The statistic is well known; more than half of all marriages end in divorce. This means that the financial services industry must be prepared to assist clients who are going through a divorce, are divorced or who have had a subsequent marriage. These life events require specific understanding and special care to help clients protect their financial future.
Throughout the divorce proceedings, each spouse’s finances will be reviewed, assets divided and child support payments or alimony payments will be set. A divorce can be financially devastating to either spouse and can destroy any current and established financial portfolio. Your role as a licensed investment professional is to help your clients with planning strategies that can help put their retirement future back on track.
One of the most basic needs of the client is asset management. There may be significant changes in income and expenses for the client and assistance may be needed in completing a realistic budget.
Dealing with taxes
Transfers pursuant to divorce are generally not taxable. The basis of the asset is carried over to the recipient spouse. Child support payments are not deductible by the payor spouse and are not taxable to the recipient spouse. Alimony payments are deductible by the payor spouse and are included in the gross income of the recipient spouse.
A complete review of the client’s current retirement funding and goals should be completed. If the client maintains a qualified retirement plan, a qualified domestic relations order may be issued to transfer interests out of the plan. The QDRO will provide instruction as to how the qualified retirement plan assets are to be distributed. The process of executing the QDRO can be complex and lengthy and should be administered by a qualified attorney.
Additionally, some plan administrators may even charge a fee for processing the QDRO. Therefore, it may be wise for the client to use other assets, such as cash, to balance the equation to the ex-spouse and avoid the use of a QDRO. In addition, a review of the client’s Social Security retirement benefits should also be done. If certain conditions are met, an unmarried divorced spouse can receive benefits on the ex-spouses Social Security record.
Beneficiary designation planning
The client will need to complete a beneficiary review of all financial assets. This important process can be overlooked. If the client is removing an ex-spouse as beneficiary and naming non-spousal individuals, this will not cause a taxable event.
However, careful review and consideration of naming parents, siblings or minor children as beneficiary should be done. If minor children are named as beneficiaries, the client may want to consider naming a trust as beneficiary for the benefit of the minor children or using a restricted beneficiary election to control how the assets are distributed. It is also important to discuss with the client that an ex-spouse or named guardian may have control over assets if payment occurs while a child is still a minor. A qualified attorney should, of course, address these specific concerns.
For example, a client named John removes his wife, Becky, as beneficiary of his IRA and names his two minor children. If John dies before the children reach the age of majority, the surviving parent (Becky) or a guardian will have control of the IRA assets. Once this fact is understood, clients may want to discuss alternatives, which can include a restricted beneficiary election or trust.
A restricted beneficiary election offered for many IRAs and non-qualified annuities lets your client determine and control how the assets will be distributed at death. However, the election cannot permit distribution to a beneficiary for health, education, maintenance or support, regardless of the circumstances. Therefore, careful consideration should be given when electing the restriction.
The client may choose to draft a trust for the benefit of minor children, which can be named as beneficiary. This may provide assurance in knowing that a third party will control how the assets are to be distributed to minor children. Furthermore, if a trust is established, provisions can be made to permit distribution to a beneficiary for unexpected circumstances regarding health, education, maintenance and support.
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