Cross Roads Divorce Advisors

Beneficiary Designation Post-Divorce: Watch Your Timing

louf — Mon, 06 May 2019 11:00:15 +0000

Many people will negotiate the date on which they will take status as single individuals for tax or other purposes. Waiting until January 1st of the year following the separation may be mandated by state-instituted waiting periods, income tax planning, insurance eligibility, or any number of other practical financial considerations. This complication provides a perfect example of an unintended consequence of negotiations: if a specific status date is negotiated into an agreement, it may have unintended consequences on a client’s financial future.

Here’s an example.

The final divorce agreement for our client, Jane Smith, was filed with the court on June 30, 2012. Part of her agreement with her ex-husband, John, says they will take status as single individuals on January 1, 2013. This was done because the couple’s tax preparer advised them that they could save $2,000 in federal taxes by filing their tax return married jointly for the current year (2012).

From the federal government’s perspective, the couple remains married for the whole year – even though they have completed their financial settlement.

The agreement awards 50% (~$600,000) of John’s 401K account to Jane via a Qualified Domestic Relations Order (QDRO). In order to receive the funds, we are opening a Rollover IRA account in advance of the QDRO in Jane’s name. This way, we can tell the 401K plan administrator exactly where the funds should go and avoid any potential hiccups in the transfer process. Remember that state law, federal law, or custodian policy requires an individual name their spouse as beneficiary of retirement funds, and our client is not yet officially divorced.

As CDFA™ professionals experienced in the intricacies of account transition, we will inform Jane that she has three options to remedy the situation and at least one to make it worse.

1. Obtain the former spouse’s signature on a Spousal Consent for the new account paperwork.

John must effectively agree to allow Jane to name her children as the beneficiary of the funds she was just awarded in the divorce.

Client Quote: “You mean I just spent 18 months and $50,000 fighting over this money and I still need his permission to do what I want with my money?!”

Practical Consideration: What if the relationship has deteriorated to the point where John refuses to agree to the change in beneficiary? It may cost thousands of dollars in attorney fees to force her to do so.

Practical Consideration: What if Jane doesn’t want John to know who her financial advisor will be post-divorce?

2. Name the former spouse as beneficiary temporarily.

In bad circumstances, when a couple no longer communicates at all, it may be advisable to simply name the former spouse as beneficiary with the intent of modifying this as soon as the judgment is final.

Client Quote: “You mean we have come all this way and I have to keep him as my beneficiary and he will inherit my money if I die?!”

Practical Consideration: What if we decide to postpone but somehow forget to change the Beneficiary Designation once the judgment is final? Does the judgment awarding the 50% to Jane protect her?

Practical Consideration: What if something happens while the judgment is pending? Who inherits Jane’s money?

3. Delay the transfer of funds.

QDROs take time: The QDRO cannot be carried out until the final judgment is signed by a judge, and it is rare to see a QDRO completed in close proximity to a judgment of dissolution.

Client Quote: “But you said ‘Taking Control Now’ was the most important part of my financial transition after the divorce! Now you are telling me to wait?! Wait for what?!”

Practical Consideration: So, what is the harm in waiting? Our major concern is the management of investments inside of the account. When transfers are delayed, the funds are often managed by the former spouse or by an investment advisor my client has explicitly chosen not to work with. I recently had a client tell me they would never invest in such a risky asset as the Facebook Initial Public Offering (IPO). Imagine her shock when I showed her the most recent account statement for her joint brokerage account and her investment advisor had purchased 3,000 shares of Facebook in the IPO! The advisors used by a couple during marriage are rarely appropriate for both parties – particularly the woman – to work with after a divorce. Either they will be aligned with one party, unfamiliar with the specific needs of a newly-divorced woman, or unable to provide the necessary services. On top of that there is often a lack of trust. Without trust, an investment advisor has no business working with an individual.

Practical Consideration: I have seen investment accounts lose half of their value during dissolution proceeding. Guess who gets blamed for the losses? Usually the former spouse – which means the client may not trust anything they have to say and turn into thousands of dollars of additional unnecessary discovery efforts.

Practical Consideration: We may want to obtain Authorization and Consent from the former spouse for our client to take over managing her portion of the funds.

4. Ignore the problem.

We certainly would not recommend this option – and we would also be remiss if we failed to mention the ramifications of doing so.

Client Quote: “He has been jerking me around and lying to me for years. What is the worst that could happen?”

Practical Consideration: We actually don’t know what the ramifications would be of disobeying from a legal perspective.

Practical Consideration: We do know if no spousal waiver has been obtained, the default plan beneficiary will be the participant’s spouse, even if he is not the named beneficiary. US District Courts have affirmed this. In this particular case, John – not Jane’s chosen beneficiaries: her children – would inherit the retirement funds if Jane should pass.

Practical Consideration: There is a bit of uncertainty and disagreement amongst experts whether these rules are equally as hard-and-fast with IRA accounts as they are with 401K accounts. The presence of uncertainty makes experienced financial advisors plan for the worst-case scenario, so ignoring the precedent is never presented as an option for our clients.

The financial transition following divorce offers the opportunity for clients to remake their financial lives in a way that supports their ongoing comfort, security, and dreams. Most importantly, it offers the opportunity to take control of their finances as a single individual and throw off the constraints of a power-struggle now terminated by a judgment of dissolution.

The complications of such simple things as paperwork, as evidenced above, can have prolonged and lasting effects when the power-struggle continues after the financial agreements are reached. Enlisting the services of an experienced CDFA™ professional during the process will help ensure your clients obtain the most financially advantageous settlement possible and support their financial independence far beyond divorce negotiations.

At Cross Roads Divorce Advisors, we are experts in the field of Divorce Financial Planning. Contact us today for an experienced and professional guide through your post-divorce transition and help considering your beneficiary designations.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

Lou Falvo is a Certified Divorce Financial Analyst® and CIMA® (Certified Investment Management Analyst) who assists clients by evaluating the tax and financial aspects of divorce. Lou is dedicated to reducing the burden of each client by thoroughly examining the financial elements of the client’s divorce, with a keen focus on what is in his or her best interests. Contact Lou to find out how he can assist you with your divorce proceedings at lfalvo@crossroadsdivorce.com or (585) 542-2382.

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Beneficiary Designation: How Should a Client Proceed After Divorce?

louf — Mon, 22 Apr 2019 11:00:12 +0000

It’s natural for clients to want to move on with their lives as quickly as possible after they complete the financial negotiations of their divorce; moving on includes taking control of their own finances.

We regularly engage with clients to complete these items and there is one simple (to us) but infuriating (to clients) road-block that almost all face: changing or naming beneficiaries in the event of the client’s death.

The first steps after divorce should include opening new retirement accounts; in most cases, this will be an IRA. New account paperwork for an IRA contains a section for beneficiary designations – the party who would inherit the account funds in the event of the account owner’s death.

While married, most people want their spouse to inherit the funds in their retirement accounts; after divorce, however, the last thing they want is for their former spouse to inherit the funds in their retirement accounts should they pass on. They will often want to change beneficiary designations to their children or siblings.

Not so fast, though.

If you live in a community property or marital property state, the client will need to obtain a signed consent from their current spouse to name someone else as beneficiary. In fact, most financial institutions require a spousal consent for a non-spouse beneficiary designation regardless of where the IRA owner resides. Experts believe this is simply a policy protection from beneficiary-related litigation for custodians.

Depending on a number of factors – including the divorce agreement – retirement savings accounts such as IRAs and 401Ks may require your client’s former spouse to remain the beneficiary even after they have reached agreements around the division of assets.

There is a long list of things to do in order to take control of post-divorce finances that are beyond the scope of this article. Our best suggestion is to enlist the services of an experienced Certified Divorce Financial Analyst® (CDFA™) professional before the divorce is final to ensure that the final agreement does not have negative long-term consequences.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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Should You be the One Who Moves After Your Divorce?

louf — Mon, 08 Apr 2019 11:00:52 +0000

This piece was provided by Joyce Fine, PhD, Licensed Clinical Psychologist, Certified Divorce Coach, Collaborative Divorce Facilitator in Denver, CO. Dr Fine specializes in psychotherapy with adults, couples, and families, provides psychological evaluations, and works as a coach with individuals and couples deciding whether or not to divorce or those going through divorce to help them make the best decisions possible for all family members.

A Changing Family

I recently met with a couple who wanted recommendations for how to talk with their two young children about their upcoming separation, ideas about setting up their parenting schedule once they separated, and support in moving forward with their separation.

During our third meeting, the wife, whom I will call Katy (no real names are used herein) was very frustrated. She was ready to separate. Her husband, whom I will call Alex, was not. He had hoped they would be able to work out their marital differences. Alex needed more time to digest the reality that Katy had made up her mind and her decision was set.

Ultimately, they were both attached to their home. It represented the foundation of their family and the emotional stability it had offered them. Neither wanted to let it go in the face of the instability and colossal transition they were about to step into, or to be the one to set up a new place with their children, since they both thought that the children would like a new place less, that the children would be less comfortable in a new place, etc.

Many divorcing moms feel that it is their right as the mother of their children to stay in the marital home and a lot of divorcing dads agree to that precedent. In Alex and Katy’s case, Katy was set on leaving the marriage and Alex did not want her to go. In asking him to leave their home, she was asking him to do something that he felt was completely against his own self-interest while their crumbling marriage was already shattering his identity, his hopes for their family’s future, and taking him in a direction that he deeply did not want to go.

Their options

We processed why Katy felt that Alex ought to be the one to move out. The more we talked about it, and came up with “atypical” options, she was able to understand the benefits of her moving from the home:

She could set up a place free of their marital disappointments.
She would be leaving Alex’s imprint behind.
Moving out might enable her to start a new life more freely and fully.

Alex and Katy came in for their next appointment two weeks later. By then, she had signed a lease for an apartment and was set to move in a few days. While Alex was still heartbroken and angry, he was relieved that the discussion of him moving out was over and that he would be able to stay in their home. Her moving out also appeared to enable him to negotiate future decisions with less agitation and sense of powerlessness.

Often, divorcing parties are driven by fear and anger in ways that obscure their ability to think openly, clearly, and flexibly, and they reach toward “common” ways that they have heard divorces are facilitated. This can keep them entrenched in defensive thinking that interferes with decision-making that is best for them and their family. Working with couples to come to the other side of defensive or frightened thinking is critical to their families’ well-being and opens pathways to collaborative movement forward.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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Does Spousal Support Affect Social Security Benefits?

louf — Thu, 04 Apr 2019 18:22:35 +0000

With the increase in “gray divorce,” we are sometimes involved in cases with an individual or couple who is already receiving Social Security benefits. These benefits are also an important consideration when someone is receiving need-based Supplemental Security Income (SSI). Here’s why.

Social Security Retirement Benefits

Social Security Retirement benefits are entitlement; this means you have to have paid into the system in order to be eligible for benefits. You are ENTITLED to a certain amount of funds in return based up on your contributions while working. These benefits are entitlement based and not subject to reduction based on income from spousal support.

Benefits may be reduced by income from earnings if the recipient is under the normal retirement age when they receive benefits. Benefits may also be reduced for taxes and or Medicare premiums. This can be determined by reviewing the participants pay-stub.

Supplemental Security Income

Supplemental Security Income (SSI), also a Social Security benefit, is a needs-based program which means you must prove you NEED the funds because of limited resources. It is, to our knowledge, reserved for those who did not contribute enough into the system to be eligible for the entitlement-based programs. Supplemental Security Income has income limits for eligibility because it is NEED based. A participant’s eligibility can be affected if they earn over a certain level of income or receive support payments, so it is very important to recognize the difference in your divorce financial planning.

Here is the link to the Social Security Administration web site http://www.socialsecurity.gov/pubs/10069.html#a0=-1 . A Certified Divorce Financial Analyst can help you navigate the many complications of the Social Security programs.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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Let’s Clarify the Changes to Dependency Exemptions and Child Tax Credits

louf — Mon, 18 Feb 2019 18:21:07 +0000

With the 2018 implementation of the Tax Cuts & Jobs Act, it’s natural that questions should arise about changes and new rules – especially regarding dependency exemptions and Child Tax Credits in relation to divorced parents.

People are confused because they might have heard that the dependency exemption went away. Yes, that is kind of true…but not really.

Here’s what you need to know

The monetary piece of the dependency exemption has gone away, but the concept of the dependency exemption has not.
The Child Tax Credit is tied to the dependency exemption. So, whomever can take the dependency exemption (same as before) can take the Child Tax Credit.
You can alternate it between parents once divorced, but you cannot split it. You can trade the child tax credit back and forth each year. It also might be necessary for the parents to file Form 8332.
If a party makes over $200k per year (filing single or HOH), they start getting phased out, with a full phase out at $240K.
Keep in mind that being able to file as Head of Household is a separate subject. You can have a situation where a parent cannot claim HOH but gets the Child Tax Credit because that is what was agreed to.

There is some confusion about this, but it is quite simple: Nothing has changed in the new tax law as far as claiming a child as a dependent. It’s the same as it always has been. You can still trade the dependency exemption back and forth each year. There is just no monetary piece of the dependency exemption anymore. However, there is a monetary piece to the Child Tax Credit. (Keep in mind that this can only be claimed as long as the child is NOT 17 by December 31^st of any given year.)

We understand that there is a lot of misinformation out there regarding what has changed and what hasn’t. Cross Roads Divorce Advisors is here to help answer any questions about this or any other issue you might be having regarding the financial aspect of divorce.

For more information click here for the Department of Treasury’s Dependents, Standard, Deduction, and Filing Information.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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What Happens to Spousal Support after the Death of the Payor?

louf — Mon, 04 Feb 2019 11:16:47 +0000

It’s hard to believe that it could ever happen to you and your family: the death of an ex-spouse.

While this not only involves a complicated grieving process, from a practical standpoint it can completely change your life if that spouse was responsible for financial support.

Here’s what you should know

Spousal support must cease upon the death of the recipient in order for it to be considered spousal support for tax purposes and tax deductible to the payor. Spousal support can be paid after the death of the payor, typically from their estate in some form, but most settlement agreements and divorce decrees state that it will stop upon the death of either spouse.

Protect yourself and your family

We suggest the payor spouse be required to carry a life insurance policy to cover the lost cash flow for the payee spouse in the event of premature death. If this isn’t required in your settlement you should ask for it to be added. In the event the agreement cannot be modified you should consider buying the policy on your former spouse yourself. You will have to pay for it, but the peace of mind is worth the cost.

In order to determine the death benefit amount needed you would do a present value calculation on the stream of cash flow from the spousal support payments: A $5,000 per month spousal support payment payable for 10 years would have a present value of $471,540.

No matter the route you take for insuring the payments make sure you, the support recipient, are both the owner and beneficiary of the life insurance policy. Losing the cash flow from spousal support can have devastating effects on your ability to maintain your lifestyle.

Need help determining how much life insurance is appropriate for your situation? Cross Roads Divorce Advisors can help you with this very necessary step in divorce financial planning.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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Over 50 and Thinking about Divorce? Here’s what you Should Know

louf — Mon, 28 Jan 2019 11:15:48 +0000

Simply put, the older you are when you divorce the lower your chances of recovering from any mistakes you make during the financial settlement process. It is critical for anyone over 50 to concentrate on the long-term financial planning implications of the settlement. You will have to live with the results the rest of your life.

With gray divorce on the rise—the divorce rate for adults over 50 has doubled since the 1990s, according to the Pew Research Center—both partners need to understand how to correctly split up retirement plans and other assets. One partner may offer to be generous, but that’s not necessarily helpful. You need to follow specific rules for dividing 401(k) plans and IRAs, or one partner could take an unnecessary financial hit or face an unexpected tax bill. And the closer you are to retirement, the more crucial it is to get it right.

Kiplinger

If you are over 50 and thinking about divorce you should answer 5 simple divorce financial planning questions along the way towards your financial settlement.

Do I have all the information to make good financial decisions?
Can I maintain my standard of living for the rest of my life?
If not, what has to change?
Can I live with it?
How can I take control of my financial future now that I am suddenly single?

Given the complexities of divorcing as an older adult, we urge you to consult with a financial professional before making any final decisions. Cross Roads Divorce Advisors is here to help you through this process.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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Divorce Mediation: Leveling the Financial Playing Field

louf — Tue, 22 Jan 2019 00:40:54 +0000

It is common for one party to hold all the cards when it comes to financial knowledge and power in a marriage. We have the economic theory of comparative advantage to thank for this reality.

Comparative Advantage

Comparative advantage at its simplest says the person most suited for a task should be the one to perform it or risk wasting valuable economic resources. In a marriage this means the spouse most skilled in financial management, most interested in financial issues or most concerned about their financial future will take over management of the family finances. Sometimes, especially in the marriages of two busy professionals, it comes down to simply giving the tasks to the spouse who has the time.

Trust is abundant during happy marriages and the non-managing spouse will often not be a part of the day-to-day budget and investing decisions, instead choosing to trust their spouse has it all under control.

Like it or not, this kind of decision-making creates a power imbalance unless the couple regularly works together to keep one another in the loop. Unfortunately, we know from experience this rarely occurs. We also know from experience and research that financial disagreements are the most common disagreement leading to divorce.

We have to keep in mind all of the emotional undertones of money. Money means power, safety and security and allows American families to buy, borrow and save for the things they believe will make their lives and the lives of their children more comfortable such as nice homes, iPads, automobiles and organic food.

When a power imbalance begins to develop, these emotions start to come to a head. A woman anxious about her family’s financial security may start to remedy the power imbalance later in life by asking the questions she never cared to ask before.

How much is in our retirement savings accounts?
How are the funds invested?
Are we on track?
Do we have a financial adviser we trust?

A man anxious about how the family bills are paid may want to engage in tasks previously left to his wife.

Can I look at our budget?
How much credit card debt do we have?
How much do we spend every month?

Marriages end when these questions begin to come up because many couples lack the tools to navigate the difficult conversations, especially when one person’s expectations are not met when they get answers.

Divorce Mediator’s Job

When one party in a divorce holds all the financial data and knowledge it creates a major power imbalance. A divorce mediator’s job is to level the playing field for the couple. What may have been acceptable during marriage when trust was prevalent doesn’t pass muster in divorce financial planning. In order for a couple to successfully navigate a divorce mediation they must have the same information from which to make decisions. Transparency must be mandated by the divorce mediator and the mediator must help to create this transparency where necessary. This may mean

assisting in the gathering of financial data and documents,
facilitating conversations between the parties,
engaging other financial professionals to assist in educating clients to level the playing field

If a mediator is unable to provide this balance of power and create a level playing field for clients to operate from in a divorce mediation the parties may struggle to meet minds on the financial picture. You may even start to distrust the other’s intentions and leave the divorce mediation process seeking an advocate who will level the playing field through formal financial discovery such as depositions and subpoenas.

Cross Roads Divorce Advisors Can Help

If you are navigating mediation and feel at a disadvantage when discussing financial issues, Cross Roads Divorce Advisors can act as a consultant to the divorce mediation process and help to level the playing field so you can negotiate the most financially advantageous settlement possible.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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5 Things You Should Know about Divorce Mediation

louf — Mon, 14 Jan 2019 21:34:28 +0000

The concept of divorce mediation has proliferated in America in the last thirty years as divorcing parties have realized that divorce court should be an option of last resort. divorce mediation supports the decision making of the people whose lives are actually affected by the decisions and allows divorcing individuals a sense of control of the outcome IF it is done right.

Divorce mediation is a delicate process. Here are some things you should know:

Divorce Mediation Defined:

Just because you resolve your differences outside of court does not mean you are engaging in divorce mediation. Mediation is a process where a neutral facilitator guides a couple through decision making around legal, emotional and financial issues that must be resolved in a divorce. Most divorce cases resolve outside of a court room in settlement conferences, collaborative divorce of formal settlement proposals via letters between legal counsel. Couples need to understand that divorce mediation is not the only way to resolve their differences outside of court. Many will be better served by a process where they have legal counsel actively engaged which usually does not occur in Mediation.

Balance of Power:

Too much power on one side of the table creates an unsafe environment. The power could be due to the marital dynamic, control of financial resources of access to information. A skilled divorce mediator will recognize the power imbalance together with the dynamic creating it and set out to level the playing field.

Safe Container:

Lack of a safe container leaves couples feeling lost in the ambiguity of a complicated decision-making process set a midst a legal dispute. A skilled divorce mediator will insure the couple is constantly apprised of where they are in the process, next steps in the process, homework assignments to be completed and time-lines for their completion and maintain an awareness for the parties of the legal process they are engaging in.

The Mediator:

Divorce mediation is a process that can be taught. What cannot be taught is the human dynamic that occurs during the process. The New York State Council on Mediation has been Accrediting members since 1986; it is important to engage a mediator with experience and training specific to divorce.

Costs:

Beware the flat fee divorce mediation. It is an unfair expectation to set a client up for. Often the professional will reach the extent of the time they have allocated for the flat fee and ask for more money or begin to dis-engage and abandon the parties before the divorce mediation process has been completed.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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Retirement Plans & Pensions: Are they marital assets?

louf — Mon, 17 Dec 2018 12:00:58 +0000

Retirement plans are marital assets subject to division to the extent they were earned during the marriage. State laws differ on how to determine exactly what “earned during marriage” means so be sure to check with a local expert.

In order to earn pension benefits a worker must be employed and participating in the plan.

In order to participate in a 401K plan the worker must make contributions to the plan by deferring wages from his or her regular paycheck.

Since both examples would require the participant to earn their benefit in one form or another, either time in the pension plan or contributions to the 401K, these earnings are considered community property or martial assets and will typically be divided 50/50 unless there are other extenuating circumstances, or the parties agree otherwise.

Be careful, though, to make sure you are dividing apples with apples as retirement plans are pre-tax money where as other assets may have already been taxed. The difference in value between $100,000 pre-tax and $100,000 after tax could be $20,000 or even $50,000.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.

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