediator. He currently focuses his practice on Family Law Mediation (including child-inclusive mediation), Collaborative Divorce and Custody Evaluations. His office is in Northfield, Minnesota and he works with people from all over the state using Zoom. Carl has been a long-time member of the Collaborative Law Institute.

Attorney/Mediator, Arnold Law and Mediation LLC, carl@arnoldlawmediation.com
507-786-9999
www.arnoldlawmediation.com

Posted on

 

It may be tempting to save money in a divorce by drafting a decree with your spouse, or by completing a form decree. This is especially true if it appears that you and your spouse are in accord on all issues. But be warned: unintended consequences can arise months or years after your decree has been filed and entered by the Court.

Once your decree has been filed by the Court and entered by Court Administration, your decree becomes the legal guide for everything related to your divorce: custody and parenting time, support, property and debt division.  On the surface, these issues can seem simple and many couples attempt drafting their own dissolution paperwork without counsel in an effort to save on the investment of lawyers and other professionals.  While it is true that parties are often in the best position to make decisions about what their families need, attorneys are uniquely trained (and perhaps some are even naturally suited) to imagining something their clients may not be inclined to consider: the worst-case scenario.

The worst-case scenario is and should be an ever-present consideration for attorneys as they counsel their clients regarding important decisions that will have long-term impacts on parenting and financial issues. An attorney may be a glass-is-half-full type of person, but he or she has been trained to imagine what could go wrong five years out from a divorce or custody determination.  The worst-case scenario may not be an enjoyable rumination, but it is critically important in drafting strong contracts.

Take Couple A, for example.  Couple A was married for 12 years.  They have an eight-year-old child and they own a home, which they purchased together during the marriage.  Couple A decide to divorce in November and to sell the home in the spring when the housing market is stronger.  They agree to share the closing costs and to equally divide the sale proceeds.  They also decide that they will have equal parenting time, but they do not create a specific parenting time schedule.  Couple A feels pretty good about the progress they are making, and they should feel great – many couples are not able to have fruitful conversations about parenting and property issues in the context of a separation.  Couple A signs and files their divorce decree, which awards the home to Wife, pending the sale of the house.  Husband has purchased a townhome a few miles away.  Couple A is glad to have the divorce behind them so they can focus on their child and on moving forward with life.

What could go wrong?

Let’s check back in with Couple A one year after their decree is entered.  It is late fall and the marital home is still unsold. At the time the divorce was finalized, the realtor recommended repairs that required time and money and the parties were not able to agree on a listing price.  Some offers were made, but the parties felt that the property should sell for more.  Wife has been paying the mortgage for the past year, and the parties have now just received a solid offer.  Wife wants to be credited for reducing the mortgage principal during the year she made mortgage payments and is asking for additional sale proceeds.  Husband does not agree –  he has done some of the repair work on the home and has paid for lawn maintenance.  The decree is silent on principal reduction, and he believes the net equity should be divided equally, as worded in the decree.

In addition, Wife has put in an offer on a home twenty miles away from Husband’s new home.  Wife wants the now 9-year-old to attend school near her new home, in a different school district.  Even though the parties agreed on equal parenting time, Husband has been picking up overtime at work to help offset some of his expenses, so Wife has had significantly more overnight parenting time over the course of the last year.  Wife has hired a lawyer and is threatening to take Husband to court to address school choice, parenting time, and the division of equity from the sale of the marital home.

If Couple A had attorneys, even to simply review their draft decree, they could have included some provisions to address these foreseeable events.  As a family law attorney, I have encountered many “Couple As,” who, with the best intentions, endeavored to divorce without counsel because they believed it would save them time and money.  However, in many instances, these couples overlook important details and pitfalls that a family law attorney will mitigate by including provisions that anticipate change and communication breakdowns.  In the end, these couples have unnecessarily spent significant amounts of money to resolve issues that could have been avoided by addressing them properly at the time of divorce.

If Couple A had engaged in the Collaborative Divorce process and retained collaborative attorneys committed to working only out of court, they would have had conversations focused on problem solving the issues that they later encountered up front. While many divorcing couples can and should make efforts to reach agreements on their own, attorneys offer unique perspective and experience when counseling clients on important agreements.  If you are considering a divorce or have questions about whether the Collaborative Divorce process is right for you (there are many wonderful blog posts on the CLI site explaining why it probably is), contact CLI or browse through the online listing of collaborative attorneys (Find a professional) – most of us offer free initial consultations and love the collaborative work we do.

About the Author:
Rebecca Randen is a family law practitioner and partner at the firm Randen, Chakirov & Grotkin LLC.  She practices collaborative and traditional family law in the metro and greater Minnesota.  She is a lifelong Beatles fan.
www.rcglawoffice.com

Posted on
tax imageIt’s important for divorcees to review and adjust their W-4 payroll withholding or start to make quarterly tax estimates following their divorce. Often, they are so relieved to have reached settlement, they fail to think about these housekeeping items. If divorced in 2018, this is especially important if transferring taxable spousal maintenance. The payor spouse can likely change their payroll withholding to increase their net income. The payee spouse will need to withhold additional tax dollars on their salary or make quarterly estimated tax payments, to account for taxes on the spousal maintenance payments received. If the payor spouse doesn’t adjust their W-4, they may not be able to meet their budget during the year and would probably receive a large tax refund when taxes are filed. If the payee spouse doesn’t adjust their W-4 or start quarterly estimated taxes, they could have a large tax liability when they file their return. Even if there isn’t taxable spousal maintenance, individuals still may need to adjust their withholding. Things that can impact taxes and often require an adjustment are a change in their filing status, pre- tax payroll deductions (retirement contributions, health savings account, health insurance premiums), and itemized deductions such as real estate taxes and mortgage interest. Making these adjustments now will help cash flow match what was projected during the divorce process and save the headache later of a tax surprise.
Posted on
clockIt is important to review and discuss tax planning for the year in which a divorce was completed, especially for high earning individuals who receive incentive compensation and plan to be divorced by December 31, 2018. As part of the 2017 Tax Cuts and Jobs Act, many tax law changes became effective in 2018. One change was to the flat tax rate that is withheld by companies on incentive income such as bonus income, commission income, exercised stock options, and vested restricted stock. As of January 2018, the federal rate changed from 25% to 22%. The Minnesota state rate remains the same at 6.25%. Most highly compensated individuals have marginal tax rates above 22%, so tax on the above income types is under-withheld. To avoid an unpleasant tax surprise come April 15th, be sure to address this potential additional tax liability and come up with a plan to handle it. Some options to consider are:
  • Estimate the tax liability now and include and allocate it as part of the property division.
  • Include language to share in the tax liability when return(s) are filed next year.
  • Consider whether it makes sense to load-up itemized deductions from the year to the higher earning spouse to help offset liability (i.e. real estate taxes, mortgage interest, charitable contributions).
Posted on
Checklist and pen When a joint investment account is divided, the financial institute will use only one Social Security number to report the earnings and thus only one 1099 will be issued for that account. For example, following their divorce, Dick and Jane divided their joint investment account and transferred their own share into an individual investment account solely in their own name, on November 1st. If the “primary” Social Security number on the joint account is Dick’s, he will receive one 1099 for the joint account earnings earned from January 1st– October 31st and a second 1099 for the individual account earnings earned on his individual account from November 1st – December 31st. And, Jane will receive only one 1099 for the individual account earnings earned on her individual account from November 1st – December 31st. If the goal is to share the tax liability for the joint investment account earnings, this can be accomplished in a few ways.
  • The tax liability is projected during the divorce process and an adjustment is worked into the property division.
  • The spouse who received the 1099 adds the investment income to their tax return and language is added to the decree outlining the agreement on how to share the tax liability at tax filing time.
  • The spouse who received the 1099 can “nominee”the correct portion of investment income to the other spouse by filing a 1099 and 1096 with the IRS and furnishing a 1099 to the other spouse.
Posted on
Friends for lifeYour divorce is over. It’s time to start sorting through all the things you need to do, to get your financial life in order.  Here are just a few tips to help you thrive financially, as you move into this phase of your life.  Pay Off Credit Card Debt One of the most important steps to achieve your financial goals is eliminating credit card debt. Start by paying off the balance of one credit card at a time, by either:
  • Paying off the highest interest rate credit card first, or
  • Paying off the smallest balance first, then applying that payment amount to the next smallest balance
And, always pay more than the minimum. Build an Emergency Fund Life has a way of throwing financial curve balls. To pay for these unexpected expenses, it’s important to have an emergency fund. A good rule of thumb is to set aside at least 3 to 6 months of expenses in a savings account earmarked for emergencies. This will keep the money “out of site, out of mind” and help reduce your stress level when financial emergencies pop up. Know Your Credit Score Despite its importance, many people don’t know their credit score. Credit scores assist lenders in determining the interest rate you’ll be charged, so you’ll want to know yours and work on improving it. To get your free credit report, visit www.annualcreditreport.com. Reviewing your credit report may also help you catch signs of identity theft early. Start Saving for Retirement We’ve all heard it before, but it truly is essential to start saving for retirement as early as possible. This is because you want to take advantage of compounding – generating growth not only on the original investment, but also on the return you’ve already earned on the investment over time. Compounding allows the potential for your initial investment to grow exponentially. Also, make sure you contribute at least enough to your company retirement plan to get our employer’s match. Don’t pass up free money! Create a Budget Although it’s not always fun, following a budget ensures you will have enough money for the things most important to you. A budget helps you find money to fuel your dreams. Refer to the attached Create Cash Flow* to help you put your budget together. One of the most important things to remember is to pay yourself first! Always set aside money for your emergency fund and retirement before any discretionary expenses. * a chapter from my book Ultimate Women’s Financial Guide to Thrive after Divorce   All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Posted on
house for sale Divorce has a way of completely upsetting one’s expectations for the future.  One day things are moving along just fine, and the next you are making decisions that will impact the rest of your life.  One of the big decisions is whether or not to keep the family home.  It may really be two questions: “Should I keep the house?” and “Can I keep the house?”.   Let’s consider both in turn. Whether you “should” keep the home is more of an emotional question.  What does the home represent to you?  Often it is an emotional safe haven full of good memories that you have spent years getting just right.  It could also be an emotional roadblock to moving forward with your life. “Can I keep the house?” is more of a financial question.  Will your income post-divorce allow you to maintain the house?  Will taking the house in the divorce mean forgoing other marital assets such as retirement accounts, that may be more valuable in the long run?  Perhaps keeping the house will require keeping your ex-spouse as co-owner, do you want that? Due to its functionality, your house is an asset different from a stock or retirement account.  So, in many cases, the decision is a compromise focused on the question: “How long should I stay in the house?”. If you are unsure of the best way to handle the house, there are 3 exercises that you should go through to determine your best decision or when you should expect to sell.
  • Develop a post-divorce budget to see if you can afford to keep the home. Perhaps with child support it may make sense to stay. When the kids go, the house may need to go as well.
  • Run a retirement projection to see how keeping the home will impact your retirement and other financial goals.
  • Finally, list the benefits and tradeoffs of keeping the home. The benefits may be proximity to work and school. A tradeoff may be that you are now in charge of the upkeep.
There is no doubt that a house is treated different from a retirement account. Even so, it needs to be viewed with an honest and objective lens to determine how it will influence the unfurling of your new future as you blossom into the new you.
Posted on
In Part 1, vortex was defined as: 1) a whirling mass of water or air that sucks everything near it towards its center; 2) a place or situation regarded as drawing into its center all that it surrounds, and hence, being inescapable or destructible.tropical-cyclone-catarina-1167137_1920 The second definition provides a visual for what many think a divorce “looks like.”  While the end of a marriage is emotionally tumultuous and devastating, the actual legal process of uncoupling does not have to be.  But, it is critical that you choose a process that promotes healing.  The Collaborative Process does just that. Collaboration is a holistic approach to divorce.  It can be utilized by couples who are ending either a marriage or significant relationship, or who have a child or children together.  Although some people question whether it is an appropriate process when domestic abuse or mental health/chemical dependency issues are present, many others think it can (and should) at least be attempted.  If you don’t want to be another “divorce horror story,” the Collaborative Process will likely be a great fit. Collaboration focuses on the future (i.e., the relationship of co-parenting in two homes) rather than the past (i.e. the vilification of one spouse); is a win-win for both partners (rather than a court-imposed win-lose); and emphasizes the well-being of the entire family.  You don’t air your dirty laundry in court, and you aren’t (literally) judged.  In fact, you never set foot in a courtroom.  The negotiation model is interest-based/win-win, rather than positional/win-lose.  You pay attorneys to help you solve problems, not argue and keep you stuck in the past.  Every family is unique, so every family deserves a unique solution.  And if you have young children, please keep in mind they need you present and available.  You can’t be present when you are fighting the other parent in court.  In Part 3, we will discuss the various professionals in the Collaborative Process and how their expertise can help you avoid the divortex.
Posted on
house for sale When divorcing, whether one spouse stays in the family home is often a pivotal decision.  For most, there are several considerations that go into deciding whether to sell or stay.  The tax impact of selling the marital home is unlikely to be at the top of that list, but with home values on the rise, it is worth understanding. The current tax rules are quite favorable to people realizing a gain on the sale of their home.  The IRS allows each taxpayer to avoid paying capital gains tax on the first $250,000 of capital gain on the sale of one’s residence. That means that a taxpayer filing “single” could exempt the first $250,000. A couple filing “married filing jointly” can avoid paying taxes on $500,000 in gains.  The capital gains tax on a $250,000 gain can range from $0 to about $75,000 so it is worth it for divorcing couple to make sure they cover this in their divorce arrangements. To qualify for the exemption, the IRS requires that the home meet the principal residence test, which is based on ownership, use and timing. For ownership, you need to have lived in the home for at least 2 years, (24 full months) in the 5 years before the sale.  These 24 months do not need to be continuous.  The use criteria require that the home be your principal residence for those 24 months.  This can be an issue if one spouse was employed in another city, where they kept a second residence. One spouse meets the use test, but the other does not.  Finally, the timing criteria requires that you have not excluded the gain on the sale of another home in the past 2 years. Tax law gives divorcing couples some leeway in these criteria. Transfer of home ownership between divorcing spouses is not considered to be a taxable event by the IRS. If ownership is not transferred during the divorce, detailing the home ownership arrangement in the divorce decree is key to minimizing taxes when selling the home later.  An ex-spouse that continues to be an owner of the home but does not live there, can still use the exclusion if there is written documentation in the decree that lays out this arrangement. Dealing with home decisions during the divorce can be a complex.  Be sure that in your home decision analysis, you are clear on your tax implications! And keep in mind that cabins, vacation homes and investment real estate generally will not meet the principal residence test, so they may have tax consequences when sold. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.