Speaker 1: Hi, I'm Stacey Hyde and I'm back for another episode of Better Financial Health in 15 minutes or less, and today I'm going to talk about something that most people don't want to think about, and that's divorce, because when you enter into a marriage, the hope is that it will last till death.
Speaker 1: Do us part, and we hope that is a long time away.
Speaker 1: But we also have to be real that half of marriages in this country end in divorce, and unfortunately we're seeing a lot more of what we call gray divorce, that is, people divorcing after age 50 and maybe after 25 or 30 years of marriage, and I think it's very important to understand what gets divided.
Speaker 1: So maybe one spouse worked, one spouse stayed home with the kids, but any assets that are earned during a marriage so that's retirement accounts, pensions, other savings, investments, maybe starting a business those are all considered marital assets and are subject to division.
Speaker 1: The other thing to keep in mind is if you inherited some assets and you always kept them separate, then those are not marital assets.
Speaker 1: The problem becomes after a 30-year marriage.
Speaker 1: You know, maybe those assets were used to provide a vacation.
Speaker 1: Every year you regularly dipped into those, then they could potentially be considered a marital asset.
Speaker 1: That'd be something to talk to your attorney about and really keep an eye on.
Speaker 1: So those are kind of those are going to get divided.
Speaker 1: But in this case, the devil's in the details.
Speaker 1: How you divide a 401k or a pension if you're lucky enough to have had one of those has to be done very, very carefully.
Speaker 1: It requires what's known as a quadro, a qualified domestic relations order, and those are complicated, partly because most attorneys are not super comfortable with them and they have to be handled very meticulously to make sure that the account gets divided properly meticulously to make sure that the account gets divided properly.
Speaker 1: Oftentimes the divorce decree will say that the assets are going to be divided, but the document has to be prepared to go to either the pension provider or the 401k or 403b provider.
Speaker 1: One thing I would encourage you, if you're in this situation or know someone who is, is many of the large record keepers that's the Fidelity's, then Powers, the Vanguard's.
Speaker 1: They've kind of gotten sort of threw up their hands and said this is crazy time we're having to charge all these fees that our plan sponsors are not happy about.
Speaker 1: So now they've created portals that have sample language that you can provide your attorney that says okay, in order to divide my 401k.
Speaker 1: This is what the court order needs to say.
Speaker 1: That will save you so much money and so much going back and forth arguing over.
Speaker 1: For example, with Empower, they have one fee if the attorney drafts the language.
Speaker 1: If the attorney uses their language, the fee's like 10% of the other fee, because they're not having to get their attorneys involved to review it, and it makes it much simpler.
Speaker 1: The key thing to keep in mind most of those quadros say that assets should be divided evenly.
Speaker 1: So that means if there's Roth assets in there, if there's pre-tax in there or after-tax dollars, it's all going to get split equally.
Speaker 1: If that's not the case, you really want to be careful with it because oftentimes the record keeper's just not going to do it.
Speaker 1: They're only going to divide it equally.
Speaker 1: So if there's some thought that well, this spouse is going to get more Roth, this spouse is going to get more pre-tax, make sure that that can be handled by your record keeper.
Speaker 1: We had one where it clearly said he got the Roth, but when they processed the Quadro it just all went evenly and there was really nothing we could do about it at that point.
Speaker 1: Iras are completely different and this is a key point.
Speaker 1: So maybe you had a 401 and that's being divided by a Quadro, but you also had an IRA from a former employer that's there.
Speaker 1: Make sure your documents don't refer to a quadro when referring to the IRA, because it's not going to work and oftentimes cause issues.
Speaker 1: It's going to be a transfer incident to divorce, so don't think you're going to go ahead and pull the money out.
Speaker 1: Give it to your ex-spouse.
Speaker 1: That's going to be taxable income to you.
Speaker 1: If you're under 59 and a half, that's going to be subject to a 10% penalty tax.
Speaker 1: It needs to be handled properly with whoever holds your IRA.
Speaker 1: So that means that your divorce decree needs to say that it is to be divided and what percentage is going where and what percentage is going where.
Speaker 1: And so you get that.
Speaker 1: You have your ex-spouse open their own IRA with their preferred financial institution and the assets are transferred.
Speaker 1: A key point here and this is a little nuanced is if your ex-spouse that separates, they cannot contribute to that IRA, even though it's theirs in the year of divorce.
Speaker 1: So they'd need to have another IRA.
Speaker 1: If they're making contributions to contribute After the year of divorce, they can contribute to it.
Speaker 1: It is their IRA, but in that first year it needs to stand on its own I think that's likely so that the IRS can track that with a Form 5498 and they know exactly what's going on there.
Speaker 1: So that's a key point of contention.
Speaker 1: And the other thing that you want to make sure of is that you remove your ex-spouse from bank accounts, credit cards, your ex-spouse from bank accounts, credit cards, in particular, life insurance beneficiaries, 401k beneficiaries Because if you don't and something happens to you, those assets are still going to go based on what the beneficiary designation.
Speaker 1: There is some catch, like, for example, tennessee has a rule that says if you're the ex-spouse and it wasn't updated after the date of the divorce, it's going to be disregarded.
Speaker 1: But I think Tennessee may be a little bit unusual there and that only applies to specific accounts.
Speaker 1: It's not going to necessarily apply to life insurance or things like that and, as you can imagine, ex-spouses are not likely to give back the money if it goes to the wrong person.
Speaker 1: So really make sure that you go through and you update all of those things.
Speaker 1: Also, if you have powers of attorney and you no longer want your ex-spouse to be your financial power of attorney, you need to update those as well.
Speaker 1: So that's really important.
Speaker 1: To stay on top of all of that and I know we've covered a lot we're actually going to be posting a couple of these checklists to the Envision Financial Planning Facebook page If this applies to you or you have a friend that you want to share this information with, so that they can share it with their attorney.
Speaker 1: So I actually hope this doesn't apply to you, but if it does, we want you to be prepared.
Speaker 1: And if it doesn't apply to you but you have a friend or a family member that it does, you can pass this information along to them.
Speaker 1: Thanks for tuning in.
Speaker 1: This has been another episode of Better Financial Health in 15 Minutes or Less.