Divorce and Your Retirement

As a family lawyer for Bucks and Montgomery County, we help clients just like you through the complicated process of divorce. When clients walk in our door, they are usually very concerned about paying and receiving alimony and child support and then working out a schedule for their children.  During the initial meetings and discussions, we remind them of the importance of looking down the road a few years to retirement.

 

Divorce is as much about your future as it is about your past and present. And retirement funds and benefits are a critical component of your financial future. Whether you are trying to protect your retirement accounts, or collect from your spouse’s retirement accounts, dealing with these funds is as important as it is complex.

 

For many people, retirement accounts and benefits are one of their most valuable assets. In a divorce, these funds are considered marital property and are subject to division. Retirement funds can include 401k money, investment funds, IRAs, and pensions.  Social Security is a benefit and not an asset that is distributed in a divorce but may be considered income for purposes of support. With short and long-term implications for both parties, it is essential to understand the laws and your rights when it comes to divorce and retirement funds. Here are a few points to keep in mind.

 

Understand how retirement funds are divided

An ex-spouse is entitled to a percentage of the amount of retirement earned during the marriage.  If a spouse has been working for 20 years, and the marriage lasted for the last 12 of those years, the ex-spouse is only entitled to retirement funds deposited and interest earned during those 12 years, not earnings or investment made prior to the marriage or after separation.  Also, since oftentimes the spouse is still working, it is unknown how many years of work they will have. A fraction, known as a coverture fraction, is a formula often used to determine what the percentage will be at retirement. The numerator is the number of years married and the denominator is the total number of years accumulated in the plan (usually TBD).  The percentage the court awards is multiplied by the fraction and the amount of the plan or the dollar benefit to determine what the spouse, called the “Alternate Payee” will receive. It is also important to determine if there are any beneficiary options and whether the spouse will be a beneficiary and whether it has marital value.

 

How are your retirement funds divided after divorce?  

If your or your spouse’s 401(k) or employer-sponsored retirement accounts will be divided, you need to let the plan administrator know as soon as possible. They will be able to tell you the value of the retirement account on the date of marriage and the value upon divorce – again, this is the part of the retirement account subject to division.  

 

If you are going to be dividing retirement assets, in many cases, you will need to obtain a Qualified Domestic Relations Order (QDRO), which is separate from your divorce decree. It will be signed by a judge and will instruct the employer to separate the retirement account into two accounts. This order will allow retirement funds to be withdrawn from the retirement account without penalty and deposited into a separate account for the non-employee. It is important to note that QDROs are not needed when the retirement plan is an IRA and in other types of plans will be a DRO similar to a QDRO.  It is best to hire an expert to draft a QDRO who is familiar with the rules and regulations and plans involved. The cost to draft it is typically around $600 per QDRO and the parties normally share that cost. You may want to check if your plan, however, imposes any of their own fees.

 

Consider Alternatives

In some situations, the parties may negotiate a settlement that avoids the splitting of retirement funds. For example, one spouse may offer the other a buy-out such as stocks, bonds, investments, or property of equitable value in exchange for keeping all of their retirement funds intact. In order to do this, however, you must know the dollar value of the marital portion of the retirement plan. In pensions, this will require an appraisal.  In 401(k) plans you will need all the statements after separation as well the statement at the time of separation in order to determine what is marital.

 

Get Professional Help

A qualified attorney will know your rights in regard to protecting or collecting retirement benefits and funds. A certified accountant can help you explore the short-term tax implications and long-term financial ramifications of dividing retirement funds.

 

Divorce presents an incredible challenge – making decisions that have far-reaching impacts at a time when you are the most emotionally and mentally stressed. Allowing a compassionate professional to provide guidance can help ensure not only a brighter future but a more financially secure one as well.

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90 day Mutual Consent Divorce

A no-fault divorce means that neither party is asserting that the other party did something wrong. Instead, the assertion is that the marriage is simply irretrievably broken. In Pennsylvania, a no-fault divorce may be granted after a waiting period of 90 days provided both parties consent to the divorce at the conclusion of the waiting period. This waiting period is often referred to as a cooling-off period. It is utilized to give the parties an opportunity to reflect on the severity of the decision to get a divorce and/or seek marital counseling to see if the relationship can be saved. The 90-day waiting period begins to run from date of service of the Complaint in Divorce.

At this point, almost half of the states have some waiting period between when you file and when you can be divorced however, there does not appear to be any correlation between the length of the cooling off period versus the rate of divorce. New Jersey and Arkansas have longer waiting periods for a no-fault divorce. New Jersey has one of the lowest divorce rates in the country while Arkansas has one of the highest divorce rates. Pennsylvania does specifically indicate its policy behind the mandatory waiting period is to “encourage and effect reconciliation and settlement of differences between spouses” as the “protection and preservation of the family is of paramount concern.” 23 Pa. C.S. 3102.

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Appraisals for Divorce

An appraisal may be needed to ascertain an accurate value of an asset in a divorce or estate matter. Assets that may require an appraisal include real property, jewelry, vehicles, antiques, and even retirement plans. Parties may elect to use one appraiser or have their own independent appraisers. When choosing an appraiser, it is important to make sure the appraiser is licensed or certified. A licensed appraiser has met the minimum requirements for practice. A certified appraiser must complete additional classroom hours and practice in the field. A list of all licensed and certified appraisers is available online. You should also make sure the appraiser you select has prior experience with the exact type of appraisal sought. This would include experience in the geographic market, the type of property, and intended use of the property.

You should discuss with the appraiser if any information you supply to them is confidential and should not be included in their report. You should also make it clear who the appraiser is permitted to discuss the appraisal with and/or share the report with. For example, you may not want to share certain information with the opposing party. You should be clear about the valuation date for the appraisal. This may be the date of purchase, date of separation, date of death, or current value. Per the Uniform Standards of Professional Appraisal Practice, appraisers are not permitted to revise an appraisal to account for a different valuation date after completion. Instead, the standards require a completely new appraisal which is not cost-efficient. Finally, you should ascertain whether your appraiser would be available as witness if their testimony in a court hearing becomes necessary. This is generally an additional cost above the cost of the appraisal itself.

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Non-Marital Property

Section 3501 of the Divorce Code sets out what property will be considered non-marital property and therefore not subject to equitable distribution in a divorce case. Any property acquired prior to the marriage that has not increased in value during the marriage is non-marital as well as any property acquired after final separation but potentially prior to the entry of a divorce decree as long as marital property was not used in its acquisition. Any inheritance received is treated as a gift and will also be deemed non-marital so long as it is not subsequently commingled with marital funds. The court will also not look at property that was disposed of in good faith while the marriage was intact. An example would be property sold to a family member for its fair market value. Veterans’ benefits cannot be attached, levied or seized except in the case where a portion of the veteran’s retirement pay was waived in exchange for the benefits. Finally, any payment from a cause of action or lawsuit where the underlying claim occurred before the marriage or after separation. Property acquired prior to the marriage or in exchange for said property is not marital as well as property expressly excluded by valid written agreement of the parties at any time.

Property that is generally considered marital would be all property acquired by either party from the date of marriage through the date of separation that doesn’t fall into any of the above categories. There is a presumption all property acquired during the marriage is marital regardless of how title is held (e.g. individually vs. jointly). It will also include the increase of value of any non-marital property during the course of the marriage.

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Separation Defined

Most parties pursuing divorce will choose to proceed with no-fault grounds for divorce. A no-fault divorce simply means there has been an irretrievable breakdown of the marriage. There are two different ways to establish an irretrievable breakdown of the marriage under the Divorce Code. First, both parties may consent to the divorce after 90 days from when the complaint was filed and served. This is referred to as a 90-day mutual consent divorce. Alternatively, if one party won’t consent, the other party can move forward after the parties have been “separated” for at least one year. This is referred to as a separation divorce. Separation, however, does not mean the parties have to physically live separately. Parties may elect to still reside in the same home but can be considered “separate” based on the definition provided by the Divorce Code. Section 3103 of the Divorce Code defines “Separate and apart” as follows: Cessation of cohabitation, whether living in the same residence or not. In the event a complaint in divorce is filed and served, it shall be presumed that the parties commenced to live separate and apart not later than the date that the complaint was served.” Accordingly, the date the divorce complaint is filed will generally be accepted as the date of separation regardless of whether the parties continue to live together or not.

The date of separation can be a date earlier than the filing of the complaint. For example, if there is a physical separation the date one party moves out of the marital home is an acceptable date of separation. Alternatively, even if the parties continue to reside together, a date of separation can be established when one party makes it clear to the other party that the marriage is over by stating so clearly or even reducing it to writing. The party alleging separation will have to submit an affidavit certifying the date of separation. The other party has an opportunity to object and a hearing may be held if necessary to determine the appropriate date of separation. Accordingly, be sure that the other party is explicitly aware of your intentions, especially if you will continue to reside together and/or hold off on filing for divorce.

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Starting a Divorce Action

The initial step is to get a Complaint filed with the court. The Complaint would include the grounds under which you are seeking divorce as well as any other types of relief requested. For example, your complaint would state if you are asking for a no-fault divorce on the basis of mutual consent or separation or a fault divorce. It may also include counts for equitable distribution if there is marital property, custody if there are minor children involved, and support for minor children or between spouses. There is a filing fee due at the time the complaint is filed.

Once a divorce complaint is filed it must be served on the opposing party before the matter can proceed. Pennsylvania Rule of Civil Procedure 1930.4 discusses acceptable methods of service for all domestic relations matters.

The complaint can be served by personal service or certified mail, restricted delivery, return receipt requested. If the complaint is being served personally, the person effectuating service should complete an affidavit of service indicating when and where the opposing party was served. Personal service can be carried out by any adult that is not a party to the action. The Sheriff can be contacted to effectuate personal service for a fee. There are also numerous private companies that will effectuate service for a fee. The opposing party also has the option to sign an Acceptance of Service form. This is a good option for an amicable divorce. Service in a divorce matter must be accomplished within 30 days of when the complaint was filed. If service is not completed within the applicable time frame, the complaint must be reinstated and a new thirty-day period begins to run.

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Divorce Jurisdiction

Under Pennsylvania law, one of the parties to the divorce action must have been a bona fide resident of Pennsylvania for at least six months prior to the commencement of the divorce. Bona fide residence is defined as actual residence with domiciliary intent or the place where a party intends to return to if temporarily absent from the state. Domicile is the place where a person has his or her true, fixed, permanent home with the intention of returning after any absence. You can look at address, driver’s license, voter registration and tax filings for confirmation of their permanent residence.

An action for divorce should be brought in the county where one of the party resides especially if there is real property involved. There are two exceptions allowing a divorce action to proceed in a different county including by mutual agreement of the parties in writing or by participating in the action started in a different county.

Parties may elect to file in a different county for a simple case to benefit from lower filing fees. If two divorce actions are commenced within 90 days of each other, the county where a party resides or where the last marital residence was located gets to determine which county should handle the matter. If neither county is the location of the last marital residence and no party resides in either county, the county that received a complaint in divorce first can make the determination as far as which county will proceed.

A divorce action that is filed in the wrong county may need to be transferred to the county where the bulk of the property is located or where the children reside for custody or where one of the parties reside for support. This will likely result in the expense of having to file a new complaint in the appropriate county as well as the expense and delay of petitioning to have the matter transferred.

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Discovering Assets and Income in Divorce

It is not uncommon for parties contemplating divorce to try to hide assets in an attempt to keep them out of the marital estate that will be up for distribution. One of the biggest red flags as far as potential hidden assets is if the spending habits or lifestyle of a party is way more than would be expected based on their reported income. You should also be wary of a party who owns their own business. If they deal in cash they can easily hide money. Additionally, what they report for tax purposes is not always indicative of income available for spousal or child support. It complex cases it may become necessary to hire an expert to analyze income flow. Top level executives may receive different forms of income. Examples include stock options, bonuses, car allowances, and deferred compensation plans. Even military members often have a compensation package that goes beyond their base salary.

Discovery is a good start in seeking to track down assets, hidden or otherwise. Tax returns and bank statements are good to review in terms of sources of income as well as where the income is going. A tax return can show rental income, interest on bank accounts, dividends on stock, etc. Bank statements can show any transfers of money and identify where it went to. Parties can subpoena documents directly from the custodian of the documents if the spouse will not cooperate and turn them over. If these initial avenues of discovery do not yield the desired results, a party will have to make a decision as to whether to invest more money in the chase for hidden assets. Any party that anticipates hiding or dissipating assets may become a problem during the pendency of the divorce should obtain a court injunction right away preventing the dissipation or transfer of any marital assets.

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Health Insurance in Divorce

One frequent question in the context of divorce is what will happen to health insurance coverage. Generally, a spouse should not drop the other spouse while a divorce is pending. Health insurance is often addressed in the context of support and spouses are obligated to provide support for each other during the marriage. A support order can mandate a spouse to continue to provide health insurance. The obligation to carry health insurance for the other spouse ends at the entry of the final divorce decree. If you are unable to obtain alternate health insurance on your own right away you can look into COBRA coverage but this can be very expensive. More affordable options may be available on the healthcare marketplace.

If there are children between the parties, the children may remain under the health insurance coverage presently provided. There may be an adjustment to any child support award based on who is paying the premiums on the health insurance for the children. Child support will end when the child is eighteen or graduates high school, whichever is later. After court-ordered child support ends there is no longer a requirement for the parents to share the cost of the child’s health insurance however a parent may elect to continue to provide coverage for the child up until the maximum age of 26. Parties with private agreements can contract to continue to share this cost.

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Steps to Take Post-Divorce

Receipt of the divorce decree does not necessarily mean nothing else needs to be done. In a case with a marital residence, the parties may still need to sell the house or one party may have a certain window for refinancing the property and buying the other party out. If you are a party retaining a marital residence by agreement or court order, you can change the locks once the property is formerly awarded to you. The party vacating the residence should be sure to change their address with the post office and update other accounts accordingly. In a case where retirement benefits are being split, the parties may need a qualified domestic relations order or QDRO for short.

A QDRO is a document used to rollover a portion of one party’s retirement plan/benefit to the other party. The benefit of a QDRO is that it allows a tax-free transfer of the funds from one party to their new or soon-to-be ex-spouse. The receiving spouse would then be taxed as they withdraw the money as the tax laws provide. The QDRO ultimately needs to be signed by both parties and the court prior to being sent to the plan administrator for implementation.

You will benefit from having an attorney review the terms of the QDRO before signing off on it and submitting it to the plan. If you have been paying support to your spouse, you should notify Domestic Relations if the support is ending or if it is converting to alimony. If switching to alimony, you should confirm the amount if there is any change from an existing charging order. You should also notify Domestic Relations of the term of the alimony.

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