1 00:00:00,161 --> 00:00:03,071 Speaker 1: Hi, I'm Stacey Hyde and I'm back for another episode 2 00:00:03,071 --> 00:00:06,964 of Better Financial Health in 15 minutes or less, and today 3 00:00:07,003 --> 00:00:10,811 I'm going to talk about something that most people don't 4 00:00:10,811 --> 00:00:15,647 want to think about, and that's divorce, because when you enter 5 00:00:15,647 --> 00:00:19,882 into a marriage, the hope is that it will last till death. 6 00:00:19,882 --> 00:00:23,330 Do us part, and we hope that is a long time away. 7 00:00:23,330 --> 00:00:28,364 But we also have to be real that half of marriages in this 8 00:00:28,425 --> 00:00:32,698 country end in divorce, and unfortunately we're seeing a lot 9 00:00:32,698 --> 00:00:35,244 more of what we call gray divorce, that is, people 10 00:00:35,284 --> 00:00:39,860 divorcing after age 50 and maybe after 25 or 30 years of 11 00:00:39,901 --> 00:00:45,652 marriage, and I think it's very important to understand what 12 00:00:45,912 --> 00:00:46,914 gets divided. 13 00:00:46,914 --> 00:00:51,906 So maybe one spouse worked, one spouse stayed home with the 14 00:00:51,987 --> 00:00:57,481 kids, but any assets that are earned during a marriage so 15 00:00:57,581 --> 00:01:02,308 that's retirement accounts, pensions, other savings, 16 00:01:02,450 --> 00:01:06,817 investments, maybe starting a business those are all 17 00:01:06,897 --> 00:01:10,445 considered marital assets and are subject to division. 18 00:01:10,445 --> 00:01:16,000 The other thing to keep in mind is if you inherited some assets 19 00:01:16,000 --> 00:01:20,507 and you always kept them separate, then those are not 20 00:01:20,587 --> 00:01:21,549 marital assets. 21 00:01:21,549 --> 00:01:25,436 The problem becomes after a 30-year marriage. 22 00:01:25,436 --> 00:01:30,745 You know, maybe those assets were used to provide a vacation. 23 00:01:30,745 --> 00:01:34,813 Every year you regularly dipped into those, then they could 24 00:01:34,879 --> 00:01:37,850 potentially be considered a marital asset. 25 00:01:37,850 --> 00:01:41,141 That'd be something to talk to your attorney about and really 26 00:01:41,221 --> 00:01:42,043 keep an eye on. 27 00:01:42,043 --> 00:01:44,969 So those are kind of those are going to get divided. 28 00:01:44,969 --> 00:01:48,862 But in this case, the devil's in the details. 29 00:01:48,862 --> 00:01:55,593 How you divide a 401k or a pension if you're lucky enough 30 00:01:55,634 --> 00:02:02,087 to have had one of those has to be done very, very carefully. 31 00:02:02,087 --> 00:02:06,394 It requires what's known as a quadro, a qualified domestic 32 00:02:06,474 --> 00:02:14,129 relations order, and those are complicated, partly because most 33 00:02:14,129 --> 00:02:18,103 attorneys are not super comfortable with them and they 34 00:02:18,143 --> 00:02:22,691 have to be handled very meticulously to make sure that 35 00:02:22,730 --> 00:02:28,401 the account gets divided properly meticulously to make 36 00:02:28,420 --> 00:02:29,362 sure that the account gets divided properly. 37 00:02:29,383 --> 00:02:30,605 Oftentimes the divorce decree will say that the assets are 38 00:02:30,626 --> 00:02:34,996 going to be divided, but the document has to be prepared to 39 00:02:35,096 --> 00:02:39,782 go to either the pension provider or the 401k or 403b 40 00:02:39,822 --> 00:02:40,323 provider. 41 00:02:40,323 --> 00:02:44,245 One thing I would encourage you , if you're in this situation or 42 00:02:44,245 --> 00:02:50,248 know someone who is, is many of the large record keepers that's 43 00:02:50,248 --> 00:02:52,789 the Fidelity's, then Powers, the Vanguard's. 44 00:02:52,789 --> 00:02:56,992 They've kind of gotten sort of threw up their hands and said 45 00:02:57,032 --> 00:03:03,116 this is crazy time we're having to charge all these fees that 46 00:03:03,376 --> 00:03:05,457 our plan sponsors are not happy about. 47 00:03:05,457 --> 00:03:12,750 So now they've created portals that have sample language that 48 00:03:12,849 --> 00:03:16,801 you can provide your attorney that says okay, in order to 49 00:03:16,861 --> 00:03:18,344 divide my 401k. 50 00:03:18,344 --> 00:03:21,350 This is what the court order needs to say. 51 00:03:21,350 --> 00:03:25,032 That will save you so much money and so much going back and 52 00:03:25,032 --> 00:03:26,861 forth arguing over. 53 00:03:26,861 --> 00:03:31,550 For example, with Empower, they have one fee if the attorney 54 00:03:31,611 --> 00:03:32,954 drafts the language. 55 00:03:32,954 --> 00:03:38,330 If the attorney uses their language, the fee's like 10% of 56 00:03:38,371 --> 00:03:40,461 the other fee, because they're not having to get their 57 00:03:40,502 --> 00:03:44,770 attorneys involved to review it, and it makes it much simpler. 58 00:03:45,752 --> 00:03:50,586 The key thing to keep in mind most of those quadros say that 59 00:03:50,867 --> 00:03:52,811 assets should be divided evenly. 60 00:03:52,811 --> 00:03:55,643 So that means if there's Roth assets in there, if there's 61 00:03:55,723 --> 00:03:58,911 pre-tax in there or after-tax dollars, it's all going to get 62 00:03:58,991 --> 00:04:00,604 split equally. 63 00:04:00,604 --> 00:04:04,676 If that's not the case, you really want to be careful with 64 00:04:04,757 --> 00:04:08,265 it because oftentimes the record keeper's just not going to do 65 00:04:08,306 --> 00:04:08,366 it. 66 00:04:08,366 --> 00:04:10,211 They're only going to divide it equally. 67 00:04:10,211 --> 00:04:13,872 So if there's some thought that well, this spouse is going to 68 00:04:13,893 --> 00:04:17,442 get more Roth, this spouse is going to get more pre-tax, make 69 00:04:17,483 --> 00:04:21,571 sure that that can be handled by your record keeper. 70 00:04:21,571 --> 00:04:25,420 We had one where it clearly said he got the Roth, but when 71 00:04:25,440 --> 00:04:29,487 they processed the Quadro it just all went evenly and there 72 00:04:29,526 --> 00:04:31,846 was really nothing we could do about it at that point. 73 00:04:33,579 --> 00:04:37,310 Iras are completely different and this is a key point. 74 00:04:37,310 --> 00:04:41,500 So maybe you had a 401 and that's being divided by a Quadro 75 00:04:41,500 --> 00:04:45,367 , but you also had an IRA from a former employer that's there. 76 00:04:45,367 --> 00:04:50,701 Make sure your documents don't refer to a quadro when referring 77 00:04:50,701 --> 00:04:55,074 to the IRA, because it's not going to work and oftentimes 78 00:04:55,153 --> 00:04:55,915 cause issues. 79 00:04:55,915 --> 00:05:01,350 It's going to be a transfer incident to divorce, so don't 80 00:05:01,389 --> 00:05:03,776 think you're going to go ahead and pull the money out. 81 00:05:03,776 --> 00:05:05,279 Give it to your ex-spouse. 82 00:05:05,279 --> 00:05:07,295 That's going to be taxable income to you. 83 00:05:07,295 --> 00:05:10,485 If you're under 59 and a half, that's going to be subject to a 84 00:05:10,547 --> 00:05:11,891 10% penalty tax. 85 00:05:11,891 --> 00:05:17,680 It needs to be handled properly with whoever holds your IRA. 86 00:05:17,680 --> 00:05:25,339 So that means that your divorce decree needs to say that it is 87 00:05:25,420 --> 00:05:33,930 to be divided and what percentage is going where and 88 00:05:33,949 --> 00:05:34,571 what percentage is going where. 89 00:05:34,571 --> 00:05:34,992 And so you get that. 90 00:05:34,992 --> 00:05:36,055 You have your ex-spouse open their own IRA with their 91 00:05:36,074 --> 00:05:39,541 preferred financial institution and the assets are transferred. 92 00:05:39,641 --> 00:05:44,415 A key point here and this is a little nuanced is if your 93 00:05:44,576 --> 00:05:49,745 ex-spouse that separates, they cannot contribute to that IRA, 94 00:05:50,190 --> 00:05:52,509 even though it's theirs in the year of divorce. 95 00:05:52,509 --> 00:05:54,615 So they'd need to have another IRA. 96 00:05:54,615 --> 00:05:58,630 If they're making contributions to contribute After the year of 97 00:05:58,630 --> 00:06:00,896 divorce, they can contribute to it. 98 00:06:00,896 --> 00:06:04,911 It is their IRA, but in that first year it needs to stand on 99 00:06:04,990 --> 00:06:11,300 its own I think that's likely so that the IRS can track that 100 00:06:11,360 --> 00:06:15,065 with a Form 5498 and they know exactly what's going on there. 101 00:06:15,065 --> 00:06:19,060 So that's a key point of contention. 102 00:06:20,670 --> 00:06:25,336 And the other thing that you want to make sure of is that you 103 00:06:25,336 --> 00:06:30,242 remove your ex-spouse from bank accounts, credit cards, your 104 00:06:30,262 --> 00:06:32,444 ex-spouse from bank accounts, credit cards, in particular, 105 00:06:32,805 --> 00:06:43,654 life insurance beneficiaries, 401k beneficiaries Because if 106 00:06:43,675 --> 00:06:45,040 you don't and something happens to you, those assets are still 107 00:06:45,060 --> 00:06:46,406 going to go based on what the beneficiary designation. 108 00:06:46,406 --> 00:06:48,834 There is some catch, like, for example, tennessee has a rule 109 00:06:48,874 --> 00:06:52,170 that says if you're the ex-spouse and it wasn't updated 110 00:06:52,451 --> 00:06:55,858 after the date of the divorce, it's going to be disregarded. 111 00:06:55,858 --> 00:07:00,156 But I think Tennessee may be a little bit unusual there and 112 00:07:00,197 --> 00:07:02,485 that only applies to specific accounts. 113 00:07:02,485 --> 00:07:05,252 It's not going to necessarily apply to life insurance or 114 00:07:05,312 --> 00:07:10,665 things like that and, as you can imagine, ex-spouses are not 115 00:07:10,764 --> 00:07:13,711 likely to give back the money if it goes to the wrong person. 116 00:07:13,711 --> 00:07:17,278 So really make sure that you go through and you update all of 117 00:07:17,338 --> 00:07:17,819 those things. 118 00:07:17,980 --> 00:07:21,716 Also, if you have powers of attorney and you no longer want 119 00:07:21,797 --> 00:07:24,230 your ex-spouse to be your financial power of attorney, you 120 00:07:24,230 --> 00:07:25,774 need to update those as well. 121 00:07:25,774 --> 00:07:28,658 So that's really important. 122 00:07:28,658 --> 00:07:33,997 To stay on top of all of that and I know we've covered a lot 123 00:07:34,410 --> 00:07:38,237 we're actually going to be posting a couple of these 124 00:07:38,336 --> 00:07:42,625 checklists to the Envision Financial Planning Facebook page 125 00:07:42,625 --> 00:07:46,216 If this applies to you or you have a friend that you want to 126 00:07:46,276 --> 00:07:49,442 share this information with, so that they can share it with 127 00:07:49,463 --> 00:07:50,103 their attorney. 128 00:07:50,103 --> 00:07:56,021 So I actually hope this doesn't apply to you, but if it does, 129 00:07:56,461 --> 00:07:57,764 we want you to be prepared. 130 00:07:57,764 --> 00:08:01,598 And if it doesn't apply to you but you have a friend or a 131 00:08:01,658 --> 00:08:04,536 family member that it does, you can pass this information along 132 00:08:04,557 --> 00:08:04,838 to them. 133 00:08:04,838 --> 00:08:06,454 Thanks for tuning in. 134 00:08:06,454 --> 00:08:09,903 This has been another episode of Better Financial Health in 15 135 00:08:09,903 --> 00:08:10,565 Minutes or Less.