Retirement Accounts & Divorce: Why you need a QDRO

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QDRO

QDRO: Qualified Domestic Relations Order

A Qualified Domestic Relations Order (QDRO) is the court order required to give notice to a retirement plan administrator that an Alternate Payee is entitled to a portion of the plan. Without a QDRO the plan administrator cannot legally make payments to the Alternate Payee.

Retirement plans such as 401(k)’s and defined benefit pension plans are often among the largest assets to be divided during the division of a martial estate. Many of these plans are governed by a set of federal laws known as the Employee Retirement Income Security Act of 1974 or ERISA. ERISA allows an Alternate Payee such as a former spouse to receive a portion of the employee’s benefits with a court order.

Who should draft my QDRO?

The drafting of a Qualified Domestic Relations Order is an important step in the divorce financial planning process and should be drafted by an attorney familiar with this subset of legal practice.

Financial planners have specific and far reaching knowledge of retirement plans and the underlying laws that govern them but are ill-equipped for drafting the actual Domestic Relations Orders as they are usually not attorneys.

Do I REALLY need an attorney?

For a QDRO to be valid and accepted by both the court and the plan administrator it must contain specific requirements under the law as well as be tailored to that specific plan. Retirement plans may even reject court certified orders that were not pre-approved by their own staff. For this reason it is necessary for a draft to be sent to the plan administrator for pre-approval prior to seeking court certification.

Wellspring Divorce Advisors suggests the qualified domestic relations order be drafted and pre-approved prior to finalizing the global financial agreements. We have seen many individuals still fighting to get their share of the retirement plans awarded to them years after settlement because the other party refuses to sign. See more on the QDRO Process here.

The Deposition: How to keep surprises to a minimum during your divorce.

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What is a deposition?

In a deposition, one party or that party’s lawyer conducts face-to-face questioning of the other party or a witness to the dispute.

The person being questioned (the “deponent”) must answer under oath, and the answers are recorded by a court reporter or possibly on video for later use at trial. If the deponent cannot testify at trial, the questions and answers might be read as evidence. If the deponent does testify and gives different answers at trial from those he gave during the deposition, the questions and answers can be used to show the jury that the witness changed his story bringing his credibility into question.

When a witness loses credibility it will tarnish the believably of his entire testimony.

When should a deposition be used?

Depositions can be under utilized in divorces…but possibly for good reasons. In situations where parties are amicable and have equal access to financial information, depositions are a waste of time and money. They should be used only in cases where the opposing party or their financial expert has information you want and need and are not freely providing it.

Some jurisdictions refer to a deposition simply as “testimony before trial” which is a much more descriptive term.

Why is a deposition important?

A deposition is a great tool to find out, in advance of hearing or trial, what a witness is likely to say in the future. You can find out:

  • What a financial expert testifying for the opposing party will testify to at the hearing.
  • How they rendered their opinions.
  • If they have any financial documentation not yet in your files.

All of these realizations can and should assist your attorney and financial expert in preparing your case before it is argued in front of a judge.

How can Wellspring Divorce Advisors help with this process?

Your Wellspring Divorce Advisor can even attend the deposition of your former spouse or their financial expert and assist your attorney in questioning the witness. Depositions can be a powerful means of gathering financial information when one party is at a disadvantage.

You Need a Game Plan: 10 strategies to help you during your divorce.

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Throughout our experience as Certified Divorce Financial Analysts we have developed a passion for strategic thinking during financial negotiations of divorce. Every case presents different challenges, opportunities and client goals. No two negotiations are the same but we find some financial strategies during divorce important to consider in every case.

Here are 10 strategies to help you during your divorce.

1. IRS rule 72(t)

This allows hardship withdrawals without the 10% penalty from 401(k) plans during divorce. Consider this strategy to help with cash flow problems during dissolution proceedings.

2. The Government Pension Offset and Windfall Elimination Provision

These are federal Social Security rules that often unexpectedly reduce Social Security retirement benefits in divorce situations and may cause inequity.

3. Consider that an apples to apples comparison may not be possible…

…for before tax and after tax dollars from an individual brokerage account versus an IRA. Agreeing to an equal offset of accounts with different tax ramifications may result in inequity.

4. Know the value

Comparing the present value of a currently available liquid asset such as a savings account versus the future value of a non liquid asset such as a pension may result in inequity.

5. Child contingency and Alimony recapture laws

These are hard to analyze and often missed in setting support awards but can cause unexpected tax ramifications of great magnitude if left without review.

6. Capital gains

Unrealized capital gains that may cause future taxes should be included in estimates of value when considering asset division. Agreeing to a division where each party receives an asset of equal value but one has a large capital gain built in will result in inequity.

7. Know what has cash value now

Dependency exemptions and tax filing status may have real cash value now and in the future and can be used as bargaining chips for financial settlements.

8. What about the life insurance?

Life insurance placed as security for support payments should be positioned before a final settlement is reached to ensure a policy will be available with an efficient cost structure.

9. Retirement plans

Qualified Domestic Relations Orders necessary to divide retirement plans should be drafted and approved by the plan administrator prior to the divorce being final to avoid delays common post divorce.

10. Don’t forget the real estate

Consider the advantages of deferring capital gains taxes on real estate assets by using a 1031 exchange or converting a rental property to a primary residence for tax purposes.

 

As your partner and with a little guidance from attorneys, we will help you reach an equitable solution. Call Wellspring Divorce Advisors today to begin the journey towards your future.