Financial Aspects of Divorce An eXtension Webinar for

Military PFMP Professionals

Dr. Barbara O’Neill, CFP® Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

Disclaimer • The intent of this Webinar is to provide accurate,

research-based information

• The Webinar in no way purports to render legal, financial, or other professional services

• Viewers should consult an attorney that specializes in military divorces if legal advice or other expert assistance is required

Webinar Agenda

• 10-Question Pre-Test

• Divorce and Military Families

• General Divorce Financial Planning

• Military Divorce Financial Planning

• Key Documents Needed in a Divorce

• Resources for PFMPs

Pre-Test: True or False? • All but a handful of states in the U.S. are

community property states.

• Fair market value is the price at which a buyer is willing to purchase an item and a seller will sell an item.

• At the time of a divorce, all property must be divided and all conditions fulfilled.

Pre-Test: True or False? • Staying in the marital home is a wise

economic and emotional decision for women with children.

• It is important to hide assets when completing divorce financial statements.

• Life insurance, pensions, and inheritances are assets to be considered for distribution by divorcing spouses.

Pre-Test: True or False?

• If a divorce attorney bills $300 an hour in increments of 1/10 of an hour, a 12-minute phone call will cost $60

• Under COBRA and its military equivalent (CHCHB), divorced persons can continue health coverage under an ex-spouse’s health insurance plan for 18 months.

Pre-Test: True or False?

• Generally, someone who was married at least 10 years prior to divorce is eligible for spousal benefits under Social Security.

• Child support and visitation orders can be heard and amended by the court before and after a judgment of divorce.

Family Law Laws and legal cases that affect families

• Divorce (with or without children)

• Parental rights (non-married parents with children)

• Adoption

• Domestic abuse protection

• Other family-related issues

Divorce Process • Very fact based (case-by-case basis)

• Range of factors considered by courts

• NO “magic formula” for the appropriate division of assets (“equitable” does not mean “equal”)

• Decisions made within state guidelines (e.g., child support and community property)

• Federal and state laws must be followed

Divorce and Military Families • Divorce rates higher for military families than

for general U.S. population • 3.7% in 2011, up from 2.6% in 2001

– WSJ Article: http://kienkerlaw.com/global_pictures/Divorce%20Splitting%20Up%20a%20Rich%20Military%20Pension.pdf

• Divorce rate for women in the military is double that of men – Highest among military women with civilian husbands

– One reason: more support services for wives?

Common Divorce Financial Issues • Division of real property (e.g., house, land) • Division of personal property • Division of savings/investments • Division of debts • Will anyone pay alimony (spousal support) • Arrangement of child support payments • Income tax exemption for dependents • Post-divorce insurance coverage (e.g., life,

health, disability)

Common Divorce Non-Financial Issues

• Where the children are going to live

• Who will make decisions about the children and their well-being

– Physical custody: where children live (overnights)

– Legal custody: decision-making authority

• Where and when the other parent can visit the children

Military-Specific Divorce Issues • Federal laws (SCRA, USFSPA)

• Military paychecks (e.g., BAH allowances)

• Jurisdiction for filing divorce

• Child support process and compliance

• Child custody and visitation decisions

• Pension rights

• Military benefits

Divorce Financial Impacts • Two divorced spouses cannot generally live

cheaper than one couple – Lose economies of scale

– Lose specialized skills and labor

– Lose child care back-up support

• Lower living standard, especially lower earner

• Additional costs (e.g., attorney, moving)

Common Divorce Errors • Thinking that divorce settlements are a “pure

mathematical equation”

• Receiving assets without considering their tax status (e.g., embedded capital gains)

• Settling for a 50/50 property split without considering income and/or health disparities

• Keeping a house that a single ex-spouse can’t afford alone

More Common Errors

• Not distinguishing between replacement value and actual cash value in settlements

• Arguing over “little things” (low value items)

• Failure to carry life insurance on the payor of child support and/or alimony

• Reaching an informal settlement that is not legally binding

More Common Errors • Ignorance of key “milestone” dates (e.g., 10

years for SS and DFAS military pension garnishment; 20-20-20 for military divorces)

• Trying to use a lawyer as a counselor

• “Going soft” on property settlements to have easier discussions about custody

• “Giving in” to an ex-spouse because that’s what was always done

Smart Negotiation Strategies • Know what YOU want

• Know what your spouse wants

• Listen to the other side

– Learn things to further your interests

• Have a fall-back plan

• Never agree to anything that is unacceptable

• Get it in writing

Negotiation Planning Grid My goals in terms of property division are:

My spouse’s goals in terms of property division are:

My goals in terms of support are:

My spouse’s goals in terms of support are:

My goals in terms of my children are:

My spouse’s goals in terms of children are:

Common “Hot Buttons” Men (and Employed Women): Pension and voluntary savings accounts (e.g., Thrift Savings Plan) • Emotionally tied to

previous work history • “I [busted my butt, went

to war, defended my country, risked my life, etc.] and she/he wants half of my pension. I don’t think so”

Women: Keeping a house and child custody • Tied to desire for

stability for self and children

• BUT…”home attachment” may not be as much an issue for military spouses used to frequent moves

Financial Statements • Big part of “Discovery” process

• Net worth: Assets – Debts – Worksheet:

http://njaes.rutgers.edu/money/pdfs/networthcalcworksheet.pdf

• Cash Flow: Income – Expenses – Worksheet:

http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf

Property Designations Separate Property

– Acquired before marriage and NOT co-mingled

– Gift from someone other than spouse

– Personal injury awards, NOT co-mingled

– Inheritances, NOT co-mingled

– Designated in a prenuptial agreement as separate property

Property Designations

Marital Property – All property acquired by EITHER or BOTH

spouses during the marriage (and before the signing of a separation agreement or the commencement of a divorce REGARDLESS of the name in which property is held

– Community property is another term for marital property in nine states

Community Property States • Most property acquired during a marriage

is owned jointly and divided at divorce (except gifts and inheritances)

• Joint ownership is automatically assumed • AZ, CA, ID, LA, NV, NM, TX, WA, WI

Types of Property • Real Estate

– House (primary residence, income-producing) – Land

• Personal Property (everything else) – Cars – Furniture, appliances, and electronics – Bank accounts – Investments (e.g., stocks, mutual funds) – Pensions and retirement savings accounts – Other assets (e.g., life insurance)

Value of Property

• Fair Market Value (FMV)- price at which an item could be sold (e.g., garage sale, eBay)

• Depreciated Value- FMV as calculated from depreciation schedules for specific property

• Replacement Value- Cost to replace or purchase a new item

Consolidate Financial Data

• “Fillable” financial record-keeping publication (print out or save on a computer): – http://www.ext.colostate.edu/pubs/consumer/09156.pdf

• Include real property, personal property, bank accounts, investments, insurance policies, retirement assets – Include owner(s), current value, account numbers

Debt Repayment • No matter WHO charged WHAT, a joint

account means BOTH spouses are legally responsible to creditors for debt repayment

• Creditors don’t care about divorce decree terms…they just want to be repaid!

• Ask creditors to close joint accounts – Try to convert to or reopen as individual account

• Got doubts? Request duplicate statements or online access to monitor ex-spouse’s compliance

Tax Considerations • Child support is neither deductible by the

payor nor included in the income of the recipient

• Alimony (spousal support) is taxable to the recipient and deductible as an adjustment to the payor’s gross income (to calculate AGI)

• Avoid attempts to “disguise” child support as alimony

More Tax Considerations • Cash and appreciated property of equal or

even greater value are not necessarily equal in a property settlement – Need to consider future CG taxes, sales expenses

• Exemption generally goes to custodial parent but it is possible to shift it to non-custodian – Like many divorce issues, it is negotiable – Custodial parent signs waiver (IRS form #8332)

for non-custodial parent to attach to tax return – http://www.irs.gov/pub/irs-pdf/f8332.pdf

Proceeds From Sale of a Home $_____ Estimated sales price Selling expenses:

$_____ Realtor commission

$_____ Fix-up costs

$_____ Amount required to pay off loans(s)

$_____ Real estate transfer taxes

$_____ Other sales costs

$ ______ Estimated selling costs $_______Estimated proceeds from sale

Staying vs. Moving Cost of Staying in Home

– Monthly PITI

– Gas and electric

– Water and sewer

– Garbage pick-up

– Yard work

– Homeowner fees

– Maintenance and repairs (1% of market value)

– Other

Total Monthly Cost: $_____

Costs of Renting Monthly Costs

– Rent – Utilities – Other

Total Monthly Cost: $_____ One-Time Costs

– Moving – Deposits – Utility hook-ups

Total One-Time Cost: $_____

Social Security Benefits • Generally, divorced ex-spouse entitled to

same benefits as spouse or widow(er) if marriage lasted at least 10 years

• This is true even if the worker remarries

• Must meet Social Security requirements – At least 62 years old

– Unmarried

– Not entitled to higher benefit on own work record • See http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/299/~/qualifying-for-

divorced-spouse-benefits

Life Insurance Considerations • Policy can be transferred to ex-spouse

– Owner has right to name beneficiaries and decide whether to continue policy; must pay premiums

• Policy can be canceled (cashed out) if it has cash value

• May be required to protect against early death of spouse obligated to pay child support or alimony

Health Insurance Considerations • Health insurance planning required at divorce • Consider “conversion coverage,” if needed

– Civilians-COBRA- dependents eligible to continue group health coverage for up to 36 months at own expense (102% of cost); only covers health plans of employers with 20+ workers

– Military- Continued Health Care Benefit Program (CHCBP)- If not TRICARE eligible, former spouse of service member can buy coverage for 36 months; may be able to extend it if entitled to share of service member’s pension and meets other requirements

20-20-20 Non-Military Ex-Spouses • Entitled to no-cost health coverage under

TRICARE if at least: – 20 years of marriage – 20 years of military service – 20 years of overlap

• If non-military spouse has other insurance, TRICARE is the secondary payor – Ex-spouse might be a service member also

• If non-military spouse marries before 55, TRICARE coverage is lost

• Timing of divorce and/or remarriage is critical!

Other Insurance Considerations • Disability insurance on the payor of child

support and/or alimony – Will usually not be required by agreement or

court order (judges don’t want to add a new expense)

• Adequate liability limits on car and homeowner’s or renter’s policy

• Notifying insurance company of changes that affect coverage (e.g., moving, longer commute)

Estate Planning Issues • Review and revise legal documents

– Will, trust, living will, PoA • Be sure you have back-ups for key positions

– Executor, guardian • Review and revise beneficiary designations

– Insurance policies, pension, IRAs, savings bonds, 401(k) and 403(b) plans

• Beneficiary Designation Worksheet: http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf

Military Divorces • Couples with marriages of all durations

– 20+ year careerists with substantial benefits • WSJ (3/10/12): Divorce: Splitting Up a Rich Military Pension

• Air Force Lt Colonel with 30 years of service gets a pension of $72,288

• http://online.wsj.com/article/SB10001424052970203961204577269460305366188.html

– Young service members in first/second enlistments • Older couples: pension is very valuable asset

• Enlist at 18, retire at 38, receive pension with COLAs for next 30? 40? 50? years

• No minimum retirement age

Military Divorce Process • Combination of state laws and guidelines

(e.g., child support) and federal laws • Servicemembers Civil Relief Act (SCRA)-

Active duty service member can request a 90-day stay of divorce action; can be extended (but not forever) if military duties interfere with participation

• Uniformed Services Former Spouse Protection Act (USFSPA)- Allows (but does not require) local courts to treat military retired pay as marital property and divide it in a divorce action

Military Paychecks • Military paychecks (LES) unlike others

• Need to determine service member’s actual pay to calculate child support

• Most state child support guidelines include all income, whether it’s taxable or not

• Include base salary, allowances, pay differentials for hazardous assignments

• Use the LES, not the tax return, for best data

Military Divorce Jurisdiction • Three possible jurisdictions to file for divorce

– Legal residence of service member

– Legal residence of spouse

– State that service member is stationed in

• SCRA allows service members to live in one state and claim another as legal residence

• Consider costs for travel for court appearances

• State that is NOT legal residence may not have authority to divide a pension

Legal Residence • Address used on your federal tax return

• Where you own a home

• Where your immediate family (spouse and children) lives

• Where you register your car

• Where you are registered to vote

• Residence declared in documents such as a will or insurance policy

Child Support • Service members are required to provide adequate

child support for their children – Sanctions for failure to pay support – Significantly higher compliance rates than civilians

• “Missing” military spouse often easier to locate • Courts usually follow state child support guidelines • Wage garnishment done through Defense Finance

and Accounting Service (DFAS) • Military legal assistance office can assist with direct

payments to family

Child Custody • Decisions may be complicated by military obligations

(e.g., deployments, PCS) • May be increased financial costs for visitation • All divorcing parents should have a Parenting Plan

(shared time with and care of children) • Service members must have a Family Care Plan if:

– Service member is single parent of child <19 or shares custody with the other parent but they are not currently married to one another

– Both parents are service members with children <19

– Service member is sole caretaker of child <19 or adult family member unable to care for self (e.g., disabled spouse)

– May be different plans for short and long absences

How Children Feel at Divorce

http://www.youtube.com/watch?v=Edb9plpHO7k

Resource: University of Minnesota Extension Parents Forever online course: http://www.extension.umn.edu/family/parents-forever/

Military Pensions • USFSPA permits states to treat “disposable

retired pay” as marital property and divide it in a divorce settlement – Monthly retirement pay minus qualified deductions

• Does NOT automatically entitle a former spouse to any of service member’s benefit

• If > one divorce, direct payments to ex-spouses should not be > 50% of retired pay

• “First come, first served” basis

More About Military Pensions • 10-10 test for DFAS to trigger garnishment of

a military pension (like a civilian QDRO) – Married for at least 10 years

– 10 years of creditable service by member

– Must request DFAS to garnish retired pay

• Consider delaying divorce if close to 10 years

• If can’t meet 10-10 test, court can still award part of pension but military spouse is responsible for making payments

Still More About Military Pensions • Technically called “retired pay”

• Calculated by points throughout career

• 20 years of service= about 7,305 points = 50% of base pay

• 30 years of service- continued “bump ups”- could realize 75% of base pay

• Ex-spouse can be granted to up to 50% of military retired pay, plus annual COLAs

– COLA is substantial over time; won’t get with fixed dollar amount settlement!

Military Pension “Issues” • Future Benefit Predictability

– How long will service member stay in the military? – Take a lump sum buyout to hedge uncertainty? – How long will SM work after benefit eligibility? – Can include provision in decree for ex-spouse to

receive share as soon as SM is eligible for benefit • Fairness Argument

– Ex-spouse of a SM will likely receive a portion of SM’s retired pay after 15 years of marriage

– Active duty SM with 15 years of service who leaves the military receives nothing

Other Military Benefits at Divorce • Non-military spouse loses ID card/installation privileges

(e.g., medical, commissary, PX) once divorce is final – Exception: unmarried 20-20-20 former spouse

– 20-20-15 spouse qualifies for medical benefits for one year from date of divorce or annulment but has no commissary and PX privileges

– Children maintain commissary/PX privileges; ex-spouse may request privileges to buy items for children

• Military housing must usually be vacated within 30 days after SM stops residing there – Installation commander may make interim decisions

Survivor Benefits • Error: Failing to file for survivor benefit plan (SBP)

benefits during divorce process. – Spousal benefits stop when SM dies without SBP – Botched survivorships: majority of military divorce

malpractice claims!!! • Safest course of action: former spouse requests court

to require SBP coverage and sends copy of order to DFAS (called a “deemed election”) – Court must order “former spouse coverage,” not just name

the party covered • SM buys SBP benefit when he/she retires (pay deduction)

• SBP beneficiary (spouse or former spouse) gets ongoing payments after SM dies

More About SBP Coverage • SM chooses a “base amount” between $300 and

100% of retired pay • Plan pays 55% of selected base amount to

beneficiary • Premium = 6.5% of base amount (deducted from

retired pay) • Deadline for notification to DFAS: one year from the

divorce • Benefit CANNOT be divided between current and

former spouse (only one SPB beneficiary) – Can be suspended for remarriage and reinstated

Other Military-Specific Divorce Financial Planning Issues

• TSP balance can be divided between divorcing spouses just like 401(k) for civilians

• “Gross retired pay” vs. “disposable retired pay” • Consider a “reimbursement clause” that requires SM

retiree to pay former spouse for loss of pension share (e.g., disability compensation)

• In most community property states, a portion of military retired pay will be property of both spouses

• Can submit Freedom of Information Act request if SM spouse won’t cooperate and provide LES

Duties of Divorce Attorney • Instruct client on the law • File paperwork correctly • Request needed documents (Discovery) • Make predictions about how case might go • Provide updates on developments in case • Make court appearances as needed Biggest Divorce Lawyer Complaints: • Billing practices • Not pushing case to a conclusion

Finding an Attorney • Friends, co-workers, family • Martindale-Hubble ratings and expertise areas

– http://www.martindale.com/ (legal directory)

• Local bar association and court staff • Referrals from military legal assistance staff • Non-military legal assistance office or law clinic Military legal assistance cannot represent SM but can:

– Write letters on behalf of SM or spouse of SM – Review and revise legal documents – Negotiate on SM’s behalf – Answer questions, including those from private attorney

Divorce Mediation • Use of neutral third party to arrive at equitable and

suitable agreement

– Property, custody, child support/alimony, retirement, taxes

• Both spouses maintain control over their destinies

• Agreements are more successful and less costly than litigated settlements

• After issues are settled, mediator drafts an MOU used by parties’ respective lawyers to develop settlement agreement in divorce decree

• Resource: http://www.mediate.com/articles/denny.cfm

Ex-Spouses Creating a Property Settlement Agreement

Value of assets allocated to wife $_______________

Value of assets allocated to husband $_______________

Value of debts allocated to wife $_______________

Value of debts allocated to husband $_______________

Net value of property allocated to wife $_______________

Net value of property allocated to husband $_______________

Key Divorce Documents • Deeds to real estate • Mortgage papers • Tax returns (last 5 yrs) • Paycheck stubs (last 8) • Bank statements • Bills for living expenses • Proof of other income

(e.g., unemployment, disability)

• Documents showing debt • Insurance policies

• Pension/retirement savings plan documents

• Business tax records • Inheritance documents • Insurance settlement

documents • Net worth statement • Household budget • Evidence of adultery

Divorce Finance Resources • Association of Divorce Financial Planners:

http://www.divorceandfinance.org/

• Institute for Divorce Financial Analysts: https://www.institutedfa.com/

• FPA (Financial Planning Association): Getting a Divorce: http://www.fpanet.org/LifeCrisis/GettingaDivorce/

• Military Money: When Love is a Battlefield: http://www.militarymoney.com/MilitaryLife/rights/tabid/115/itemId/2229/Default.aspx

Find Us Online http://www.facebook.com/PersonalFinance4PFMs http://blogs.extension.org/militaryfamilies/ Twitter: @moneytalk1 @mikegutter @MollyCHerndon @DollarDecisions @dfougie Homefront Connections – Personal Finance group

To Receive CEUs • You must be AFC or CHC credentialed through

AFCPE.

• Send an email to afcceu@gmail.com by Monday, April 16 at 5 p.m. with:

– Your first and last name in the email.

– And the phrase “divorce and military families” in the email.

• E-mails sent without this information cannot be sent to AFCPE for application of credit.