By Jennifer Webb Gordon, CFLS
“Why divorcing couples should consider creative solutions in their divorce”
If you are contemplating divorce you probably want to know “what you are legally entitled to.” This is the most common question asked by new clients, who often tell me “I just want what I’m entitled to.”
It is natural to want information to help with divorce planning and to set expectations.
Since divorce is a legal process, people turn to “legal entitlements” as a measuring stick.
What most couples contemplating divorce don’t realize is the restrictive range of outcomes available through the court system. Judges are limited by the laws that exist at the time you arrive in court. Laws change, and what is true today may not apply next year or next month. One recent example is the tax deductibility of spousal support (alimony) payments. Up until January 2019, spousal support payments were tax deductible to the party paying and taxable to the recipient. Today, the payment of spousal support is no longer deductible on federal returns. Similarly, the spouse who receives spousal support is no longer required to claim the amount as income on their federal tax return. This is just one example of how the landscape of the law is subject to change. While understanding your legal rights is important, engaging in creative problem solving will often result in better outcomes for both parties, and the entire family.
Creative solutions can apply to parenting plans as well as allocation of income and apportioning assets and liabilities. Below are just a few examples of creative solutions that worked for other couples which a court would not have been able to order without their prior agreement.
Creative Parenting Plans – Nesting
The typical custody orders handed down by the court provides for the children to alternate time with each parent in that parent’s home based on a standard time share schedule. Sometimes parents alternate weekly or have a 2/2/3 alternating time share.
Some co-parents are choosing innovative arrangements to keep their children from feeling some of the effects of divorce and the disruption caused by having to transition back and forth between two homes. A nesting arrangement means the children stay in the family home after the divorce. It’s the parents who take turns living with the children; the adults shuffle back and forth. This type of arrangement is typically for a limited period of time and allows everyone to adjust and prepare for a new family structure in 2 households.
Nesting isn’t for every family. It takes a great deal of cooperation between co-parents to make this arrangement work, and sometimes the cost of maintaining separate homes precludes many from exploring this option at all. But for parents who have good communication skills and are able to resolve conflicts productively, it can be a win for the children. This is not an arrangement that can be ordered by the court, however, parents can plan creatively to meet the needs of their children during a divorce.
Using Retirement Funds Creatively
Transferring retirement funds earned during marriage from one party to another is commonly done as part of the dissolution process without incurring taxes or penalties to either party. Employer sponsored plans such as 401(k) plans require a special court order called a Qualified Domestic Relations Order (QDRO). However, this means the funds stay in pre-tax retirement accounts and are not available, for example, to satisfy consumer credit debt or for use as a down payment on a home.
Couples who have ample retirement but are cash strapped and want to use retirement funds for these or other purposes, may find relief in Internal Revenue Code §72(t)(2)( c) which exempts early distributions from the 10% additional tax if those withdrawals are made as a result of a qualified domestic relations order (QDRO). It can become a key issue because the interests of participants in employer-sponsored retirement plans are often one of their largest assets next to equity in their home.
Take for example the recent situation where each party had $125,000 in an employer sponsored retirement plan which they had earned during marriage. Typically, each party would retain his/her own plan since the plans were of similar value. In this case, however, the parties had incurred substantial consumer debt, with each party assuming over $45,000 in debt as part of the divorce. Both parties wanted to eliminate the high monthly payments so they could better provide for their children’s needs after the divorce.
Utilizing IRC §72(t)(2)( c), each party was awarded a portion of the others retirement plan, divided through a QDRO. Each party withdrew the portion awarded to them from the other’s retirement and used those funds to satisfy the debt, giving each a fresh start.
You should always discuss cashing out retirement funds with your CPA or Tax Attorney as it may not be the right solution for everyone.
Medical Insurance – Delaying Termination of Marital Status to Extend Health Benefits
Many couples worry about the loss of health insurance after divorce when they are covered under their spouses health plan. Once a dissolution is entered and the parties are restored to the status of single persons, the former spouse will not be eligible to be covered on the former spouse’s plan. The cost of obtaining individual health plans can be daunting. Even when coverage is available, the plan benefits may be inferior.
Couples utilizing a Collaborative process or Mediation are sometimes able and willing to structure the termination of their marriage in order to afford the other party time to obtain insurance. This doesn’t require delay in filing the final agreement in your case. Once you have reached an agreement, if you both concur, you can have all the other provisions of the agreement signed by the court and still provide that you will remain legally married for a period of time after the agreement is filed in the court.
In one case, the cost of providing health insurance was taken into consideration in the negotiations and the wife agreed to delay termination of the status of the marriage for a period of 7 months after the Judgment was entered.
Although individual insurers have different rules about covering a spouse from whom you are physically separated, most allow coverage until the status of the marriage itself is terminated.
Creative Solutions for your Family
The above represent just a few of the many creative solutions available. Out of court processes such as Collaborative Divorce and/or Mediation encourage parties to design unique solutions that best fit their own situation. With the assistance of trained professionals, the parties engage in brainstorming creative approaches to restructuring their family. This allows for the ability to “Think Outside the Box”, to be creative in determining the financial arrangements and parenting plans that work for your family.
