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Money June 2018

Dollar Sense

Heading to Divorce Court with Gray Hair (Or Close to It)

By Teresa Ambord

 

More and more, the divorce rate among those age 50 and up has doubled since 1990. It’s even higher for those age 65 and older, according to a new study from Bowling Green State University.

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If you have 401(k)s and defined benefit retirement plans, that’s likely to be more complex in a divorce. Chances are you’ll need a qualified domestic relations order (QDRO) which is a state court order. A QDRO must be drawn up by an attorney, approved by your retirement plan administrator, and signed by a judge.

 

Evidently getting older isn’t always a vaccination against divorce. Not many couples stay married 73 years, as George H.W. Bush and his wife Barbara did, separated only when she died in April 2018. But more and more, the divorce rate among those age 50 and up has doubled since 1990. It’s even higher for those age 65 and older, according to a new study from Bowling Green State University sociologists Susan L. Brown and I-Fen Lin.

The same study states that while among other age groups, divorce rates have dropped or leveled off, that’s not true among older married couples.

If you’re a senior or close to it and contemplating divorce, there are many points to consider, even if you think you know the ropes. Perhaps you were divorced decades ago in your 30s or 40s, and then remarried. Now you’re getting divorced again. You’re no stranger to the process, but the stakes have likely changed for those undergoing “gray divorce.”

You probably don’t need to worry about who will have custody of minor children. Presumably they’re grown and on their own. But most likely you have different financial considerations: a more expensive house, some valuable family heirlooms and antiques, perhaps a business, and savings and investments, including retirement accounts that were accumulated during your marriage.

 

Dividing the IRA

If you have an IRA, the process of splitting that isn’t hard and can be tax-free if it’s done as part of a divorce settlement. If it’s done wrong, you could end up with tax headaches. Contact your IRA custodian and authorize him or her to transfer money to an IRA for your former spouse.
Also, make sure the custodian has a copy of your divorce decree (or separation agreement). Whatever you do, don’t handle this important task yourself or the IRS will likely see it as a taxable distribution. Letting your IRA custodian make the transfer leaves your hands clean, taxwise.

 

Company Retirement Accounts

If you have 401(k)s and defined benefit retirement plans, that’s likely to be more complex in a divorce. Chances are you’ll need a qualified domestic relations order (QDRO) which is a state court order. A QDRO must be drawn up by an attorney, approved by your retirement plan administrator, and signed by a judge.

Important point: a QDRO applies only to company retirement plans, not IRAs.

Estate experts say, if company retirement accounts are part of your divorce, start early to get this QDRO right. A poorly drafted QDRO can cost you a bundle. Karen Ferguson, the director of the Pension Rights Center reminds divorcing spouses that if there’s a pension plan involved in your divorce, be thorough. “Time and again we’ve heard from women whose lawyers did not know to ask for survivor’s benefits.” Suppose your divorce settlement entitles you to half his (or her) pension. Then, when your ex-spouse dies, you get nothing… unless you remembered to ask for survivor’s benefits in the divorce decree.

Also, if your soon-to-be ex-spouse is still working and has a pension, find out if the pension includes an early retirement benefit. If it does, ask to have that included in your QDRO. Otherwise, he or she could retire early and start drawing benefits, but you won’t, because your QDRO didn’t give you that right.

 

Stick to Your Written Agreement or Call a Professional

In many cases, the break-up is amicable. But when one of the partners feels guilty for his or her role in the divorce — such as infidelity — that person wants to make it up to the other by being more generous than the divorce decrees demands. Here’s what happened to one guy. He was ordered to pay alimony to his ex-wife. But he made an oral agreement with her to pay substantially more than required by the written document. He said he wanted to “do the right
thing.”

When he filed his taxes for that year, he deducted the higher amount as alimony on his tax return. The IRS said, “not so fast.” An oral modification doesn’t qualify as alimony.

 

Know the Difference between the Property Settlement and Alimony

That may seem obvious, but it isn’t always. In on recent case that went before the U.S. Tax Court, the husband didn’t fully understand the difference. As part of his divorce decree, he was ordered to pay joint debts incurred during his marriage. His ex-wife’s share of the joint debt was $22,176, which he paid. He then deducted that amount as alimony. The Tax Court denied the deduction, pointing out that the payments didn’t qualify as alimony, because — among other reasons — those debts would not terminate if the ex-spouse died. Termination at death is a defining characteristic of alimony.

It’s true that divorce has gotten much easier in recent decades. But if your divorce includes IRAs or other retirement accounts or a significant property settlement, don’t leave it to chance. Getting competent professional help will pay off in the end.

 

Sidebar: New Rules for Alimony for Post-2018 Divorces

For a long time, taxpayers who pay alimony according to a divorce decree have been entitled to deduct that amount from their income “above the line,” meaning they do not have to itemize deductions to do so. And the recipient of the alimony must claim the amount as taxable income. That’s still true for existing divorces or divorces that will be settled before 2019.\

Under the Tax Cuts and Jobs Act, for divorces that do occur (or aren’t finalized) until after 2018, alimony paid is no longer deductible. And alimony received will no longer be counted against the recipient as taxable income. Depending on which side of that equation you are on, this could be good news or bad. Check with your attorney about timing issues if you’re in the middle of a divorce or a change of your settlement.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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