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Some Financial Hints for Divorce
It's a sad fact that 50% of all marriages fail and the spouses wind up in Family Court seeking a "Dissolution of Marriage" also known as a Divorce.
This is not an article intended to give legal advice but rather point out a few financial issues which are often overlooked or misunderstood by participants. None are complicated, except for the QDRO and some may be completed prior to the actual divorce.
If you will be dependent on an ex-spouse for alimony, child support and contributions to a college fund for the children, you should take steps to insure that the money will be there should anything happen to the ex-spouse. In the case of death, this can be accomplished by having your spouse apply for life insurance, before the divorce. You should be both the owner and beneficiary of the policy and it should be sufficient to provide a lump sum of money approximating the discounted value of the future payments.
It is important that this be addressed prior to the divorce since there is a possibility that the applying spouse may not be able to obtain insurance coverage, and armed with that fact, the property settlement may be structured differently. In many cases a term policy will be the most appropriate type of policy. Depending on the age of the insured and state of residence, it is possible to obtain affordable coverage where the rates are guaranteed to remain level for 20 years.
Why should you be the owner of the policy you ask? Simply put, if you are the owner you will know if the policy is in force, and if the ex-spouse is supposed to make payments and does not then you will be able to make the payment and not let the policy lapse. Also as owner you are the person who names the beneficiary.
Can you imagine mistakenly believing that a policy was in effect and then finding out that it was cancelled a few years ago and now you have lost the 10 years of future child support plus whatever else may have been planned? The issue of the spouse failing to have made the payments can be addressed in Court, but in the meantime the coverage has remained in place.
Disability insurance is also something that should be considered, although it is more expensive and more difficult to obtain. Disability insurance is designed to replace a portion of a person's income if they are unable to work due to accident or sickness. It is actually more difficult to obtain than life insurance and is relatively expensive, yet if circumstances allow for it, then it should be considered.
The other area which I find is misunderstood is the division of retirement assets. Retirement assets are IRA's and company sponsored retirement accounts such as a 401(k), 403(b), 457 Plan and your traditional defined benefit pension plan.
In your divorce decree it should mention how an asset will be divided. For the sake of simplicity let's assume that the accounts are to be divided evenly, 50% to each party. In the case of an IRA, you need to contact the custodian of the account and ask them what they require in order to split the IRA. The custodian will be the bank, brokerage or insurance company that holds your assets. Each custodian will have their own requirements. In one instance there were four IRA's which were being split, and the requirements ranged from simple to more cumbersome. One custodian asked only for a letter from the person who was losing 50% of the IRA requesting that it be transferred to the ex-spouse and a letter from the ex spouse acknowledging the transfer. Another custodian required complete paperwork plus an original certified copy of the divorce decree and the other two custodians asked for the same paperwork but would accept photocopies of the decree.
Transfers can only be made after the divorce but it is certainly within each of your rights and abilities to have an understanding of the requirements and have as much of the paperwork completed prior to the divorce so that when the divorce papers are signed by the Judge and the copies of the decree are available they can be submitted to the custodians in a timely manner.
When dealing with a corporate sponsored plan it is more complicated. For sake of brevity, and the purpose of this article, it is assumed that the values of the plan have already been determined. Again, it has been agreed that each will receive 50% of a retirement plan, and clearly says so in the decree. While this is satisfactory paperwork for an IRA it means absolutely nothing for a qualified plan. You will need another document known as a Qualified Domestic Relations Order, or QDRO, to be signed by the Judge ordering the plan administrators to divide the participant's plan into two portions.
Without the QDRO the plan sponsors are unable to divide the accounts as per agreed in the divorce settlement and your spousal rights may be in jeopardy.
There are a few things that can be done to help simplify the matter. You should obtain what is known as a Summary Plan Description for the plan which you are receiving the money from. It will disclose the plan features and the payout options available. If a QDRO contains payout instructions which are not allowed by the plan, the QDRO will not be accepted by the plan sponsor because it will be impossible for them to comply with. You might also ask the plan sponsor if they have either their own QDRO form which they like used or have a checklist. Please understand that even if they have their own form, it is permissible to have your attorney prepare one that may provide better protection for you. Lastly, when the QDRO is prepared and before it is signed by the Judge, you may be able to submit the QDRO to the company for their review and they will confirm that they will or will not accept the document signed by the Judge.
If a QDRO is rejected by the plan administrator then a new one will need to be prepared, reviewed, signed and submitted. Apart from the extra costs involved, there will be time delays in which you may not be protected and will not have control of the money.
If you are working for the military, United States Government, state or municipality the QDRO may not be applicable but there will be a substitute document which will operate in a similar fashion.
In Connecticut, grounds for divorce may be no-fault, which means irreconcilable differences, or the traditional fault grounds of adultery, fraud, intolerable cruelty, imprisonment, confinement due to mental illness, and living separately for 18 months.
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