How Does Spousal Support Affect My Social Security Retirement Benefits?

From time to time we are involved in a divorce with an individual or couple who is already receiving Social Security benefits. It is important to consider the affect of spousal support payments on these benefits during your divorce financial planning.

  • Social Security Retirement benefits are entitlement based meaning you have to have paid into the system in order to be eligible for benefits. You are ENTITLED to a certain amount of funds in return based up on your contributions while working. These benefits are entitlement based  and not subject to reduction based on income from spousal support. Benefits may be reduced by income from earnings if the recipient is under the normal retirement age when they receive benefits. Benefits may also be reduced for taxes and or Medicare premiums. This can be determined by reviewing the participants pay-stub.
  • Supplemental Security Income (SSI), also a Social Security benefit, is a needs based program which means you must prove you NEED the funds because of limited resources. It is, to my knowledge, reserved for those who did not contribute enough into the system to be eligible for the entitlement based programs. Supplemental Security Income has income limits for eligibility because it is NEED based. A participants’s eligibility can be affected if they earn over a certain level of income or receive support payments so it is very important to recognize the difference in your divorce financial planning.

Here is the link to the Social Security Administration web site . A Certified Divorce Financial Analyst can help you navigate the many complications of the Social Security programs.

Financial Crisis Still Causing Complications in Finances of Divorce

Four years later we are still encountering financial complications of our 2008-2009 financial crisis in divorce proceedings. Many bank and brokerage companies were forced to merge during the crisis. Morgan Stanley merged with Smith Barney. Bank of America merged with Merrill Lynch. Wells Fargo took over Wachovia and Lehman Brothers went out of business.  On top of the logistical problems; many people lost a lot of money. Here are three complications to watch out for.

1. During mergers many firms changed client account numbers. I have seen more than one occasion where a Marital Settlement Agreement was written with two different account numbers for the same account. Even worse, the two different account numbers might be treated differently. One awarded as separate property and the other to be divided.

2. During the crisis itself many investors lost large sums of money in their investment accounts. The S&P 500 lost 56% during the crisis and I have seen some situations where clients lost money then sold the assets locking in the losses. Now the spouse with no involvement in the investment management is wondering where all the money went. They may even be considering the possibility that they spouse responsible for managing the investments could have taken the funds and hidden them elsewhere in preparation for the divorce.

3. Some brokerage companies and banks did go out of business. It makes it difficult to track down account statements and verify funds when the custodian of the account no longer exists or has been consumed by another institution.

I suspect the effects of the Financial Crisis will continue to complicate the financial negotiations of divorces for a few more years maybe longer in situations where separate property claims must be traced back to 2008 and earlier.

We can help you and your attorney piece together the information that is available and make intelligent decisions about building your financial case.



Post-Election Income Tax Planning for Divorce and Beyond

We now have a bit more clarity about the future income tax landscape in the United States and the State of California specifically.

Here is what I know.

In 2013 the 0.9% Medicare surtax kicks in on taxable income over $200K for single filers and $250K for married filers.

In 2013 the 3.9% Medicare tax on unearned income such as dividends, interest and capital gains kicks in for single filers with taxable income over $200K for single filers and $250K for married filers.

President Obama wants the top rate on capital gains to rise to 20% for single filers with taxable income over $200K for single filers and $250K for married filers. He also wants the top tax rate to go higher from it’s current 35%.

What does this mean to you? It may be a good idea to sell appreciated assets in 2012. Taking gains in these assets in 2012 could save you the 0.9% Medicare surtax, the 3.9% Medicare tax on unearned income and 5% or more from the increase in capital gains tax rates.

For divorcing parties this might mean selling some appreciated assets such as stock positions or real estate in order to lock in the 15% capital gains rate and avoid the 3.9% additional Medicare tax rather than retaining them post divorce. It might mean exercising non-qualified stock options in 2012 to lock in the maximum 35% income tax bracket and avoid the additional 0.9% Medicare surtax.

California passed Proposition 30. Proposition 30 raises taxes on EVERYONE.

  • The income tax increases are RETROACTIVE to January 1st 2012
  • Sales tax rates  are increased by 3.45%
  • Three new high-income tax brackets are created raising rates from 9.3% to 10.3% for taxable income over $250K but below $300K (10.6% increase), from 9.3% to 11.3% for taxable income over $300K but below $500K (21.5% increase), from 9.3% to 12.3% for taxable income over $500K but below $1,000,000 (32.26% increase), and from 10.3% to 13.3% on taxable income over $1,000,000 (29.13% increase).

There is nothing to do about Proposition 30 at this point since the changes are all RETROACTIVE. It has amazed me how many people did not realize the measure was retroactive.

Beneficiary Designations – Post-Divorce Financial Pitfall

Change beneficiary designations on insurance and retirement accounts immediately after divorce.

Without exception, our clients want to move on with their lives as quickly as possible after they complete the financial negotiations of their divorce. Moving on includes taking control of their own finances. There is a long list of things to do in order to take control of post-divorce finances that are beyond the scope of this article (We would be happy to send you a guide via e-mail if you request.) Our best suggestion is to enlist the services of an experienced Certified Divorce Financial Analyst® (CDFA™) professional before the divorce is final to ensure that the final agreement does not have negative long-term consequences for the client.

We regularly engage with clients to complete these items and there is one simple (to us) but infuriating (to clients) road-block that almost all face: changing or naming beneficiaries in the event of the client’s death. The first steps after divorce should include opening new retirement accounts; in most cases, this will be an IRA. New account paperwork for an IRA contains a section for  beneficiary designations: the party who would inherit the account funds in the event of the account owner’s death. While married, most people want their spouse to inherit the funds in their retirement accounts; after divorce, however, the last thing they want is for their former spouse to inherit the funds in their retirement accounts should they pass on. They will often want to change beneficiary designations to their children or siblings.

Not so fast, though. If you live in a community property or marital property state, your client will need to obtain a signed consent from their current spouse to name someone else as beneficiary. In fact, most financial institutions require a spousal consent for a non-spouse beneficiary designation regardless of where the IRA owner resides. Experts believe this is simply a policy protection from beneficiary-related litigation for custodians.

Depending on a number of factors – including the divorce agreement – retirement savings accounts such as IRAs and 401Ks may require your client’s former spouse to remain the beneficiary even after they have reached agreements around the division of assets.

Planning Consideration: Timing

Many people will negotiate the date on which they will take status as single individuals for tax or other purposes. Waiting until January 1st of the year following the separation may be mandated by state-instituted waiting periods, income tax planning, insurance eligibility, or any number of other practical financial considerations. This complication provides a perfect example of an unintended consequence of negotiations: if a specific status date is negotiated into an agreement, it may have unintended consequences on a client’s financial future.

Here’s an example. The final divorce agreement for our client, Jane Smith, was filed with the court on June 30, 2012. Part of her agreement with her ex-husband, John, says they will take status as single individuals on January 1, 2013. This was done because the couple’s tax preparer advised them that they could save $2,000 in federal taxes by filing their tax return married jointly for the current year (2012).

From the federal government’s perspective, the couple remains married for the whole year – even though they have completed their financial settlement.

The agreement awards 50% (~$600,000) of John’s 401K account to Jane via a Qualified Domestic Relations Order (QDRO). In order to receive the funds, we are opening a Rollover IRA account in advance of the QDRO in Jane’s name. This way, we can tell the 401K plan administrator exactly where the funds should go and avoid any potential hiccups in the transfer process. Remember that state law, federal law, or custodian policy requires an individual name their spouse as beneficiary of retirement funds, and our client is not yet officially divorced. As CDFA professionals experienced in the intricacies of account transition, we will inform Jane that she has three options to remedy the situation and at least one to make it worse:

  1. Obtain the former spouse’s signature on a Spousal Consent for the new account paperwork. John must effectively agree to allow Jane to name her children as the beneficiary of the funds she was just awarded in the divorce.
    1. Client Quote: “You mean I just spent 18 months and $50,000 fighting over this money and I still need his permission to do what I want with my money?!”
    2. Practical Consideration: What if the relationship has deteriorated to the point where John refuses to agree to the change in beneficiary? It may cost thousands of dollars in attorney fees to force her to do so.
    3. Practical Consideration: What if Jane doesn’t want John to know who her financial advisor will be post-divorce?
    4. Name the former spouse as beneficiary temporarily. In really bad circumstances, when a couple no longer communicates at all, it may be advisable to simply name the former spouse as beneficiary with the intent of modifying this as soon as the judgment is final.
      1. Client Quote: “You mean we have come all this way and I have to keep him as my beneficiary and he will inherit my money if I die?!”
      2. Practical Consideration: What if we decide to postpone but somehow forget to change the Beneficiary Designation once the judgment is final? Does the judgment awarding the 50% to Jane protect her?
      3. Practical Consideration: What if something happens while the judgment is pending? Who inherits Jane’s money?
      4. Delay the transfer of funds. QDROs take time: the QDRO cannot be carried out until the final judgment is signed by a judge, and it is rare to see a QDRO completed in close proximity to a judgment of dissolution.
        1. Client Quote: “But you said ‘Taking Control Now’ was the most important part of my financial transition after the divorce! Now you are telling me to wait?! Wait for what?!”
        2. Practical Consideration: So what is the harm in waiting?  Our major concern is the management of investments inside of the account. When transfers are delayed, the funds are often managed by the former spouse or by an investment advisor my client has explicitly chosen not to work with. I recently had a client tell me they would never invest in such a risky asset as the Facebook Initial Public Offering (IPO). Imagine her shock when I showed her the most recent account statement for her joint brokerage account and her investment advisor had purchased 3,000 shares of Facebook in the IPO! The advisors used by a couple during marriage are rarely appropriate for both parties – particularly the woman – to work with after a divorce. Either they will be aligned with one party, unfamiliar with the specific needs of a newly-divorced woman, or unable to provide the necessary services. On top of that there is often a lack of trust. Without trust, an investment advisor has no business working with an individual.
        3. Practical Consideration: I have seen investment accounts lose half of their value during dissolution proceeding. Guess who gets blamed for the losses? Usually the former spouse – which means the client may not trust anything they have to say and turn into thousands of dollars of additional unnecessary discovery efforts.
        4. Practical Consideration: We may want to obtain Authorization and Consent from the former spouse for our client to take over managing her portion of the funds.
        5. Ignore the problem. We certainly would not recommend this option – and we would also be remiss if we failed to mention the ramifications of doing so.
          1. Client Quote: “He has been jerking me around and lying to me for years. What is the worst that could happen?”
          2. Practical Consideration: We actually don’t know what the ramifications would be of disobeying from a legal perspective.
          3. Practical Consideration: We do know if no spousal waiver has been obtained, the default plan beneficiary will be the participant’s spouse, even if he is not the named beneficiary. US District Courts have affirmed this. In this particular case, John – not Jane’s chosen beneficiaries: her children – would inherit the retirement funds if Jane should pass.
          4. Practical Consideration: There is a bit of uncertainty and disagreement amongst experts whether these rules are equally as hard-and-fast with IRA accounts as they are with 401K accounts. The presence of uncertainty makes experienced financial advisors plan for the worst-case scenario, so ignoring the precedent is never presented as an option for our clients.


The financial transition following divorce offers the opportunity for clients to remake their financial lives in a way that supports their ongoing comfort, security, and dreams. Most importantly, it offers the opportunity to take control of their finances as a single individual and throw off the constraints of a power-struggle now terminated by a judgment of dissolution.  The complications of such simple things as paperwork, as evidenced above, can have prolonged and lasting effects on your clients’ lives when the power-struggle continues after the financial agreements are reached. Enlisting the services of an experienced CDFA professional during the process will help ensure your clients obtain the most financially advantageous settlement possible and support their financial independence far beyond divorce negotiations.

At Wellspring Divorce Advisors we are experts and international leaders in the field of Divorce Financial Planning. Contact one of our advisors today for an experienced and professional guide through your post-divorce transition and help considering your beneficiary designations.

5 Financial Negotiation Strategies for Divorce

“What are 5 things people who are somewhere in the divorce process should think about?”

  1. Avoid deciding financial issues piecemeal instead of understanding the big picture.
  2. Do not allow your former spouse to use financial data as a weapon against you. The cost of divorce proceedings can be directly correlated to the amount of time and effort it takes to level the information playing field “discovery”.
  3. Budget, Budget, Budget
  4. Do cost benefit and risk versus reward analysis with your CDFA and attorney
  5. Understand that not all lawyers are skilled in resolving disputes. They are always trained to create and escalate them. Dispute resolution is a whole different world.