How To Manage Your Finances After A Divorce

Contributed by: Kali Hassinger, CFP®, CDFA®

Divorce isn’t easy.  Determining a settlement, attending court hearings, and dealing with competing attorneys can weigh heavily on all parties involved. In addition to the emotional impact, divorce is logistically complicated.  Paperwork needs to be filed, processed, submitted, and resubmitted.  Assets need to be split, income needs to be protected, and more paperwork needs to be submitted!  With all of these pieces in motion, it can be difficult to truly understand how your financial position will be impacted.  Now, more than ever, you need to be sure that your finances are on the right track.  Although every circumstance is unique, there are few steps that are helpful in most (if not all) situations.

Assess your current financial situation

Following a divorce, you’ll need to get a handle on your budget. You may be responsible for paying expenses that you were once able to share with your former spouse.  What are your current monthly expenses and income?  Regarding expenses, you’ll want to focus on dividing them into two categories: fixed and discretionary.  Fixed expenses include things like housing, food, transportation, taxes, debt payments, and insurance.  Discretionary expenses include things like entertainment and vacations.

Reevaluate your financial goals

Now that your divorce is finalized, you have the opportunity to reflect on your needs and wants separate from anyone else.  If kids are involved, of course their needs will be considered, but now is a time to reprioritize and focus on your needs, too.  Make a list of things you would like to achieve, and allow yourself to think both short and long-term.  Is saving enough to build a cash cushion important to you?  Is retirement savings a focus?  Are you interested in going back to school?  Is investing your settlement funds in a way that reflects your values important to you?

Review your insurance needs

Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement, however, there is often still a need to make future adjustments to coverage.  When it comes to health insurance, having adequate coverage is a priority.  You’ll also want to make sure that your disability or life insurance matches your current needs.  Property insurance should also be updated to reflect any property ownership changes resulting from divorce.

Review your beneficiary designations & estate plan

After a divorce, you’ll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts. This is also a good time to update or establish your estate plan.

Consider tax implications

Post-divorce your tax filing status will change.  Filing status is determined as of the last day of the year.  So even if your divorce is finalized on December 31st, for tax purposes, you would be considered divorced for that entire year. Be sure to update your payroll withholding as soon as possible.

You may also have new sources of income, deductions, and tax credits could be affected. 

Stay on top of your settlement action items

Splitting assets is no small task, and it is often time consuming.  The sooner you have accounts in your name only, the sooner you will feel a sense of organization and control.  Diligently following up on QDROs, transfers, and rollovers is important to make sure nothing is missed and the process is moving forward as quickly and efficiently as possible.  Working with a financial professional during this process can help to ensure that accounts are moved, invested, and utilized to best fit your needs.

When your current financial picture is clear, it becomes easier to envision your financial future.  Similarly, having a team of financial professionals on your side can create a feeling of security and support, even as you embrace your new found independence.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

Tying Up Loose Ends Post-Divorce: What’s Your Game-Plan?

Contributed by: Jacki Roessler, CDFA®

Your divorce is final! For many couples, getting divorced takes so much time and effort, it practically feels like a part-time job. While it might be tempting to quickly close the door on this unpleasant chapter, you actually need to do the opposite. 

It’s important to understand that your divorce decree is only binding on you and your ex. It isn’t binding on third parties such as insurance carriers, retirement plan administrators, credit unions and credit card companies. Regardless of what your Judgment says, third parties aren’t bound by your divorce decree.  Let’s suppose your ex-spouse was supposed to make the payments on the mortgage (currently in both of your names) and she decides to stop. The lender isn’t going to care that your divorce decree says she was supposed to pay. Your name is on the loan, therefore, you’re responsible. The same is true for pension plans, retirement accounts, etc.… If your ex-spouse dies, remarries, retires, moves money to a different account or stops making insurance payments before you tie up the loose ends, you may end up getting significantly less than what you worked hard to agree upon. Time is your enemy.

Tracking asset transfers

First things first, create a document that lists all the assets/debts that are being transferred as well as all the details. Since we work with such a large number of post-divorce clients at the Center, we often create a transition table or spreadsheet to track paperwork and follow-up.  Again, follow up is key as once your Judgment of Divorce is signed, there is little incentive for your ex-spouse to cooperate with any transitions.

Prioritize your list of “do it now” versus “do it later” items

Not all post-divorce tasks should be categorized as “do it now” items. Some might be “do it later” such as re-financing a mortgage or getting help with investing your settlement. Others are definitely “do it now” such as making sure your ex’s employer has received notice you want to continue your health insurance coverage through COBRA. Another important “do it now” item is closing all joint credit card accounts. Again, you don’t want to be responsible for debt that isn’t yours and you certainly want to be in control of your own credit rating. Be careful to note any items that have a written deadline in your divorce decree.

Also keep in mind that everyone’s list of “do it now” versus “do it later” might be different. If you think mortgage rates are going to up, for example, it might higher on your list than someone who is more concerned about building a better credit rating than interest rate fluctuation. Same is true for those that are ready to develop and implement an investment strategy tailored to their new lifestyle and circumstances.

A word of caution for the “do it later” items. Put a deadline in place for yourself to make sure these items actually get done. It’s shocking to learn how many people wait more than 10 years to get their QDRO drafted, for example. Similarly, during times of market volatility such as we’ve been experiencing, novice investors sometimes choose to sit on the sidelines. Since no one has a crystal ball, this wait and see approach –called “market timing” is generally a losing proposition. Many market timers miss out on the largest days of investment gains in the stock market which can seriously impact their retirement objectives.

There IS light at the end of the tunnel

There will come a day when everything is resolved. It will surely come sooner and with much less aggravation (and chance of post-judgment legal fees) if you develop your strategy now.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

Recently Divorced? Tax Strategies to Save Money in 2020

Contributed by: Jacki Roessler, CDFA®

It’s an opportune time to discuss tax planning for the recently divorced. Let’s turn to a professional, my colleague Matt Trujillo, CFP®, for his year-end tax tips. Many of my clients have the benefit of working with my colleague Matt for their post-divorce financial planning needs. Matt is an enthusiastic advocate for clients when it comes to tax savings.

Right now, newer divorcees may be in a unique position to take advantage of money-saving tax strategies in 2020. 

Although they may be receiving substantial income, much of it might be non-taxable. Like child support for example. Any spousal support that began after January 1, 2019, is also treated as a non-taxable income. As some divorcing clients transition back into the workforce over the next few years, they may find themselves in the lowest tax bracket of their life. Low tax brackets can be used to an investors’ advantage when they have tax-savvy advice. 

1. One of Matt’s key strategies is converting traditional IRA dollars into Roth IRAs. How do Roth Conversions save taxpayers over the long term? Money converted is treated as ordinary income. The long-term benefit of Roth IRA accounts is that the money grows income tax-free versus income tax-deferred growth in regular IRAs. When it’s withdrawn in retirement, there is no tax due. Plus, there are no required minimum distributions (RMDs) on Roth IRAs whereas RMDs are required beginning at age 72 in Regular IRAs. So while taxes are due at the time of conversion, Matt reminded me that clients in transition can take advantage of “locking in” their lower tax rate today by converting IRAs when they are in an extraordinarily low tax bracket. Of course, this doesn’t make sense for every divorced person, and often, it takes some careful planning that incorporates converting a set amount each year for years to be the most tax-efficient.

   Money converted into Roth IRAs must come out of the regular IRA by the end of the year to qualify.

2. Another important strategy Matt employs is tax-efficient investing which involves tax-loss harvesting, tax gain harvesting, and appropriate asset allocation. Many divorced clients don’t realize the amount of money they lose on tax-inefficient investing; what is often referred to as “tax drag”. Loss harvesting involves selling positions that have decreased in value to realize a “capital loss” that offsets any capital gains realized in the same tax year. Losses can even be realized today and “carried over” to future tax years. With the market performance this year, many investors will have to report significant mutual fund capital gains. Offsetting gains with losses can save immediate dollars today. 

   Matt shared with me that tax-efficient asset allocation strategies are a key component of smart investing that novice investors may not be aware of. For example, do clients own municipal bonds and low turnover funds inside of their IRA accounts? These types of assets are best utilized in taxable accounts where their low anticipated return is in correlation with their tax efficiency. Holding them inside of retirement accounts is an unnecessary redundancy that may limit growth opportunities. 

The greatest takeaway for every new divorcee is that they should sit down with their financial advisor and tax professional to determine what they can do right now. If you wait until 2021, you may be leaving money on the table that could be in your pocket.

Any opinions are those of Jacki Roessler and Matt Trujillo and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. While we are familiar with the tax issues presented here, as financial advisors with Raymond James, we do not provide specific tax advice. You should speak to the appropriate tax professional in regards to your particular situation. All investing involves risks, including loss of principal amount invested. No investment or tax strategy can guarantee your objectives will be met. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

The Importance Of A QDRO In A Divorce

Contributed by: Jacki Roessler, CDFA®

It’s the end of an arduous divorce process. You and your spouse have agreed on parenting time, spousal support, and what to do with the house. It hasn’t been easy. You’re more than ready to sign the Judgment of Divorce and move on to the next phase of your life. 

As you’re signing all the documents, your attorney mentions that you need a QDRO and you should get it done sooner rather than later. You put it off. You’re not exactly sure what a QDRO is and you’re overwhelmed with helping your family adjust to its new normal.

To say this is a big mistake is a big understatement. Getting the QDRO (short for Qualified Domestic Relations Order) done needs to be at the top of every divorced spouse’s “Do it Now!” list. The longer the wait, the more the settlement is at risk because there’s a much greater chance something could go wrong. 

First things first, what is a QDRO and what is the harm in waiting? 

A QDRO is a legal document used to divide a qualified employer-sponsored retirement plan (i.e a 401(k), 403 (b), pension, etc…) under a divorce. Based on the federal law ERISA (Employee Retirement Income Security Act), the only way to divide a 401k type plan is with a QDRO. The Judgment of Divorce can’t be used for that purpose unless the terms of the QDRO are embedded in it. Furthermore, the only one with authority over “qualifying” a QDRO is the plan administrator. ERISA grants them ultimate decision-making authority. 

What can go wrong if there is a delay?

Where to begin? One common issue occurs when a 401(k) account owner takes a distribution, loan, or rollover before the QDRO is entered, thereby reducing or even eliminating the former spouse’s access to their share.

For example, John and Samantha divorced in 2019. Samantha was awarded 50% of John’s 401k account with Acme Widgets. She waited two years to retain an expert to prepare her QDRO. In the meantime, as a result of being laid off, John took a CARES Act distribution that liquidated his entire 401(k). Remember, the Judgment of Divorce is only binding on the parties; it’s not binding on third parties like insurance carriers, credit card companies, or plan administrators. Without a QDRO in place, Samantha didn’t have any legal right to the money in John’s 401(k) so the plan let him do what he wanted with it.

Now let’s suppose that Samantha only waited 3 months to get the QDRO prepared. John’s employer changed custodians and the new custodian no longer had a record of his account balance on the date of divorce. Surprisingly, account custodians aren’t required to maintain any historical records. In this case, the QDRO is rejected and the parties are left to negotiate what happens next.

Of course, no one wants to hire an attorney again and hash out a QDRO issue in front of the judge. Imagine how much worse it would be if someone has to take their ex-spouse’s estate to Court.

Consider the case of Mike and Carrie. Mike was to receive 50% of Carrie’s pension with General Motors. The QDRO wasn’t entered and Carrie died unexpectedly in an accident. Of course, her new spouse was named beneficiary and he was the one that began receiving survivor benefits on the pension. Mike wrote a letter to the plan and gave them a copy of his Judgment of Divorce which stated he was supposed to be the beneficiary. The Plan responded by telling him to get an attorney; they weren’t bound by the Judgment of Divorce. 

These are only a few of the many things that can go wrong when the parties wait to enter the QDRO. Once they leave the courthouse and they don’t have a QDRO in place, it’s almost as if a time bomb waiting to go off is hanging over their head. It’s possible nothing could go wrong, but if it does it could be disastrous. If you need a QDRO, make sure that it's at the top of your priority list. 

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

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Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal advice matters with the appropriate professional.

A Checklist For Managing Finances After A Divorce

Contributed by: Jacki Roessler, CDFA®

As a divorce financial planner, my clients often ask what financial tasks should be addressed immediately and which ones can wait. Post-divorce life can feel overwhelming. To achieve long-term financial success, I recommend sorting your financial tasks into 3 categories: those that need immediate attention, those that can wait 3-6 months, and those that should be tabled until more time passes. Although each case is different, there are a few items that always seem to hover at the top of my “Do it now!” list.

Secure spousal support through life insurance

If you’re receiving child support or alimony payments, in most cases your divorce decree would state that your ex-spouse needs to maintain “adequate” term life insurance coverage to secure your interest. However, what most clients don’t understand is that the divorce decree is only binding on you and your ex-spouse. If he or she changes the beneficiary or stops paying the premiums, your child support and alimony could be at risk. Your ex-spouse might be in violation of the divorce decree, but that doesn’t matter much if they are no longer alive. There are steps to take to prevent that from happening. Ask your former spouse to make you the owner of the policy. Only the owner is notified when a premium payment is missed and only the owner can change the beneficiary. If your spouse doesn’t agree, contact the insurance carrier to see if they will copy you on quarterly or even monthly statements so you can take immediate legal action if needed.

Remove your ex-spouse as a beneficiary

Suppose that based on your agreement, your divorce decree says your ex-spouse won’t receive any share of your retirement accounts. Upon your death, if you forget to change your beneficiary designations, your ex-spouse will still receive your retirement account, regardless of what your divorce decree states. As noted in item 1 above, your divorce decree isn’t binding on third parties, such as insurance carriers and account custodians. It’s only binding on you and your ex-spouse. Rather than expose yourself or your heirs to estate litigation, confirm that you’ve changed your beneficiary designations on all retirement accounts.

Get your QDRO

The QDRO (Qualified Domestic Relations Order) is the only legal document that will transfer interest in a qualified (i.e. employer sponsored) retirement plan or pension between spouses pursuant to a divorce. The problem is that most couples wait several months (sometimes significantly longer) to get their QDRO drafted. Why does it matter? If your ex-spouse (the account owner) dies, remarries or retires prior to the plan administrator approving your QDRO, your awarded benefits could be severely diminished or even eliminated. Timing is critical.

Partner up with a qualified financial advisor

Last but certainly not least, I recommend that clients without investment or financial planning experience find an experienced and trustworthy advisor to work with going forward. There are multiple moving parts after the divorce is final. Clients need to open new accounts, transfer assets, obtain health insurance, make sure QDRO are in place, and design a new investment portfolio strategy. The transition process can seem daunting. Enlisting the aid of a financial advisor/advisory team that has experience working with post-divorce transitions can ease the pressure. That partnership will help you complete the “Do it now!” checklist.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

COVID-19, The CARES Act, And Divorcing Clients: A Call To Action For Divorce Professionals

Contributed by: Jacki Roessler, CDFA®

Are divorcing couples more susceptible to becoming sick with a virus than the rest of us? According to the Holmes and Rahe Stress Scale[1], a research study that measured the correlation between stressful life events and future illness, divorce is second only to the death of a spouse as a predictor of future health problems. Viewed through the lens of our current social, health and economic environment, this insight resonates particularly strong. As I write this in early April 2020, Family Courts around the Country remain closed (other than for essential emergency matters), however, several divorce-related issues can’t wait. There are also some unique planning opportunities offered through the newly passed CARES (Coronavirus Aid, Relief and Economic Security) Act that may be appealing to divorce clients. 

First Things First: Cash Flow Needs

One of the most important (and revealing) questions to ask clients right now is “how are you managing with your cash flow?” For those who are dependent on temporary support to pay their bills, this is a good time to discuss cash flow priorities and make sure there haven’t been any changes to the status quo. For some that may mean re-directing outflows to expenses that take the highest priority such as food, mortgage payments, and utilities. For example, take a hypothetical client Anne...I had a virtual meeting with my client and her attorney. Anne revealed she was feeling panicked about her dwindling cash reserves. Concerned about her mounting legal fees, she had been using her temporary support to make payments to her lawyer. Anne’s attorney let her know their firm was suspending the accrual of interest charges on outstanding legal fees during the current crisis. She also directed her to pay legal fees from a joint marital account and use her income for her family’s living expenses. Similarly, now is not a good time for clients to add to their credit card balances. Discretionary spending for most clients should be reduced or eliminated if at all possible during this time of economic uncertainty. 

For clients who are concerned about low liquidity in their estate, they may want to discuss liquidating securities or mutual funds in post-tax brokerage accounts to free up cash. Although it’s never the best idea to sell into a down market, in certain cases, it may be necessary. Clients should be advised to consult with their financial and/or tax advisor to determine the most tax advantageous way to liquidate securities while taking their overall long-term investment strategy and financial goals into consideration. 

Other clients may not have any brokerage accounts to liquidate despite their concerns about short term cash needs. In fact, for the vast majority of my current open divorce cases, the parties have the bulk of their assets tied up in retirement accounts and real estate equity; neither of which can be easily accessible for cash needs. There are two provisions of the newly passed CARES Act that may help clients who are looking for creative ways to free up cash.

CARES Act changes to 401(k) loan rules

Before the passage of the CARES Act in March 2020, federal law provided a means for employees to access the money in their retirement accounts for short term personal loans. Qualified plan sponsors could allow employees to borrow up to $50,000 or 50% of their total account value (whichever was less). The benefit of a 401k loan is that it can be quickly and easily accessed, there aren’t any long approval delays and the borrower pays the money back to him or herself. Loans aren’t treated as taxable distributions and the employee immediately starts to pay the loan back through (after-tax) payroll deductions.

The CARES Act expanded the existing program by increasing the loan limit to $100,000 or 100% of the account balance (whichever is less). This may be a valuable tool for divorcing clients to access money during the divorce, as long as both parties understand the money must be repaid. This opportunity is time-sensitive as the increased limit is only available through September 22, 2020. 

There are other pitfalls to parties taking out loans that attorneys and financial professionals should discuss with their clients. Let’s suppose, for example, Jane and Jack are in the process of divorce. Jack is feeling anxious about his job as his employer is considering potential layoffs. Without conferring with his attorney, Jack initiates a loan of 100% of his 401(k) balance to pay his temporary spousal and child support to Jane. Jane’s signature isn’t required for the loan and he takes it without her knowledge or agreement. Will this loan be considered dissipation of the marital estate, a separate debt of Jack’s alone or will it be viewed as a legitimate marital debt the parties will share? It’s certainly something he needs to discuss with his attorney before he takes any action.

Even if the parties agree that a 401k loan is a good idea for both of them in the short term, Jack needs to understand the potential risks. If his employer is forced to lay him off, for example, the loan would need to be repaid within the tax year it is withdrawn. If it isn’t repaid, it's treated as taxable income and Jack would also owe an additional 10% penalty for early withdrawal since he’s under 59 ½ years old.

CRD-Coronavirus Retirement Distributions

The other option the CARES Act provides is a CRD (Coronavirus Retirement Distribution) for those who have the virus, have a spouse or dependent with the virus, or those who experienced financial hardship due to the virus. As of now, it seems that what qualifies as a “financial hardship” will be loosely interpreted and monitored. The maximum withdrawal amount is $100,000 per person and can be from an IRA, 401k, 403b, or other qualified retirement annuities as long as the plan sponsor allows it. Additionally, taxes on the withdrawal can be spread out over 3 years and will not be subject to the 10% penalty for early (pre age 59 ½) withdrawals.

For many divorcing couples, this might provide a planning opportunity to free up liquid assets within the marital estate. It’s important to note that to qualify, distributions must be made before December 31, 2020. Liquid assets may be needed for one or both parties for their cash reserves, to pay legal fees, moving costs or other one-time expenses. They also may be needed to buy-out all or a portion of alimony in certain cases. 

One important note for couples who will be filing separately in 2020 is that any distribution will be treated as taxable income to the person who withdraws the money. For example, suppose Jack and Jane want to free up $75,000 in cash from their combined retirement accounts. Although they both have separate retirement accounts, they decide it makes sense to take a $75,000 CRD from Jane’s IRA. They plan to split the net proceeds between them and they want to minimize taxes. Jane who plans to file as Head of Household in 2020 and whose sole income will be child support and alimony will be in a low tax bracket for the next several years. Jack predicts he’ll be in a high tax bracket. Jane will spread the tax liability on the distribution out over 3 years, thereby greatly minimizing (possibly even eliminating) the tax liability on the distribution. 

Although the tax liability can be spread out over 3 years, it’s still important to note that it’s best to leave retirement assets invested in tax-deferred vehicles, if at all possible. Of course, Jane and Jack should also be advised to consult with a qualified tax advisor about their particular situation before taking any distributions.

In stressful times such as these, it’s easy to forget that the new world we’re living in may provide unique planning opportunities. Now, more than ever, divorcing clients need the professionals they work with to reach out to them with creative ideas, suggestions, and re-assurance. 

[1] Holmes and Rahe (1967) – used a self-report measure with their Social Readjustment Rating Scale (SRRS) which looked at the events which had occurred in a person's life and rates their impact.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Examples used are for illustrative purposes only.

The Most Important Question for Every Divorcing Client: How much do you spend?

Contributed by: Jacki Roessler, CDFA®

How much money did you and your spouse earn last year? I bet you can come up with an answer or a pretty close approximation at a moment’s notice. Now, what if I ask you how much you spent last year?

Long pause and nothing more than a vague idea, right? Let me assure you, you are not alone.

When I sit down with clients who are contemplating or in the process of divorce, the most important question I ask is “have you completed a budget yet?” It’s extremely rare for someone to say yes. No one likes the dreaded “b” word. Yet, after nearly 25 years of being a divorce financial planner, creating a budget (let’s call it a spending plan) for the future is the one foolproof way I know for clients to take control of their financial well‐being and have less stress and money anxiety in the future.

On a global level, if you don’t know what you spend every year, how can you make the big decisions that will be facing you in your divorce such as “should I keep the house” or “what amount of alimony can I agree to?”

On a smaller scale, sometimes we don’t realize we’re overspending on discretionary items such as dining out, holiday gifts and personal care. Seeing it on paper is an eye‐opening experience and a powerful tool to get spending under control.

Where should you begin?

Follow this link for my favorite budgeting worksheet or find one online that you like. If you pay for most expenses with credit cards, you have a simple place to start. Pull out a years’ worth of statements and tally up the totals in each category; housing, medical, food, groceries, dining out, vehicle costs, travel, etc.

Next, consider items you don’t charge on credit cards, for example, mortgage, tax and insurance payments which are generally automatically debited from a bank account. Other items that can be overlooked are those that are deducted directly from your paycheck such as Federal and State taxes, FICA, health insurance premiums, retirement account contributions and healthcare savings accounts.

Another place to look for spending “clues”? Not sure what your annual property taxes are on your home or what you donated to charities in the past? Look at your income tax returns for the past 3 years to give you some insight.

Once you’ve completed this time consuming task, stop and give yourself a high‐five! Creating a spending plan is a lot of work.

Next, give your completed spending plan to your divorce financial advisor and your attorney. They’ll provide valuable feedback about items you’ve missed and/or things you may need to scale back on. Discussing your spending plan together is also a good way to share your financial priorities with your professional team. Most importantly, your spending plan is a necessary tool your attorney needs in order to advocate for you in your divorce.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

Are you Owed Back Child Support? A QDRO Could be the Solution

Contributed by: Jacki Roessler, CDFA®

In May of 2019, Michigan’s Attorney General, Dana Nessel announced the collection of more than $275 million in child support owed since the 2003 formation of the Attorney General’s Child Support Unit (www.michigan.gov). Of course, back child support is a problem in every state, not just Michigan. In fact, this socio-economic problem severely penalizes the children whose custodial parent is dependent on child support to pay their monthly bills.

A little known recourse to collect back support is with a Qualified Domestic Relations Order (QDRO, for short).

A QDRO is a legal document that assigns money from an employee’s qualified retirement plan (401k-type plan or pension), pursuant to a divorce or domestic relations matter. Payments pursuant to a QDRO can be for the purpose of child support, alimony, or property division. Further, the recipient (“Alternate Payee”) of a QDRO may be a spouse, former spouse, child, or dependent of the employee (“Participant”). (ERISA §206(d)(3)(B)(i); IRC §414(p)(1)(A)).

Let us consider the hypothetical case of Jenny and Mike, who were divorced 10 years ago and have two minor children. Pursuant to their divorce, a court order required Mike to pay Sandy $1,500 per month in child support. Four years ago, Mike retired from his job with General Motors and moved to Florida. He currently owes Jenny $72,000 in back support, plus interest.

Jenny was fairly certain that Mike was receiving pension benefits through General Motors. She and her attorney hired an expert to prepare a QDRO awarding her a monthly sum for a period of 36 months, until the arrearage was paid off. The QDRO was quickly approved, and Jenny immediately began receiving payments directly from the pension plan. It’s important to note that the payments were treated as taxable income to Mike, not Jenny, as child support is not taxable income to the recipient.

In another case, Jill owed her ex-husband, Bob, $15,000 in back child support. Jill wasn’t retired or receiving a pension, but she did have a 401(k) with her employer. Bob’s attorney hired an expert to draft a QDRO on Jill’s 401k, which awarded him a lump sum of $18,750. This sum represented the amount owed ($15,000), grossed up for the 20% in taxes the plan would be required to send to the IRS. Again, the tax liability would be the responsibility of Jill, not Bob, because the QDRO was for the purpose of child support.

A few important things to note:

One, back child support doesn’t ever “go away”. A QDRO can always be used today for an arrearage built up in the past. Second, there is no limit on how many QDROs can be prepared assigning money to an Alternate Payee on a single qualified retirement plan. Further, a QDRO can assign up to 100% of the entire account balance or monthly pension benefit. Last, QDROs only apply to qualified plans; they aren’t applicable to IRA or non-Qualified Annuities.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

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Any opinions are those of Jacqueline Roessler, CDFA®, Branch Associate for Raymond James Financial Services, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

This case study is for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

A HOUSE DIVIDED: Handling the Marital Home in Divorce

Contributed by: Jacki Roessler, CDFA®

As we head away from the lazy days of summer in Michigan and families are securely back in their school-time routines, many divorcing clients turn their focus to questions about how to handle the marital home. In fact, lately, it’s a question I hear at least once a week. Read on for important factors to consider and some often overlooked tips.

There are three general ways to treat the marital home in a divorce.

1. With Option A, one party keeps the home and pays the other party their equitable interest, either from home equity or from their share of another asset. Let’s assume a couple has a home with an appraised value of $300,000 and an outstanding mortgage of $200,000. If the wife retains the home, she owes the husband $50,000 for his share of the equity. To pay him, she can re-finance the mortgage for $250,000 and give him $50,000 in cash, or the husband can take his $50,000 from the wife’s share of a bank or investment account or a pre-tax equivalent amount from a retirement asset.

2. Option B is to list the home for sale and split the net proceeds. Using the same example as above, let’s assume the home is sold for $300,000. After paying off the mortgage lien and deducting 8% in closing costs and sales commission ($24,000), the remaining equity is $76,000. In this scenario, both parties would net $38,000 in cash.

3. Lastly, with Option C, the parties jointly retain the home (as Tenants in Common) for an agreed upon number of years, at which point the house would be sold and the proceeds split. At the time of sale, whoever was paying down the mortgage would receive credit for any portion of the principal paid in the intervening years. This type of arrangement often allows one party the option to buy out the other’s interest at a future date, and at an agreed upon value.

Many couples find the most difficulty in separating the financial and emotional aspects of the house.

For many, the house comes with a mortgage payment and with property tax obligations, insurance, maintenance and upkeep costs. The financial burden may not be worth the comfort of keeping it. For others, staying put may be the most cost-effective option. The best tip I can give my clients is to carefully itemize all the potential, realistic costs associated with the home before making an emotion-based decision about who should keep it. Take stock of needed repairs, appliances reaching the end of their life, and what it costs to keep the house warm in the winter and cool in the summer. 

Another important financial consideration is to make sure the home is properly valued.

I’ve had many clients use a quick, free, internet-generated estimate rather than spend money on a qualified appraisal. If the house will be jointly retained and sold in the future, or sold at the time of the divorce, an appraisal isn’t necessary. As a financial planner, I never want clients to needlessly spend money. However, if one party is buying out the other’s interest in the home, it’s imperative to get a reasonable (and hopefully neutral) appraisal by a qualified appraiser. If the house needs a new roof or just had a sprinkler system installed, the internet estimate won’t include that. Realtor appraisals generally aren’t acceptable for this purpose.

As always, each couple’s situation is unique, and their circumstances should receive a critical analysis. Seek advice from an experienced financial advisor.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

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Opinions expressed in the attached article are those of Center for Financial Planning, Inc and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The scenarios described are hypothetical examples for illustration purposes only. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Collaborative Divorce: A Win/Win Financial Settlement?

Contributed by: Jacki Roessler, CDFA®

Traditionally in Michigan, couples could approach divorce in two ways: through litigation or mediation. Both can be contentious and lead to further litigation post-divorce.

Although it has, for quite some time, had a foothold in other states, a new approach is steadily gaining momentum in Michigan: the Collaborative Divorce Process. Collaborative Divorce is a team approach in which both parties obtain legal counsel trained and certified in the Collaborative method. Other trained professionals, such as a mental health professionals and financial experts, can be added to the team. The goal of the Collaborative team, which of course includes both spouses, is to resolve all the parties’ issues outside of the court system in a way that is both transparent and fair.

The big question clients ask me is this: Does it work and is it right for every case?

As a divorce financial planner with nearly 25 years of experience, I have to admit that I greatly prefer the Collaborative Process. Does it work? Absolutely! Is it for every case? Maybe not. Read on to determine whether it might be worth exploring for you.

My role in a Collaborative Case is to act as a financial neutral for both parties. What does that look like? It generally incudes gathering and compiling all the financial data into simple spreadsheets everyone can understand. I put together a list of all the parties’ assets and liabilities and run a cash flow analysis for both to help determine each parties’ post-divorce living expenses. If one person has been primarily in charge of the finances, and the other one is in the dark, I will often meet with one or both spouses individually to educate them. This levels the playing field when it’s time to re-convene the team and discuss financial settlement options.

How is this different than a traditional case? There is transparency of information.

As a neutral, I receive all the financial data including account statements, tax returns, pension and employment information, budgets, etc. There is no tracking down of missing data or wondering whether all the assets have been captured. Not only does this eliminate stress for the least informed party, but it also saves on the legal fees that pile up when an attorney has to become a data detective.

After all the financial data is captured, compiled, and understood, the real team work can begin. We can be creative and arrive at financial solutions no one could even take the time to consider in a traditional divorce.

So, is it for everyone? It’s for everyone who wants to settle outside of court. If either of the parties attempts to hide or conceal information, the Collaborative Process probably will not work. It also is for couples who are willing to commit the time for team-to-team meetings and however many meetings are needed to come to resolution on all issues. Lastly, in my experience, Collaborative Divorce requires the parties to keep an open mind. When parties are entrenched in a position and will not budge, the Collaborative Process can become stalled.

If you think Collaborative Divorce might work for you, do some exploring! It always makes sense to look at all the options available when you’re making decisions that affect the rest of your life.

Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.

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Any opinions are those of author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.