Retirement Benefits

Creative Divorce Solutions: Thinking Outside The Box

January 8, 2021 By CDSOC

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.

Five Important Financial Issues in Military Divorce

October 30, 2020 By CDSOC

By Kristine Rushing, CFP®, CDFA® Intro: There are many considerations in divorce, but those experiencing military divorce have some additional things to think about. Here are five issues military spouses should be aware of.

Along with cooler weather and thoughts of Thanksgiving, November also brings Veterans Day, providing an opportunity to honor and thank those who have served in the United States Armed Forces. For many, that service has required personal sacrifices, from family challenges to the ultimate sacrifice. Whether during war or peacetime, events such as frequent moves, multiple deployments, isolation, stress of war, injuries, and returns to civilian life can all cause stress and anxiety for service members, spouses and their children. While the military branches offer programs to support relationships, divorce becomes a reality for many. Like their civilian counterparts, military spouses will need to determine a co-parenting plan, asset and debt division, and child/spousal support. However, those experiencing a military divorce need to be aware of some special rules.

1. Jurisdiction and State Law

Generally speaking, a spouse may file for divorce in the state where either spouse legally resides, with minimum residency requirements. However, the laws and treatment of property varies from state to state and there are some other factors pertaining to jurisdiction for military spouses, especially if divorcing while the service member is overseas. When there are questions about this it would be wise to consult with a knowledgeable attorney. For the most part, all other aspects of the property division, co-parenting, and child or spousal support follow state law similar to a civilian divorce. However, the “Service Members Civil Relief Act,” or SCRA, allows active-duty service members to file a Motion to Stay Proceedings which, if granted, causes a delay of 90 days, plus possible extensions.

As with civilian divorce, one of the most important decisions a couple has to make is which process to use. There are four major options: DIY/Kitchen Table, where couples sit down and reach their own settlement agreement; Mediation, where couples hire a neutral professional to assist them with the negotiations; Collaborative Divorce, where each party has their own legal representation, one or more divorce coaches/therapists, a neutral financial advisor, and perhaps a child specialist, all working together in a team approach; and Litigation, where parties cannot agree and ask the court to decide the outcome. Whenever possible, either mediation or collaborative divorce are recommended. These usually provide the most efficient process and set the parties up for more effective co-parenting and healing post-divorce.

2. Dividing Military Retirement

Military pensions are considered a marital asset and the Uniformed Services Former Spouses’ Protection Act (USFSPA) allows for division, though it is not necessarily required. Technically, it is the “disposable retired pay” that is subject to division, which is the gross retired pay less deductions for disability pay benefits and Survivor Benefit Plan premiums. Spouses may divide the pension or, instead, arrange a full or partial off-set via lump sum payment in cash or other assets to the non-service member spouse. The option for a lump sum or off-set is more common in short term marriages and requires a pension valuation to determine the present value of the off-set amount.

Those divorcing after retirement use a straight-forward coverture formula to determine the marital portion: months of marriage overlapping military service ÷ total months of military service at the time of retirement. For those divorcing prior to retirement, there is still a coverture fraction, calculated as a percentage of the service months overlapping marriage based on the total service months at the time of dissolution. However, it is applied to the hypothetical retirement benefit the service member would have received based on pay at the time of dissolution rather than actual retirement.

With the implementation of the new Blended Retirement System (BRS) in 2018, many service members receive automatic contributions and possible matching to a Thrift Savings Plan (TSP), a defined contribution account. The TSP operates much like many private company 401(k) plans do, allowing service members to leave the military with those TSP retirement benefits before serving a full 20 years, even if they choose to forego the pension benefits.

3. Getting the Retirement Division Done Right

Once the non-military spouse’s retirement benefit allocation has been determined, there are two ways in which the actual division and payment administration can take place. If qualified according to the “10/10 Rule,” the benefit payments for the non-military spouse may be issued directly from the Defense Finance Accounting Service (DFAS). The 10/10 Rule refers to the provision within the USFSPA which allows for this direct payment to a non-service member spouse as long as the pension division results from a marriage lasting ten years or more, which also overlapped service by ten years or more. A Military Pension Division Order (MPDO) must be carefully completed and submitted to DFAS. Retirement divisions that do not qualify for direct DFAS administration and payment according to the 10/10 Rule must be handled directly between the parties.

There are additional considerations for survivor benefits and disability pay. The Survivor Benefit Plan (SBP) is an annuity program allowing the service member to provide continued income to a surviving beneficiary in the event of their death. Only one beneficiary may be designated, and if the intention is to name the former spouse, it must completed in a timely manner.

Unlike the military pension, which is a defined benefit plan, division of the TSP is more straight forward. Once the amount or percentage being allocated to the non-service member spouse is determined, and after the divorce is final, the account funds may be transferred into another retirement account in the non-service member’s name, such as an IRA, with a Retirement Benefits Court Order (RCBO). It is important that the terms be defined clearly and having a professional prepare this, as well as the MPDO mentioned above, is recommended.

4. Healthcare and Other Benefits

Tricare and care at military treatment facilities, as well as commissary and exchange privileges, may be available to the non-service member spouse in long-term marriages that overlap service. The USFSPA offers Full Coverage under the “20/20/20 Rule,” and Transitional Coverage under the “20/20/15 Rule.” The full coverage rule requires the spouses to have been married for at least twenty years, the service member must have at least twenty years of creditable service toward retirement pay, and that twenty years of marriage overlap twenty years of creditable service. The transitional coverage rule provides one year of medical coverage (no commissary or exchange privileges) have between fifteen and twenty of years of marriage overlap the years of creditable service.

5. Co-Parenting, Child Support, and Spousal Support

Child support is based on state law, including factors such as custody, time with each parent, and incomes. The Leave and Earnings Statement (LES) should be used to determine all forms of compensation, including Basic Allowance Housing (BAH), the value of on base housing, and other non-taxable in-kind compensation. While service members can face penalties from their commanding officer if delinquent on support payments, enforcement is typically handled by the state court system.

Like child support, spousal support, also called alimony, is determined according to state law. The USFSPA, however, limits the amount paid to a former spouse directly through DFAS to 65% of disposable retired pay, including up to 50% of pay for pension division and other garnishments such as alimony and child support. Considerations for the spousal support order may include the length of the marriage, the earning capacity of each spouse, age, and health.

While most of the issues facing military spouses in divorce are the same as their civilian counterparts, these specific concerns do need to be addressed carefully. Spouses should take advantage of the various resources available and consult with an attorney who specializes in military divorce when needed. Again, one of the most important decisions a divorcing couple must make is which process to use. Whenever possible, work together and consider mediation or a collaborative team approach, including attorney-mediators, a financial advisor, such as a CPA, CFP® or CDFA®, and therapists and/or coaches to provide accurate legal information and the best chance for effective co-parenting and healing post-divorce.

To all members of the U.S. Armed Forces, we honor you this Veterans Day and thank you for your service in defending our nation and protecting our freedom.

Social Security and How It Affects Your Divorce

July 28, 2016 By CDSOC

by Tracy S. McKenney, CFP®, CDFA™
Irvine, California

When a couple divorces, you may wonder whether anything happens to their Social Security benefits. What if the husband has been employed the entire marriage and the wife has stayed home with the children? Do they split the husband’s Social Security benefit at retirement? What if one of them remarries?

First, divorce laws are different from state to state. Social Security is a federal program and can’t be overridden by

Orange County Divorce Financial Analyst Tracy McKenney — Tracy McKenney

divorce laws or a divorce judgment in any individual state including California. California courts cannot issue a divorce judgment to ‘split’ Social Security payments at retirement, because the federal rules governing Social Security override them.

What does the law say about Social Security and Divorce?

As of summer 2016, if a person has been married longer than 10 years and then gets divorced, the ex-spouse can receive 50 percent of their former spouse’s Social Security benefit –OR- 100 percent of their own Social Security benefit. Notice: you can collect only ONE benefit, not both.

For example, “Dolly” and “Dennis” got divorced when Dolly was age 52, and Dennis was age 54. Dennis decided to start collecting Social Security when he turned 67. Dolly only worked part-time for most of their 27 year marriage. She decided to start collecting Social Security benefits as soon as possible, at age 62. Dennis collected on his own benefit because it was higher than ex-spouse Dolly’s benefit. Dolly made an appointment with her local Social Security office two months before she turned age 62. Dennis’s benefit was higher than hers so she collected based upon his benefit. Note: Anytime you start social security earlier than your full retirement age (see more below), you will receive a reduced benefit.

Before your ex-spouse gets angry over losing half of his or her government retirement benefits, the Social Security Administration is willing to pay out 100 percent to your ex-spouse and 50 percent to you from your ex-spouse’s work history. Yes, Social Security will pay 150 percent if you meet the qualifications.

Social Security payments can start as early as age 62. Your monthly payments are reduced at age 62. Full Retirement Age (FRA) is based upon your birth year. FRA is age 65 for anyone born before 1937; 66 for anyone born 1943-1954; and age 67 for anyone born 1960 or later. You can look up your own FRA at www.ssa.gov. Be aware the FRA age for you personally is based upon YOUR age, not your ex-spouse’s age. If you delay claiming Social Security benefits until age 70, you will receive additional income if you claim on your own work history, but will NOT receive additional income at age 70 if you claim based upon your ex-spouse’s work history.

Remarriage Affects Your Retirement Benefits

What happens if either ex-spouse remarries? If you remarry before age 60, then you will not be able to claim benefits based upon the ex-spouse’s work history. If you remarry after age 60, then you can claim based upon your ex-spouse, your current spouse or your own work history. Choose wisely because you only get ONE benefit. If you have been married over 10 years more than once, you can claim on either ex-spouse, whichever is more favorable to you.

What happens if your ex-spouse dies?

Social Security has survivor benefits if your ex-spouse dies. If you are eligible to claim on your ex-spouse’s work history, then you also qualify for a survivor benefit. You can receive the same benefits as the widow/widower of your ex-spouse.

For more information, go to www.ssa.gov and search ‘divorced spouse benefits’ or ‘divorced survivor benefits.’

Securities offered through Securities America, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Tracy S. McKenney, Registered Representative. Advisory Services offered through Securities America Advisors, Inc., an SEC-Registered Investment Advisor. Securities America and its representatives do not offer tax or legal advice. You should consult with and rely on your own legal and tax advisors. 6/2016

When 50/50 Isn’t Always Equal in a California Divorce

June 6, 2016 By CDSOC

by Diana L. Martinez Collaborative Lawyer and Mediator, Law and Mediation Office of Diana L. Martinez

California is one of nine “community property” states as it relates to divorce. This means that assets and debts acquired and incurred during your marriage will be divided equally upon divorce. Exceptions exist for specific items received during marriage that are deemed “separate property” under the law. This includes gifts and inheritance.

This is one of the most misunderstood concepts in divorce law. Spouses often believe their divorce will be easy if they just split all of their property in half, or “50/50.” While strong emotions present a barrier to resolving issues during a divorce, not far behind is the misunderstandings by couples about the concept of what is “fair” when it comes to dividing up assets and liabilities.

From extensive experience as a mediator, consultant, and Collaborative Divorce lawyer, I am a strong advocate for giving spouses a greater voice in the outcome of their divorce. I am also a strong proponent of ensuring divorcing spouses have as much information as possible to make the best decisions moving forward.

Although the courts are required to enforce the laws, spouses in a divorce, with few exceptions (typically related to minor children) are not limited by the law; they can create their own, unique, agreements, based on their goals and values. Laws controlling the division of assets and debts, the amount you receive or pay in support, and the amount of time granted with your children exist to guide you IF you and your spouse are not able to resolve these items together. If you can’t resolve your differences, a judge will make the decisions for you. He or she is required to enforce the law, regardless of your personal goals and values.

You and your spouse may have some understanding of the law. But in negotiating your agreement, you may be better served by accepting less than the law allows in return for a greater benefit elsewhere. The benefit could be a better co-parenting relationship, or the opportunity to reduce or eliminate spousal support. It may even be the creation of balance where the laws aren’t able to provide it.

Annette and John Peterson provide a case study worth discussing as an example. The Petersons were able to resolve all disputes in their divorce except one: Annette’s pension benefits of approximately $100,000. This roadblock stalled the Petersons’ divorce for six years, from February 2010 until the California Supreme Court rendered its decision in January 2016.

In retrospect, after nearly six years of legal fees, lost time from work, and stress, Annette and John might have preferred finding a compromise outside of the contested court process. State laws governing pensions and federal laws governing Social Security created the sense of imbalance that Mr. and Mrs. Peterson fought so hard to correct, as each, individually, deemed most “fair”.

In California, pension benefits are community property when earned during marriage. Pension benefits are a form of deferred compensation for services rendered. Non-financial contributions to pension benefits, or “service credits,” are also considered “a form of deferred compensation for services rendered” and, therefore, community property.

But Social Security benefits are separate property under federal law. Federal law preempts state law. Social Security is not transferable, nor can it be assigned by the wage earner. There are, however, derivative rights upon divorce if:

you and your spouse are entitled to receive Social Security;

your marriage lasted 10 years or longer;

the ex-spouse did not remarry;

the ex-spouse is age 62 or older; and

the benefit the ex-spouse is entitled to received based on his/her own work is less than the benefit he or she would receive based on his/her former spouse’s work.

If each requirement is met, an ex-spouse could elect to receive either all of his/her own Social Security, or one-half of his/her former spouse’s Social Security, but not both.

As an employee of the County of Los Angeles, Annette did not contribute to Social Security. Instead, the County contributed to a defined pension plan for Annette through the Los Angeles County Employees Retirement Association (LACERA). As an attorney in private practice, John contributed to Social Security through mandatory payroll deductions.

Annette’s LACERA benefits totaled between $200,000 and $216,000. Based on Social Security calculations, John’s Social Security benefits totaled $228,000. Annette attempted to argue that the laws governing LACERA pensions and the laws governing Social Security created unequal benefits. Annette and John would split her LACERA benefits in their divorce (approximately $100,000 to each). But John would keep all of his Social Security benefits.

The trial court ruled in John’s favor, creating an actual 150% windfall for John ($328,000 from 50% of Annette’s LACERA and 100% of his Social Security). Annette asked the California Supreme Court to correct this unfair situation, suggesting the court give John less than half of her LACERA pension benefits.

The Supreme Court let the trial court’s ruling stand, citing the requirement under California law that community assets be divided equally in a divorce. Since Social Security is not a “community asset,” the court correctly divided the community assets and could not deviate from that equal division, even when it creates an unequal division overall.

But the Supreme Court pointed out that it was completely within Annette and John’s power to create their own, more equal solution, even though the court under the law could not.

So let’s go back to Annette and John’s original circumstances. What was the value to John if he had agreed to give Annette all of her LACERA benefits, instead of insist on following the state law giving him a far greater share? What would have been the value to Annette to propose an alternate payout to John to resolve this issue?

As of 2010 in California, the average cost of a divorce where the parties were represented by lawyers was approximately $50,000 each. This amount is on the low end for a contested divorce in Orange County, and it does not include the legal fees for an appeal. Over the period of six years, based on 2010 estimates, Annette and John would have spent more than $100,000 each. Resolving your divorce early and collaboratively can save on legal fees, lost work time, and other intangible and emotional costs.

Managing emotional trauma and stress for yourself and your family offers priceless benefits, far beyond feeling a sense of entitlement or unfairness. Attorneys frequently fail to focus on these practical impacts because they are hired as legal advisors and guides, not as therapists. Attorneys are not equipped to help people through their fears; they are not trained mental health professionals.

Alternative (also known as “consensual”) dispute resolution models often incorporate legal and non-legal professionals to help educate and guide couples through unexpected emotional landmines, often resulting in less, or better managed, conflict, and better informed and well reasoned results.

For example, the Collaborative Divorce model incorporates guidance from a “divorce coach” to help manage the emotions of divorcing spouses, often saving the spouses tens, if not hundreds of thousands of dollars, as well as years of stress embroiled in a contested divorce, and the subsequent modifications to orders after trial. The outcomes tend to be far more satisfying to both spouses, and result in fewer or no additional hearings after judgment to modify those orders.

Making decisions based on accurate legal and financial information, as well as balancing the practical impact on your family and finances often results in far greater and lasting benefit for you and your family. Sometimes, there is too high a price for the short-term gain of getting everything you can under the law.