Financial Decisions During a Divorce

Financial Decisions During a Divorce

Dealing with your finances may be the last thing on your mind when going through a divorce, or it may be the first. Regardless of the order, deciding how the couple’s assets will be split is one of the biggest decisions the two parties will face. As such, it is important to have a strong understanding of the financial rules that are applicable during a divorce to help ensure both individuals’ financial stability before the process has been finalized. With this in mind, we share our thoughts on important considerations to keep in mind if you or someone you know finds themselves faced with the financial decisions of a divorce.

One of the most important areas to consider when deciding how to split a couple’s assets is the difference between retirement assets held in employer plans vs. assets held on an individual basis and the applicable tax rules of each account type. As long as the appropriate steps are followed, transfers incident to divorce are tax-free scenarios and will not trigger a transfer of value (recognition of tax). For accounts that are held individually, assets can be separated immediately after the divorce is finalized but should be done so carefully to avoid tax ramifications. For example, if you take a portion of your former spouse’s retirement account(s) and do not direct that amount to an IRA, you will create a tax liability based on your marginal tax rate. A way to avoid this tax liability is to use a direct rollover to transfer the funds from your former spouse’s account to yours. This method will qualify as a tax free transfer as there is no constructive receipt by the receiving party. After this transfer occurs, it is important to know that the receiver assumes the tax responsibility going forward and must adhere to IRA tax rules. For couples who split both pre-tax and post-tax accounts, the receivers can expect to maintain the benefits of the more advantageous tax situation when they start taking distributions during retirement.

When it comes to assets held in employer plans, it can be beneficial to request a Qualified Domestic Relations Order (QDRO) as part of the divorce agreement to establish your legal right to receive a designated percentage of your former spouse’s qualified plan. In the eyes of the law, any retirement assets accumulated by a working spouse during marriage are recognized as earned by both spouses. As employer provided retirement accounts predominately receive the majority of a couples shared retirement funding, it is therefore an important order to consider as part of a divorce settlement.

No matter the account type, one of the first things to be done once the assets are transferred is to update your beneficiary information on all retirement accounts. This update will allow post-death control of where your assets are directed and if left unchanged will most likely revert back to your former spouse.

The second area to pay attention to in regards to assets after divorce is the ability to utilize your former spouse’s Social Security benefits. Federal law mandates that a former spouse has a right to Social Security earnings much in the same way as they view accumulated retirement assets as shared earnings. You are entitled to 50% of your former spouse’s full retirement social security benefit if you were married to your former spouse for more than 10 years, have reached age 62 and have not remarried. The federal law also mandates that if you remarry at any time, you will lose the benefit amount.

At Yeske Buie, our goal in supporting any Client going through the divorce process is to help ensure that the financial assets they receive are handled in the most appropriate and unbiased way. It is our hope that removing the stress of finances from this emotional process will provide some peace of mind to focus on the other considerations that arise at this time. If you have any questions related to the financial decisions during a divorce either for yourself or for someone you know, please do not hesitate to contact us.