What is a Qualified Domestic Relations Order?

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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. 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.

Who Should Draft My QDRO?

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

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.

Temporary orders for money in divorce

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Temporary orders are usually issued regarding child custody, child support, spousal support and use or possession of assets. They cover the time period between the time that the divorce petition is filed and the time that the judgement of divorce is issued. Orders of any type are legal matters requiring the attention of legal counsel. Wellspring Divorce Advisors requires all of our clients consult with legal counsel to make sure they understand their legal rights and obligations.

Divorce is not a fast process. It is a legal, emotional and financial process often lasting years from the date a petition for dissolution is filed. Because of the often long periods of time passing between petition and judgment the court is often asked to make temporary orders on certain pieces of the case. Temporary Orders are important from a financial perspective because they are designed to protect the parties from risks that appear during pending dissolution proceedings. Risks might include a full time mother and homemaker being cut off from family bank accounts and by extension unable to pay bills. They may be entered for the sole purpose of providing clarity and guidelines to parents as to their obligations to support minor children. There may also be reasons to make orders for a party to continue supporting the costs of a marital asset in order to protect credit scores. Temporary orders could also be used in situations where extensive financial data gathering is under way and the court simply lacks complete information to make longer term decisions.

Following are some examples of temporary orders related to finances we have seen in our practice. We have provided links to California self help websites where possible.

  1. Order for Temporary Alimony or Spousal Support – A temporary order for alimony is often entered to ensure both parties have the ability, to the extent possible, to maintain the marital standard of living they enjoyed during marriage. At the very least the temporary order is put in place to provide necessary funds to a non-working or lower earning spouse to support themselves during pending litigation or settlement discussions. In California the amount of temporary alimony will usually be calculated by a computer program called Dissomaster based upon historical and current incomes of both parties. Note: Temporary spousal support is almost always higher than long term spousal support in our experience.
  2. Order for Temporary Child Support – A temporary child support order provides necessary funds to a non-working or lower earning spouse to support the expenses necessary to support minor children. The amount of temporary child support will be based upon the incomes of both parties as well as the needs of the children. If, for example, the children have special needs or attend private schools, orders may be entered to cover the associated expenses of specific items.
  3. Order for Sole Use and Possession of the Marital Residence – In more contentious cases parties may argue over who should move out of the marital residence during the pending litigation. It may be necessary in this case to grant one party sole use and possession of a marital home on a temporary basis while litigation or settlement discussions proceed.
  4. Automatic Temporary Restraining Orders – in most jurisdictions the filing of a petition for marital dissolution in accompanied by temporary orders restraining either party from selling, encumbering or otherwise disposing of an asset. The orders may also restrict you from changing beneficiaries on insurance or retirement funds.

 

What is no fault divorce and how does it affect my financial settlement?

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No Fault Divorce means that you are not required to provide proof your spouse was “at fault” or did something wrong, such as committing adultery, or being abusive to be granted a divorce. Every state in the US has adopted some form “no-fault” divorce laws. California was the first to do so in 1969 under then Governor Ronald Reagan. New York was the last to do so in 2010. The application of the no fault divorce terminology is not uniform from state to state since each state independently passed laws to enact it. Some states allow but do not require the proof of fault in a divorce filing while others don’t even allow a petitioner to claim any grounds for fault in a filing. Check with an attorney in your state to verify your state laws.

How can no-fault laws affect your financial settlement?

They don’t necessarily. You may still be permitted to show facts related to one parties actions as part of your case. Some states are known as “equitable distribution” states and allow a judge to take the conduct of parties during the marriage into account in dividing assets. Equitable does not mean equal. This means the court can divide assets based up on what it believes is FAIR and effectively penalize a party financially for their actions during marriage. Dissipation is one of the most common fault actions affecting an asset division in divorce. Dissipation, in loose terms, refers to the misappropriation of marital assets. Usually these allegations stem from drug use, pornography, gambling or expenses related to acts of infidelity.

If you believe dissipation to be an issue in your divorce we suggest you seek guidance of a certified divorce financial analyst at Wellspring Divorce Advisors to help you understand the cost/ benefit of making such an argument. These types of claims typically require significant forensic accounting to prove the flow of funds and who was in control of it and it may not be worth it to pursue the claim in light of the cost associated with doing so.

Are pension and other retirement plans considered marital assets and subject to division in divorce?

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Yes, retirement plans are marital assets subject to division to the extent they were earned during the marriage. State laws differ on how to determine exactly what “earned during marriage” means so be sure to check with a local expert. In California the presumption is that any pension plans, 401K balances and other retirement accounts are community property and subject to division unless/until proven otherwise. If the retirement plan benefit was earned during marriage it will be divided.

In order to earn pension benefits a worker must be employed and participating in the plan.

In order to participate in a 401K plan the worker must make contributions to the plan by deferring wages from his or her regular paycheck.

Since both examples would require the participant to earn their benefit in one form or another, either time in the pension plan or contributions to the 401K, these earnings are considered community property or martial assets and will typically be divided 50/50 unless their are other extenuating circumstances or the parties agree otherwise.

Be careful though to make sure you are dividing apples with apples as retirement plans are pre-tax money where as other assets may have already been taxed. The difference in value between $100,000 pre-tax and $100,000 after tax could be $20,000 or even $50,000.

Defense of Marriage Act Ruled Unconstitutional – Same-Sex Marriage Legal in California

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The Supreme Court has found the Federal Defense of Marriage Act (DOMA) to be unconstitutional in all states where the state allows same-sex marriage. Same-sex couples now have equal rights to those of opposite-sex marriages including

  1. File joint tax returns as their marriage is not recognized for this purpose. This may result in larger tax bills for same sex couples compared to a marriage of a man and woman which enjoys the right to file Married Jointly. Under DOMA same-sex couples did not have the option.
  2. Take advantage of unlimited asset transfers between spouses. Section 1041 of the internal revenue code allows married couples to transfer an unlimited amount of assets back and forth during marriage and as part of a marital dissolution proceeding. A same sex couple did not have the same rights under DOMA and instead was often required to make other plans for tax efficiently passing assets via complicated and costly estate planning and trusts. Property settlements upon the dissolution of an opposite-sex marriage would not trigger income taxes. However, under DOMA a property settlement in the divorce of same-sex couples resulted in appreciated assets being deemed to have been sold for the value of the obligation being extinguished (the property settlement). This could trigger a gain or loss for tax purposes and have possible tax implications.
  3. Collect Social Security benefits on their spouses record. Under DOMA Same sex couples did not have the right to spousal or survivor benefits under the Social Security system. This kept a same sex couple from adopting a family model with a stay at home parent and had major negative consequences if a major bread-winner passes away.
  4. Have a spouse covered under an employer provided benefit program such as medical insurance. Under DOMA a same-sex couple was not afforded the same rights to cover their spouse on employer provided medical and other benefits.  The resulting accommodation had become some corporations adopting eligibility requirements allowing a same sex couple to have coverage but DOMA made the benefit a taxable income to the employee when a man and woman couple would avoid such taxation.
  5. Deduct alimony payments to their spouse on a tax return. Under DOMA alimony payable from a member of a same sex couple to their spouse is not tax deductible as it would be when payments are made between a man and woman couple. This arrangement generally had the effect of transferring income between ex-spouses tax efficiently by reducing income of the taxpayer in the higher marginal tax bracket and transferring it to the ex-spouse in the lower marginal tax bracket. Under DOMA alimony payments from same-sex divorces are not deductible for federal income tax purposes and may in fact be considered a gift, further reducing the lifetime limit or even triggering taxable gifts.

The Supreme Court has found the Proposition 8 supporters in California lack standing for appealing the voter decision making same-sex marriage legal in California and remanded the case to a lower court. Ultimately this means same-sex marriage in California will resume.

The combination of Defense of Marriage Act strike down and Proposition 8 decision means same-sex couples in California will have the same rights under the law as their opposite-sex counterparts.