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Retirement Planning Tips for Divorced And Blended Family Clients

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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.

Retirement assets

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.

Reviewing insurance needs

With the life event change, a careful review of insurance coverage should be completed. The review may include life, health, disability and property insurance. Adjustments in coverage and ownership may be necessary. Additionally, property division will require an update to property insurance.

An attorney will update existing wills. Additionally, if minor children are involved, the attorney will help name a guardian to raise the children and manage their property. The client should name someone who has a real interest in the welfare of the children.

Estate planning with blended families

Another important aspect of estate planning is estate equalization in a blended family situation. Serious problems may occur if the client has children from a previous marriage and then later remarries and neglects to accommodate the blended family. In many instances, parties who were assumed to inherit assets may not. For various reasons, costly litigation may diminish estate assets. Estate-tax savings opportunities may be lost, further lowering the value of the estate.

Planning techniques can be put in place to assist the blended family client. Initially, the client, along with an attorney and a licensed investment professional, should complete a thorough financial review, revise wills and update beneficiary designations. Once that review is complete, various solutions should be reviewed and discussed.

Using life insurance and annuities

First, life insurance can help provide income replacement to a surviving spouse or estate equalization for children of a prior marriage. Second, survivorship life insurance can be used to help pay estate taxes at the second spouse’s death. Additionally, an irrevocable life insurance trust, if properly established, can provide a source of cash that is both income and estate tax free at death.

The ILIT assets could pay income and principal to children and grandchildren. A qualified terminable interest trust can defer estate taxes by using the marital deduction and provide ultimate control of the disposition of the assets. The QTIP limits the ultimate disposition of assets (possibly to children from the first marriage) while also providing an income stream to the surviving spouse. These issues should be addressed by a qualified estate planning attorney.

An immediate annuity can be purchased to satisfy an alimony obligation to an ex-spouse. The payor spouse can purchase an immediate annuity for a term-certain period or for the recipient spouse’s lifetime to conform to the provisions of the separation agreement. Periodic payments will be made by the insurance company rather than the payor spouse.

It will be necessary for the payor spouse to fully understand the payout terms of the product selected and the tax reporting procedure of the company. Depending on the product selected, the income payment may be paid directly to the recipient spouse.

The payor spouse should consult with a tax accountant to ensure the payment is deductible in accordance with Section 71 of the Internal Revenue Code. The full payment will be income taxable to the recipient spouse rather than the reportable amount on the 1099R.


A complete financial checkup with careful review and consideration of the unique concerns and needs of the client should be done during the divorce process. This is a difficult time for the client. If a licensed investment professional is involved early in the process–because all strategies have limitations and involve risk–proper awareness and education can be accomplished.

Catherine L. Venard, CLU, JD, is director of advanced sales at Nationwide Financial, Columbus, Ohio. She can be reached at .


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