Breaking Bonds, page 18
STOCKS, BONDS, AND CASH
“Life isn’t fair. Everybody has their issues. It’s how you handle your issues that distinguishes you.”
―MARIA SHRIVER
Cash that is in savings accounts, checking accounts, and money market accounts is liquid, or readily available. Besides covering expenses incurred during the divorce, you need to receive an adequate portion of the remaining liquid assets in the divorce settlement for emergencies, to possibly buy a home, or to pay for going back to school. Find out if the accounts are in single or joint name, if there is overdraft protection, or if there is a payable on death designation on each of these accounts. Your attorney will ask you for this information, so make sure that you have it.
Certificates of deposit (CDs) have penalties if you cash them in before their maturity dates unless they are held at a brokerage firm. CDs held at a brokerage firm do not have penalties, but they may be sold prior to maturity at a gain or at a loss, depending on what interest rates are doing at the time of sale. You will need to find out who owns them, whether there is a listed beneficiary, and, if they are bank CDs, if they have been pledged as collateral for a loan.
Brokerage accounts may include cash, money market funds, CDs, stocks, bonds, mutual funds, annuities, and other securities. You will need to find out who owns them, if there are any named beneficiaries, and if there are any loans against the accounts. It will be important to get the cost basis and date of purchase for each of the securities that are still owned in accounts that are not retirement accounts. The cost basis may be provided on the brokerage statements.
This information will be important in deciding which nonretirement assets to ask for in the division of assets. You do not want to receive all the investments with a low-cost basis while your husband receives the investments with a high-cost basis. That would not be fair to you because the low-cost basis investments will incur more taxes when sold. If there is no agreement between you and your husband on the division of securities, you may want to insist that they are divided down the middle as much as possible. Municipal bonds are sold in increments of $5,000, so an exact down-the-middle division with a bond portfolio may not be possible.
Get help from your financial advisor in deciding what to ask for in the division of assets.
Employee stock options and restricted stock (stock that is not transferable until certain conditions are met) have vesting schedules for when the employee acquires ownership in them after they have been granted. The transfer of ownership to the employee is contingent on their continued employment with the company for a certain period. For example, these securities may become 25 percent vested after one year, 50 percent after two years, 75 percent after three years, and 100 percent after four years. If some of the vesting occurs outside the period of the marriage, then that portion of the investment is not considered marital property. Your attorney may need to hire an accountant to determine the marital value of vested and unvested securities. Employers do not allow a former spouse to own options and restricted stock in their companies, so it will be necessary for your spouse to buy out your share at the time of your settlement. Do not consent to a court division of the options or restricted stock, as your spouse would be in control of managing the options and stock for you, and you would have no way of knowing when the securities are sold post-divorce unless your husband provides you with that information. It will also likely be difficult to obtain your share of the proceeds from him. Take half of the current value in cash instead to avoid this issue.
Make sure that you get statements going back several years on all bank and brokerage accounts. Check Schedule B and the K1s for your tax returns for the last few years to make sure that you do in fact have all of them. Go through the account statements to see if you can find any suspicious-looking withdrawals. That will be a good way to find out if your husband has been hiding money from you.
If there are U.S. savings bonds in your portfolio of stocks and bonds, you will need to find out the ownership, face amount, series, rate of interest, and whether the bonds are still accumulating interest. If they aren’t accumulating interest any longer, they will need to be cashed in and the proceeds divided or allocated in the divorce decree. The U.S. Treasury has a website where you can calculate the value of federal government bonds (See Resources). Some of the older bonds may be in paper certificates, so be sure to keep them in your lock box in case of fire.
LIFE INSURANCE AND ANNUITIES
“If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.”
―SUZE ORMAN
If you are to remain the beneficiary of your husband’s life insurance after the divorce, please be aware that many states automatically revoke spousal beneficiary designations after a divorce is final. If your husband owns the policy, it will probably be necessary for him to redesignate you as the beneficiary of the policy after the divorce. If you don’t ensure that he does this, the insurance may not be paid to you. Your attorney should insist that a provision is included in the divorce agreement that gives you access to information about the policy so that you can periodically check with the insurance company and verify that you are still the beneficiary and that the premiums have been paid on time. If he doesn’t designate you as beneficiary, you may have to go back to court at your own expense. The owner determines the beneficiary and can change the beneficiary at any time.
I believe that it is prudent to insist that there be a change of ownership of the policy to you as part of the divorce agreement, and for you to pay the premiums yourself after the divorce to make sure that the policy stays in force. Include these premiums as part of your budget for determining alimony.
If your husband has a group term policy at work, only he can be the owner, and it will be canceled if he switches jobs anyway, so it may not be worth fighting over. There is no cash value for term insurance.
Get advice from a financial advisor regarding any annuity policies that are marital property so that you become fully informed of the details of each specific policy in your portfolio to determine the best way to handle each one in the divorce. An annuity is a contract that guarantees that the insurance company must pay benefits to the owner or the beneficiary upon certain conditions. Just like life insurance, the owner has control of the policy and can change the beneficiary at will.
The annuitant, the person on whose life the policy is written, usually cannot be changed until death. When the annuitant dies, the proceeds are paid to the beneficiary. The owner and the annuitant may or may not be the same person. The owner and the beneficiary may or may not be the same person; keep in mind that the owner can change the beneficiary at any time.
Fixed annuities guarantee a fixed rate for a limited term. There may be penalties if you cash in an annuity before the maturity date. The surrender period may be longer than the term the rate is guaranteed for, so you need to find out the details. If the policy has been annuitized, it may guarantee periodic payments for a definite period or the lifetime of one or both of you.
Variable annuities are invested in sub-accounts that may have a guaranteed option as well as in money market funds, stock funds, and bond funds. Their values are subject to daily market fluctuations. There are internal expenses in variable annuities called mortality and expense charges, as well as internal expenses for the mutual funds. There may also be income riders or death benefit riders, which may be quite valuable. If you take out more than the guaranteed amount from these funds in a given year, you could lose valuable income guarantees, if they apply.
There can be substantial taxes and penalties if annuities are cashed in as part of the divorce, so it is important to find out:
If there is a surrender period and when this period ends.
The cost basis if it is not held in a retirement account.
Whether it is more prudent for you to divide any policies between you and your ex-husband rather than to cash them in. This could mean changing the ownership and the beneficiary. Remember that in most cases, you will not be able to change the annuitant.
Some annuities are held in an individual retirement account or IRA, which means that they are subject to IRA rules and are fully taxable. Others are nonqualified assets, which means that they have a cost basis. This point is very important because the cost basis in a nonqualified annuity is not taxable. Retirement accounts, including IRAs and ROTH IRAs, will be discussed in the next section, “Retirement Protection and Disability” (click here).
Keep in mind that there are income tax consequences to pulling periodic payments from all annuities, whether they are in retirement accounts or not. All the assets in a retirement account, apart from the ROTH IRA, will be subject to taxation at ordinary income tax rates when withdrawals are made. The IRS treats withdrawals from nonqualified annuities (except annuities from one insurance company that I know of) as taxable interest first. This means that all the interest must be taken out and subject to ordinary income tax first before you can pull out the “tax-free” return of principal, or cost basis. Also, there is a 10 percent penalty on the portion of the withdrawal that is considered income if you are under age fifty-nine and a half unless you qualify for one of the exceptions listed in the next section.
It might be better to negotiate for a lump sum payment for your share in the annuities that have been annuitized rather than having to depend on receiving a check every month from your ex-husband and having to worry about taking him back to court. Personally, I would rather take a discount than 100 percent of nothing, which is still nothing.
I believe most abusers will not honor agreements, even legal ones. Be realistic about how your husband will behave based on past behavior, not on sugary promises. The fewer times when you must rely on his goodwill, and the less contact you have with him after the divorce, the better.
If your husband is in the military, you may be able to get an annuity through the Survivor Benefit Plan. Janice Green states in Divorce After 50, “In divorce situations, timing regarding the SBP is crucial. State courts now have the authority to order a military member to designate a former spouse as a beneficiary, as part of the divorce judgment.”1 The election of a beneficiary does not happen until the military member is eligible for retirement, which means that this designation must be handled very carefully. You must file the signed divorce decree specifying that you are to receive the annuity with the Defense Finance and Accounting Service (DFAS) within one year of the divorce, as well as inform the DFAS to activate the deemed election for survivor benefits at the time he is eligible to retire. Both these steps are necessary to ensure that a subsequent spouse does not become the beneficiary and leave you with nothing.
Send the DFAS the documents by certified mail, return-receipt requested, so that you have proof in the future that the DFAS receives the notification. Follow up with a phone call requesting written acknowledgment from them.
If your attorney is taking care of this matter for you, make sure that you are provided copies of all correspondence and the return receipt. You may need to produce it to the DFAS in the future (at the time of your ex-husband’s death) to be able to collect your survivor benefits. Make sure that you follow up if you don’t receive the written acknowledgment.
RETIREMENT PROTECTION AND DISABILITY
“Retirement protection is often compared to a three-legged stool supported by social security, employer-provided pension funds, and private savings.”
―SANDER LEVIN
Most company-sponsored retirement accounts are defined contribution plans, 401(k) plans, 403(b) plans, or simplified employee pension (SEP) plans. These accounts, which are called qualified assets, grow tax deferred. There is a greater compounding effect over time than with after tax assets, called non-qualified assets, because of the tax deferral. Keep in mind that you will have to pay federal income taxes on any portion of the retirement assets that you withdraw from the account. Also, you may also have to pay state income taxes on withdrawals, depending on where you live. If the withdrawal occurs before age fifty-nine and a half, you will have to pay an additional 10 percent federal tax penalty unless you qualify for one of the exceptions listed below. Some employers offer a ROTH 401(k) or 403(b) option, where contributions do not qualify for a tax deduction, but the funds grow tax-free if the rules are followed.
Find out if your state considers the taxability of an account when assets are divided. Cash and unappreciated securities in taxable accounts have already had taxes paid on them and are for that reason worth more than the same amount of retirement dollars that have not yet been taxed. In many cases, the sensible thing to do is to split the accounts. However, your trusted financial advisor will advise you as to what is in your best interest given your particular situation That person will guide you on how to do an IRA rollover of your portion and to reallocate the account for you after the divorce. Individual retirement accounts (IRAs) are discussed below.
A qualified domestic relations order (QDRO) is a court order that your attorney may need to prepare to protect your interests in your husband’s retirement plan if the divorce decree from the court alone does not give you the protection that you need. The QDRO will give instructions on paying your share of these benefits to the administrator of the retirement plan for your husband’s company.
If you husband has a defined benefit or pension plan that pays a future fixed monthly amount, your attorney may have to hire an actuary to figure out how much you are entitled to receive. These plan payments are based on complex actuarial factors and assumptions related to compensation, years of service, inflation, interest rates, and life expectancy.
A QDRO is not used to protect marital interests in military or government pensions, which are covered by other laws. Your attorney will advise you regarding this issue. If he is not an expert on such plans, you may need to hire one to make sure that your rights are fully protected if there is a substantial sum involved.
Make sure that your attorney asks for a copy of the plan document, plan summary, and statements for the last several years to date for your spouse’s 401(k), 403(b), or other retirement plan accounts. Please don’t assume that your attorney has reviewed the pension fund restrictions, because he may not have even thought of this. Bring it to his or her attention and keep a checklist of all the details to cover in the divorce so that important items are not overlooked. Give a copy to your financial advisor to review for you.
You may take a cash settlement, or receive half of the retirement assets into an IRA on a tax-deferred basis, or have the right to collect a portion of the payments of your ex-husband’s defined benefit pension plan when he qualifies to retire. Find out if you will still be able to receive your share of his pension in the divorce settlement if your ex-spouse dies before his retirement. If the right to any benefit terminates at his death, it is worth nothing to you if he dies prematurely. You should know this important fact in advance of negotiating a settlement.
In drafting the QDRO for a pension plan, make sure that your attorney includes the cost of living adjustment (COLA) if one is offered, and that your interest in the plan is stated as a percentage of your husband’s pension, not as a specific dollar amount. This is very important, as inflation will eat into the purchasing power of your retirement payments over time.
Make sure that you receive increases in value from accrued earnings, which is income that has been earned but has not yet been paid. If this is not spelled out appropriately in the QDRO, you won’t get a share of those increases.
Earned, but not yet distributed contributions to plans should be accounted for as well.
Also, if the plan permits, your attorney should state in the QDRO that your benefits are to become payable at the earliest date that either one of you would be eligible to receive them, and your benefit is not tied only to when your ex-husband actually retires.
You may be better off negotiating a lump sum rather than having to wait until your ex-husband retires to collect a share of his benefits. An actuary will have to figure out the current value of those future benefits. Be sure to get advice from your financial advisor as well. How disciplined you are with large sums of money should be a factor in this decision. If you are a spendthrift, it may be more prudent to receive monthly checks instead.
If your spouse is receiving disability benefits or worker’s compensation due to illness or injury, those payments will be considered marital property if they replace income that your spouse would have earned during the marriage. If your spouse receives these benefits after the divorce is final, they will be considered his sole property; however, the payments may be taken into consideration in setting marital support. If you are receiving those same sorts of payouts, they will also be considered marital property under the same regulations.
If your husband receives military disability or veteran’s disability compensation, you are not eligible to receive any part of those payments in a divorce. If your ex-husband is working and then becomes disabled after your divorce is final, he may choose to take disability payments that eliminate any potential retirement pension benefits. This choice would leave you without an enforceable division of those pension benefits, yet another reason that you may want to consider taking a lump sum payment instead. Be sure to discuss this possibility with your attorney.
Different laws apply to military and government retirement plans. It will be very important to have an attorney with experience in such plans prepare the document to avoid problems that could cost you a lot of money in the future, especially if an argument arises as to which spouse (you or someone before or after you) is entitled to survivor benefits. You may need to hire a specialist before you go to mediation if the amount is significant.
In Divorce After 50, Janice Green offers a lot of good information about military retirement plans. If you were married for ten years or more while your ex-husband served in the military, you will be able to collect your share of the retirement benefits directly from the DFAS, so long as you are awarded no more than 50 percent of his pension in the divorce. If you are awarded more than 50 percent, you will have to collect the rest directly from your ex-husband.2
