Georgia Family Law Blog

Divorce: Counting Money Gets Tougher

Dividing up assets in a divorce is hard enough already. Now, it's getting tougher to count the money.

The popularity of hedge funds, stock-option grants and other investments that can be tricky to value is giving warring spouses something new to fight over. At the same time, the IRS is keeping a sharp lookout for cases where two separate taxpayers both claim the kids as dependents, a big no-no.

The list of potential blunders facing splitting spouses is head-spinning: Dividing a stock portfolio the wrong way can trigger vastly unequal capital-gains-tax hits. Overlooking the mysterious QDRO form (pronounced "KWA-dro") can make a mess of dividing a 401(k).

All of this is proving to be a boon to the nascent industry of "certified divorce financial analysts." For fees of $150 to $250 or so an hour, these advisers help to navigate the economic aspects of divorce, as opposed to the legal issues like custody that are the domain of divorce lawyers.

In recent years, about 2,500 of these divorce specialists have been trained, according to the Institute for Divorce Financial Analysts, with new registrants increasing about 25% a year. Financial-services giants including Merrill Lynch & Co., Morgan Stanley and Ameriprise Financial Inc. have them on staff as well. Many are listed at www.institutedfa.com.

Five Tips to Protect Your Retirement Assets in a Divorce

When it comes to splitting assets during a divorce, the house and retirement funds are usually the biggest. As the housing market tumbles, retirement assets are taking center stage.

But deciding who gets what and how much when the Golden Years roll around can be tricky.

“That old saying that 'the devil is in the details' is especially true when it comes to dividing up retirement assets in a divorce,” said Martin Shenkman, a lawyer in New Jersey. “After all the trauma of a divorce, people don’t want to do the detailed paperwork, but you need to."

Retirement funds accrued during the marriage, are considered marital assets and are hard to get excluded from a divorce settlement. "It is generally up to the person claiming a different designation to prove it in court," said Maury Beaulier, an attorney based in Minneapolis, Minn.

What Your Ex-Spouse is Entitled to

Your marriage could have ended more than 20 years ago, but your ex-spouse may still be entitled to part of your retirement. 

If a marriage laster longer than 10 years, your ex can claim Social Security at a rate of spouse contribution. Social Security is not usually addressed during a divorce, but it's good to know that they can be entitled to part of it.

"An unmarried, divorced spouse is entitled to 50% of [her/his] former spouse's Social Security starting at age 62," said Clay Caldwell, a certified financial divorce practitioner.

The law sees marriage like a contract or starting a business partnership, Beaulier said.

“When two people get together, each owns 50% of a business--even if one sits at home--so the theory is the efforts of a homemaker to marriage is just as much as the person in the workforce,” said Beaulier. 

The type of fund doesn't matter: Whether it's a pension, 401(k) or profit-sharing agreement, it will most likely be split up in your divorce settlement.

The best way to split up qualified accounts like 401(k)s and ESOPs is to use a Qualified Domestic Relations Order [QDRO] in your settlement. A QDRO establishes what each party is entitled to designates the amount of tax each party pays on the account.

Choosing not to use a QDRO is risky and can leave you paying taxes on money distributed to your ex.

Splitting your retirement can be as complicated as splitting hairs, and making a wrong decision could cause a financial disaster in your vintage years. Here are five ways to protect your retirement nest egg:

What you should know about QDROs

A Qualified Domestic Relations Order (QDRO) is a legal document that directs the administrator of a pension plan to give a certain amount of an employee's pension to his/her non-employee ex-spouse after the divorce is final. Here are the top four mistakes people make when it comes to QDROs.

By The Institute for Certified Divorce Financial Analysts

Consider this scenario: husband and wife happily sign the divorce decree, relieved that the divorce proceedings are finally over. The settlement agreement states, "All retirement assets will be equally divided between the parties."

Fast-forward three months. The parties jointly retain a Qualified Domestic Relations Order (QDRO) expert to draft the documents dividing up the retirement plans. Uh oh. His pension is a non-qualified plan and can't be divided. Her 401(k) has dropped in value by $50,000 -- what was the official division date? The divorce decree doesn't say. Are supplements, temporary benefits, and cost-of-living adjustments on both parties' pensions to be included or excluded? The divorce decree doesn't say.

Sadly, this is an all-too-common situation. It's common because there is much confusion in the legal community regarding pension and retirement plans in general and, more specifically, QDROs. QDROs have only been in existence since 1984. Exposure to increased liability has increased steadily amongst family-law practitioners as attorneys struggle with untangling the pension maze. This article attempts to shed some light on the most common mistakes and ways to avoid them.

Glossary of QDRO Terms

The following terms may be useful in understanding division of retirmenet benefits through Qualified Domestic Relations Orders (QDRO's).

SOURCE: Pension Benefit Guaranty Corporation

Drafting Qualified Domestic Relations Orders

What is the best way to divide a participant's pension benefits in a QDRO?
There is no single best way to divide pension benefits in a QDRO. What will be best in a specific case will depend on many factors, including the type of pension plan, the nature of the participant's pension benefits, and why the parties are seeking to divide those benefits.

In deciding how to divide a participant's pension benefits in a QDRO, it is also important to consider two aspects of a participant's pension benefits: the benefit payable under the plan directly to the participant for retirement purposes (referred to here as the retirement benefit), and any benefit that is payable under the plan on behalf of the participant to someone else after the participant dies (referred to here as the survivor benefit). These two aspects of a participant's pension benefits are discussed separately in this booklet only in order to emphasize the importance of considering how best to divide pension benefits.

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How much can be given to an alternate payee through a QDRO?
A QDRO can give an alternate payee any part or all of the pension benefits payable with respect to a participant under a pension plan. However, the QDRO cannot require the plan to provide increased benefits (determined on the basis of actuarial value); nor can a QDRO require a plan to provide a type or form of benefit, or any option, not otherwise provided under the plan. The QDRO also cannot require the payment of benefits to an alternate payee that are required to be paid to another alternate payee under another QDRO already recognized by the plan.

Reference: ERISA §§ 206(d)(3)(B)(i)(I), 206(d)(3)(D), 206(d)(3)(E); IRC §§ 414(p)(1)(A)(i), 414(p)(3), 414(p)(4)

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Why are the reasons for dividing the pension benefits important?
Generally, QDROs are used either to provide support payments (temporary or permanent) to the alternate payee (who may be the spouse, former spouse or a child or other dependent of the participant) or to divide marital property in the course of dissolving a marriage. These differing goals often result in different choices in drafting a QDRO. This answer describes two common different approaches in drafting QDROs for these two different purposes.

One approach that is used in some orders is to split the actual benefit payments made with respect to a participant under the plan to give the alternate payee part of each payment. This approach to dividing retirement benefits is often called the shared payment approach. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status. This approach is often used when a support order is being drafted after a participant has already begun to receive a stream of payments from the plan (such as a life annuity).

An order providing for shared payments, like any other QDRO, must specify the amount or percentage of the participant's benefit payments that is assigned to the alternate payee (or the manner in which such amount or percentage is to be determined). It must also specify the number of payments or period to which it applies. This is particularly important in the shared payment QDRO, which must specify when the alternate payee's right to share the payments begins and ends. For example, when a state authority seeks to provide support to a child of a participant, an order might require payments to the alternate payee to begin as soon as possible after the order is determined to be a QDRO and to continue until the alternate payee reaches maturity. Alternatively, when support is being provided to a former spouse, the order might state that payments to the alternate payee will end when the former spouse remarries. If payments are to end upon the occurrence of an event, notice and reasonable substantiation that the event has occurred must be provided for the plan to be able to comply with the terms of the QDRO.

Qualified Domestic Relations Orders

What is a Qualified Domestic Relations Order?
A qualified domestic relation order is a domestic relations order that creates or recognizes the existence of an alternate payee's right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a pension plan, and that includes certain information and meets certain other requirements.

Reference: ERISA § 206(d)(3)(B)(i); IRC § 414(p)(1)(A)

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What is a Domestic Relations Order?
A domestic relations order is a judgment, decree, or order (including the approval of a property settlement) that is made pursuant to state domestic relations law (including community property law) and that relates to the provision of child support, alimony payments, or marital property rights for the benefit of a spouse, former spouse, child, or other dependent of a participant.

A state authority, generally a court, must actually issue a judgment, order, or decree or otherwise formally approve a property settlement agreement before it can be a domestic relations order under ERISA. The mere fact that a property settlement is agreed to and signed by the parties will not, in and of itself, cause the agreement to be a domestic relations order.

There is no requirement that both parties to a marital proceeding sign or otherwise endorse or approve an order. It is also not necessary that the pension plan be brought into state court or made a party to a domestic relations proceeding for an order issued in that proceeding to be a domestic relations order or a qualified domestic relations order. Indeed, because state law is generally preempted to the extent that it relates to pension plans, the Department takes the position that pension plans cannot be joined as a party in a domestic relations proceeding pursuant to state law. Moreover, pension plans are neither permitted nor required to follow the terms of domestic relations orders purporting to assign pension benefits unless they are QDROs.

Reference: ERISA §§ 206(d)(3)(B)(ii), 514(a), 514(b)(7); IRC § 414(p)(1)(B)

Dividing Pensions: Separate Interest vs. Shared Interest

When dividing a Defined Benefit Plan (Pension) in a divorce case, the QDRO can be drafted using either a “Shared Interest” approach or a “Separate Interest” approach. The main difference between the two is that Separate Interest is based on the Alternate Payee’s lifetime and Shared Interest is based on the Participant’s lifetime. Below are some pros and cons of each approach:

SEPARATE INTEREST

•   Adjusts the amount of the award to be paid over the lifetime of the Alternate Payee rather than the Participant’s lifetime.
•   “Post-retirement” survivorship language for the benefit of the Alternate Payee is not required, because he or she is automatically guaranteed a lifetime of actuarially-adjusted benefits.
•   It is still necessary to include “pre-retirement” survivorship language to secure the Alternate Payee’s right to benefits in the event of the Participant’s death before retirement.
•   The Alternate Payee can choose to begin receiving benefits at a different time than the Participant.
•   If the Alternate Payee is much younger than the Participant, this approach is not favorable.
•   If the Alternate Payee predeceases the Participant, the benefit may revert back to the Participant or just disappear.

SHARED INTEREST

•   Benefits are adjusted over the lifetime of the Participant.
•   Must have pre- and post-retirement survivor language in the QDRO to secure the benefit for the Alternate Payee in the event that the Participant dies first.
•   Only method allowed if the Participant has already retired.
•   In the event that the Alternate Payee predeceases the Participant, the benefit reverts back to the Participant (if allowed by the plan).
•   Participant must begin receiving benefits before the Alternate Payee may receive benefits.
•   If the Alternate Payee is younger, he or she will receive more benefits using this method since the benefit is actuarially based on the Participant’s life expectancy.

Property settlements should spell out the terms of the division of the pension. It is not uncommon to see agreements containing clauses such as “the pension will be divided between the parties.”  Unless survivorship issues are agreed upon and put into the agreement, it is likely that one may be forced to use the Separate Interest approach, which may not be consistent with best interests.

SOURCE: DivorceNet

Tax Issues Related to Qualified Domestic Relations Orders and Divorce

An increasingly large portion of the assets of married couples consist of rights to payments and stock from pension plans. In many states such assets are subject to division during a divorce. Divorce and division of property are generally controlled by state law, but pension plans are controlled by federal law in many respects.

Pension Plans and ERISA
A major advantage of saving for retirement through a pension plan is that contributions from employees and employers for plans such as a 401(k) plan are not taxed as income until distributed by the plan, usually after retirement, at lower tax rates. However, under provisions of the Federal Internal Revenue Code, the assignment of pension benefits, including transfers to a spouse during divorce, may result in the loss of such tax benefits.

Glossary of Pension and Retirement Terms

The following is a glossary of terms related to pensions and retirement plans, which are often significant assets in a divorce case.

SOURCE: Pension Appraisers

Present Value Calculation Versus Deferred Distribution of Employee Stock Options

In an issue of national interest, the Pennsylvania Supreme Court in Fisher v. Fisher [769 A.2d 1165 (Pa. 2001)] held that employee stock options are not suitable for present value calculation and recommended deferred distribution. Since employee stock options are normally nontransferable, any domestic relations order would be on an asifwhen basis, with the employee spouse paying the nonemployee spouse his or her share when the option is executed. Thus, the domestic relations order amounts to a contract between the parties binding them after the divorce. This is very different from a qualified domestic relations order (QDRO), where the order is served on the plan, not on the employee, and the parties are separated. Even though the court discussed the fact that binding the parties is not desirable, it decided that immediate offset did not apply for stock options, since execution of the option is merely an expectation without a real value.

Comparison to Pensions

The nonemployee spouse (wife) argued that unvested stock options are similar to an unvested pension and may be valued as such. In Pennsylvania, a pension may still be present valued even if not vested. There are, however, many issues besides vesting in terms of the valuation of stock options. In essence, a stock option is much more speculative than a pension, and this is why the Pennsylvania Supreme Court found the options to be an expectation. Even if the stock options were vested, there still is an assumption of future service in the valuation of stock options. This is due to the nature of stock options. The option has an expiration date after which it cannot be exercised. It also has a strike price at which the owner buys the stock under the options. If the stock price exceeds the strike price before the expiration date, the option can be exercised by selling the stock, assuming the strike price exceeds the strike price of the option. The BlackScholes algorithm (mathematical method) uses the expiration date, the current price, the strike price, and the stock volatility (amount of fluctuation) to arrive at the BlackScholes value of the option. The higher the BlackScholes value, the more likely the stock is to exceed the strike price before the expiration date. Thus, applying the BlackScholes algorithm to an employee stock option assumes that the employee will stay with the company until the expiration date of the option. If the employee leaves, he or she forfeits the option.

QDROs and Child Support

According to the provisions of the Employee Retirement Income Security Act (ERISA), qualified domestic relations orders (QDROs) can be utilized for one of three distinct purposes: (1) to provide property rights to a spouse or former spouse; (2) to provide child support to a spouse, former spouse, child, or other dependent of a participant; and (3) to provide maintenance to a spouse or former spouse of a participant.

While QDROs are most associated with the division of the parties’ respective property interests in a pension, they are also an effective tool for the collection of past-due child support or maintenance. In fact, Section 414(p) of the Internal Revenue Code references domestic relations orders for child support first and for property settlement purposes second.

In order for a QDRO to be approved by the plan administrator, it must include the name of the alternate payee. An alternate payee can be a spouse, former spouse, or dependent child of the participant.

Whenever the spouse or former spouse is named as the alternate payee, such spouse or former spouse will be taxed on the QDRO distribution. This is true even if the QDRO was drafted for child support arrearage purposes.

If your QDRO is for child support purposes, you may want to consider listing the child as the alternate payee in the QDRO itself, rather than naming the participant’s former spouse. When the child is named as the alternate payee, the participant will be taxed on the distribution.

Of course, QDROs work only if the parent participates in an ERISA-governed retirement program, such as a 401(k) plan or pension plan.

SOURCE: DivorceNet

No Agreement on Use of QDRO, No Error in Not Including It - Sweat v. Sweat

In Sweat v. Sweat, the Supreme Court of Georgia automatically granted husband’s application for discretionary appeal pursuant to the Domestic Relations Pilot Project. In his application, Husband "appeals his final judgment and decree of divorce (‘decree’) entered pursuant to a jury verdict and the denials of his ‘Motion to Set Aside Judgment,’ ‘Motion for New Trial,’ and ‘Motion to Partially Amend or in the Alternative Reconsider Decree to Correct Omission of QDRO and as to Retirement Plan and Alimony Issues’ in regard to the decree."

The jury awarded wife 43% of the husband’s retirement account. The jury did not detail how this division was to be accomplished for the purpose of tax treatment. The parties discussed the use of a Qualified Domestic Relations Order ("QDRO") to attempt to mitigate tax consequences of the transfer. However, the trial court did not provide for a QDRO in the decree. Even though the husband stated more than once the desire to use a QDRO to pay out the wife’s portion of the retirement fund, he also indicated, at various points in the lengthy colloquy among the trial court, the attorneys for the parties, and the husband, that he was not willing and/or able to pay for preparation of the QDRO. And the final word in the matter was that there was no agreement between the parties to utilize a QDRO.

Upon review of the record and arguments, the Court unanimously affirmed the rulings of the trial court in Gwinnett County. However, the Court remanded the case to the trial court so that a clerical error on the date of valuation of the retirement account in the final decree can be corrected.

SOURCE: Supreme Court of Georgia