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Dissecting and Monitoring Your Divorce Agreement
“I love deadlines. I like the whooshing sound they make as they fly by!”
- Douglas Adams
I love “to do” lists. It is an art form of sorts to take out my favorite pen (a Uniball Vision Elite) and spiral notebook and make lists of tasks neatly segmented into “work”, “personal”, and “other” categories. I even put little dots next to each task and an estimated time to complete. I know it’s odd and a little obsessive compulsive but it works for me (I have been known to even add unplanned activities I do during the day to my list just so I can cross them off). My kids find it weird.
But if you want to accomplish anything in life you must have a plan. Fuzzy plans yield fuzzy results. Good plans yield good results. In this you will see how to build a plan for your financial life that will set you on the path towards the fresh start you desire.
Your personal recovery plan is a “to do” list that ensures you will take the actions needed to re-organize your financial life the right way. It connects directly with your vision and the settlement agreement you built during negotiations; it is also the last step in this long saga called divorce.
If you follow these steps, what might take years to accomplish in an incremental hit-or-miss way will happen much more quickly, giving you the peace of mind that financial security brings.
There are three steps to building your recovery plan:
In this article we talk about the first two of these items. I will cover the third in another article.
Get Yourself Organized
The Financial Freedom Binder
It is totally understandable that once the divorce is finalized you simply want to take a break from all the financial stuff, but it is important to reserve a little energy to get your new financial life in order.
I recommend you get a single binder for all important papers. When we work with our clients in their recovery plans we give them a binder with tabs for all the important papers. The binder has sections for estate planning, budgets, investments, and the other elements of a person’s financial life. When it is time to talk about money matters everything is in one place.
Gather all of your account statements - from checking account to investment accounts to your company retirement plan, all of them. This is your “asset” information. Then do the same for your “liabilities” such as your mortgage, credit cards, car loans, and other debt. Create sections for all your divorce paperwork, insurance policies, and estate documents. Put it in a safe but accessible place since you will refer to it often.
Dissecting and Monitoring Your Agreement
Your agreement is a legal contract that can be simple or amazingly complicated. Either way, there are commitments both you and your spouse must take action on in order make your agreement a reality and to keep out of legal trouble.
You would think that given all the time and energy that goes into an agreement, putting it in place would be an easy, if not automatic, process. But that is simply not the case.
Lawyers can take their eye off the implementation ball as they move on to the next divorce case, and your mediator is not responsible for implementing agreements. So it is really important that YOU, whose financial life hinges on getting your agreement implemented properly, be on top of things.
Fortunately, there is a process for doing this. And it is simply to read your agreement, make a list of each action and commitment, and create a tracking sheet so you can keep tabs on what is to be done and by whom.
Agreements are a mass off words on white paper, and sometimes written in ways that are tough to decipher, but they generally contain four types of financial commitments:
Let’s go over each one.
Asset Division Instructions
The splitting up of marital assets are the bread and butter of settlement agreements. How this is accomplished varies depending on the type of asset being divided.
Investment, Checking, and Savings Accounts
If these are held in joint name they are available to either owner. Therefore it is a simple matter to open a separate account and transfer the agreed-upon amount to an account held in your name. If they are held in single name only the account owner issues a directive with the bank or brokerage firm so the so assets can be sent in the form of a check or direct transfer into an account at the firm.
Please note that there are tax implications in liquidating investment assets such as stocks, bonds, and mutual funds in taxable accounts. It may be beneficial to simply move the assets “in kind,” which means to transfer a portion of the investments as-is (as IBM stock for example), rather than sell them and move the cash proceeds.
You should consult with your tax and investment advisor as to what may be most appropriate for you from a tax perspective. In general, if the portfolio is a good one for you a sale will just add unnecessary expense in the form of taxes and transactions costs.
Qualified Domestic Relations Order (QDRO or “Quadro”)
Some types of accounts, mainly retirement plans sponsored by corporations, can only be split through a formal order known as a QDRO. This legal document is the formal authorization that instructs a company to transfer assets to a non-employee spouse as an “alternate payee” per a divorce settlement.
Assets that require a QDRO are “defined contribution” accounts like 401(k)s and “defined benefit” plans such as pensions. They are part of a group of corporate retirement plans regulated by the federal government under the ERISA Act of 1974.
This is an area of divorce recovery that is littered with potential problems. These are legal documents often created by disconnected third parties requiring just the right wording so that appropriate action is taken by the employer.
As you might imagine there is the opportunity for delays and errors in the process, especially if what is being transferred involves complex assets such as pensions. So it is essential that you make note of what assets require a QDRO and monitor the process carefully (also see 17 for more information about QDROs).
A QDRO is a complicated document dealing with the division of a complex investment. It is important that care be taken in structuring your agreement so that it is clear how these assets are to be divided and to monitor the creation of the QDRO so it conforms to your wishes.
Other Types of Asset Splits
Individual retirement accounts (IRAs) do not require a QDRO. The brokerage or mutual fund firm holding the assets just need a “letter of instruction” from the account owner specifying that assets are to be moved to another party as part of a divorce agreement. They may have their own forms to simplify the transfer. If you don’t have an IRA opened in your name, you will need to open one.
Executive compensation plans may or may not be divided subject to a divorce, depending on the rules of the corporation. These plans include deferred compensation, stock purchase plans, restricted stock grants, and stock option programs.
As part of building your agreement, and prior to your approval, you should have learned which of these plans, if any, could be split into accounts in your name. If they were not able to be placed in an account in your name then you may have put in your agreement “if and when received” language that states what is to happen when the assets become available to the employee spouse.
Obligations to Provide Income or Pay Expenses
Alimony and child support payments, or commitments to pay expenses such as a mortgage or health care insurance, should be noted and tracked.
It is especially important where you are the beneficiary of a life insurance policy that you know when a payment has been made. Arrange to have duplicate statements sent to you or have the check deposited into an account you can monitor.
Sales of Assets and Division of Proceeds
If a home or other asset is going to be sold and the proceeds divided, you should make note of this. While it is unlikely you will forget about a home sale, there may be other assets that will call less attention to themselves, especially if the accounts are numerous and small. Small brokerage accounts, health savings accounts, and even frequent flyer miles you agree to split tend to vanish from consciousness unless special care is taken. Your CDFA can create a spreadsheet for you.
Obligations Based on a Future Event
There is nothing to do here except to understand clearly what will trigger a potential payment. Typical events include death, remarriage, termination of employment, retirement, or children reaching the age of majority.
Most people just feel collapsing after the divorce papers arrive, but you need to reserve some energy for making sure the details of your well designed agreement are implemented properly.
This article is excerpted from “The Financially Smart Divorce”
In determining child support, Rhode Island uses the Income Shares Model, which takes into account the amount of support that would have been available to the children if the marriage had not ended in divorce.
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