Divorce and retirement: It's a matter of trust

Retirement funds often make up a considerable — if not the largest -- portion of assets to be divided in a divorce settlement.

That makes obtaining all the necessary account information key -- if not vital -- for those seeking to get their fair share of the stakes.

“Getting your fair share in a divorce settlement is typically straightforward if the retirement account is marital property. The key is getting the correct information,” said Josh Strange, founder and president of Good Life NOVA.

Depending on the length of the marriage, a lawyer may ask for several years of statements. If a spouse fails to produce adequate responses, the opposing lawyer will file a motion to compel discovery with the court. 

“We will often subpoena retirement statements directly from the retirement plan, this ensures we receive all the documents we need," said Brandon Bernstein, a Maryland-based divorce attorney. "This can be especially important if you believe your spouse may have withdrawn or borrowed funds from his or her retirement plan."

Once all the necessary information is in hand, a lawyer can make a settlement demand for an appropriate division of retirement assets. If the case can't be settled and is destined for trial, once again it all comes down to having the necessary and correct material.

“If you are entitled to an award from your spouse, when done properly with the appropriate court order, you should receive a rollover from your spouse's retirement plan into your plan with no tax implications to you unless you withdraw the funds as cash," Bernstein said. "For that reason, leaving those funds in your retirement account is often preferable.”

DON’T FORGET SOCIAL SECURITY

While employer-sponsored retirement accounts are typically shielded from taxes during a divorce with a qualified domestic relations court order, or QDRO, individual retirement accounts can be trickier, said Colleen Jaconetti, senior manager in Vanguard’s Investment Advisory Research Center. She recommends individuals have an expert on hand to help them navigate dividing retirement assets and avoid early withdrawal penalties.

“If your client was married for 10 or more years, did not remarry, and their spouse is eligible for Social Security, they may be eligible to claim on their ex's earnings," Jaconetti said. "Individuals can collect half of their ex's benefits once they reach full retirement age. But they won't receive increased benefits if they wait longer.”

“There’s a possibility that the benefits someone would receive by collecting on their own earnings record are more than what they’d collect on their ex's record," she added. "So that should be taken into consideration.”

LOOK AT THE WHOLE PICTURE

Along those lines, lawyers and financial advisers stress considering the totality of marital assets, not just retirement assets. Depending on one’s tax situation and goals, going after other property may make more sense than trying to maximize one’s share of the retirement accounts.

“Individuals going through a divorce should be most interested in what benefits them the most -- is it receiving taxable assets or enhancing retirement dollars? Answering this question must factor in liquidity needs, tax brackets, and goals -- short- and long-term. Too often, taxable assets are distributed, ignoring embedded gains and overlooking the benefits of tax-deferred or tax-free growth with retirement accounts,” said Jeremy Paul, president and partner at Perigon Wealth Management.

Renee Hanson, private wealth adviser at Ameriprise Financial, points out that a savings account provides full purchasing power since the interest is taxed annually, with no fluctuation in value, and the immediate availability can be enticing when experiencing a financial transition. On the other hand, a retirement account will enjoy the benefits of tax deferral and investment growth, then later be reduced by taxes during the distribution period. 

“Carefully consider the equitable -- not always equal -- strategy of how you split different assets to ensure receiving your fair share of retirement accounts,” Hanson said.

BEWARE OF LOANS AND BE PATIENT

Occasionally, a party will attempt to liquidate retirement funds to prevent their spouse from receiving their fair share of retirement assets. For this reason, it's important to be aware of any loans or withdrawals taken from the retirement account, and in the event of liquidation, to ensure that those funds are accounted for when determining the final award.

There can also be quite a bit of red tape about finalizing the transfer of retirement assets. The QDRO needs to be submitted to the court for execution and then subsequently submitted to the plan administrator. If the plan administrator takes issue with any of its language, the QDRO may be rejected and the process will need to start over again. 

“Even if all goes well, you may still have to wait several months for the transfer to be completed,” Bernstein said.

TRUST YOUR TEAM

Pension plans also deserve special attention as spouses need to know whether they're entitled to survivor benefits. The awarding of survivor benefits should be addressed in the settlement agreement, or judgment at trial, as well as the QDRO or other qualified order.

“Establishing the value of certain types of retirement assets, such as defined-benefit plans -- or pensions -- can be tricky," said Allen Drexel, a partner in the matrimonial and family law practice of Gallet Dreyer & Berkey. "Determining asset shares is not a simple matter of looking at the monthly balance of an account at the time spouses are going through the divorce process. The wise divorcing spouse and her or his counsel are generally well advised to engage a qualified pension actuary to handle the valuation.”

Jeffrey Hunter, vice president and wealth strategist at TD Wealth, echoed Drexel’s advice about hiring an expert to guarantee a fair and accurate valuation of the marital assets. And he adds that those valuation experts had better be well versed in tax policy as well.

“For many people, the answer is a collaborative team working together for your best interest. You want to have someone that knows the divorce laws in your state and someone that knows finance,” said Sarah LePhew, a financial adviser at Wealth Enhancement Group.

“Trust matters,” she added.

Even in divorce.