Over the next 4 weeks we will be posting tips for divorce financial settlements. Attorneys are licensed to advise and practice the laws in the state in which they reside and hold licensure in. Attorneys are not licensed to give financial advice and can risk losing their legal license if they do so. Before one enters into financial negotiations or mediation for a financial divorce settlement it is wise to seek the advice of a licensed Certified Divorce Financial Analyst (CDFA), CPA and/or Tax Advisor regarding the particular details of their family situation and potential financial/tax implications of what they are considering for final settlement terms. Budgeting for recommendations from a licensed financial professional is a far better investment in family funds to be prepared to make permanent financial decisions in a negotiation or mediation. A CPA, Tax Attorney prepared the following points of discussion included in our Transitions Divorce Prep Workbook:
Medical Insurance/Auto Insurance for minor children: After securing quotes, discuss creative options for Medical Insurance/Auto Insurance coverage of minor children, which parent should carry minor children on their policy to minimize the expense to the new post-divorce family structure and how the expense should be structured proportionately based on individual parent income.
Division of Tax Deferred Retirement Accounts (401(k), Retirement Savings): A majority of retirement accounts are pre-tax accounts. What this means is that any money you take out of the account will be subject to income tax. Therefore, the immediate cash values of these accounts are actually less than what the balance is. If you are younger than 59 ½, in most cases, an early distribution from a pre-tax retirement account will cost you a 10% penalty for an early withdraw in addition to income taxes. To transfer tax-deferred retirement account funds, a legal document called a Qualified Domestic Relations Order (QDRO) signed by your Judge is required authorizing the holding/manager of the funds to move the funds into separate accounts. The verbiage for this legal document must be supplied by the Corporation who is offering the retirement account and the preparation of these forms is usually handled by an Attorney and can be quite costly ($1000-$1500 for preparation). Since there are legal expenses related to the preparation and filing of this document, the parties should address how this expense will be handled in their financial settlement agreement.
Transfer of Stock Holdings and potential tax liability if liquidated within 12 months of division of funds: If you acquire (transfer ownership of) stock from your former spouse, you should understand the tax impact of cashing out the stocks. If you decide to sell the stock less than a year after you acquired it (took ownership), the stock will be subject to income taxes (taxed at a maximum 35% rate or more). However, if the stock is held for a year or more, it will be taxed as a long term capital gain which has a much lower tax rate which is capped (15%-tax laws may have changed). Consider having names of both spouses added to the stock accounts prior to the division of the stocks if possible (during temporary settlement period).
Remember to consider the value of Retirement Pensions and Corporate Stock Options not yet exercised that accumulated during the marriage, these are considered marital assets that have a value to be divided.
Former Wills/ Trusts Documents/Marriage Licenses and Divorce Decrees: Post –Divorce it is important to retain all originals and additional certified copies of all of the above listed documents. Often, in order to obtain retirement benefits, Social Security benefits and Death benefits of an Ex-Spouse originals or certified copies of the above specified documents are required. If the partners were married for 10 years or more, Spouses are eligible for Ex-Spouse Social Security benefits beginning at age 60.
Do you have a personal story that you can share regarding these issues? I would love to hear from you.
More financial settlement advice and tips in Transitions Divorce Prep Workbook
Disclosure of Material Connection: I have not received any compensation for writing this post. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR. Part 255: “Guides Concerning the Use of endorsements and Testimonials in Advertising.”
Disclaimer: This is my personal blog. The opinions I express here do not necessarily represent those of my organization, Transitions Resource, LLC. The information I provide is on an as-is basis. I make no representations as to accuracy, completeness, suitability, or validity of any information on this blog and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its use.