Divorce and the dissolution of a long term domestic partnership is, for many people, the largest financial deal they will ever make. It can have major consequences for both parties, sometimes very disadvantageous if done incorrectly.
The goal of financial consulting related to a divorce/dissolution is to achieve a fair and equitable settlement so that neither party to the divorce/dissolution is unfairly disadvantaged.
Working cooperatively with your attorney, if applicable, Otter Creek Partners is skilled and experienced in the analysis of any split of the assets, liabilities and income of a marriage or long term domestic partnership and can advise the client, before he or she agrees to a specific settlement. Retirement plans can be split, if agreed to, with a properly worded Qualified Domestic Relations Order (QDRO) when applicable.
A Case Study in Divorce Planning
Jon and Mary
Jon and Mary have been married for 20 years. He is a self-employed writer, age 47 and she is a teacher in a public school, age 45. They have no children. They own a home worth about $375,000 with a mortgage of $218,000 that has 13 years left on it and have a joint savings account with a balance of about $28,000 in it. Jon has a solo 401-k plan plus an IRA, a ROTH retirement account and a classic car worth approximately $40,000 in today’s market. Mary has a teacher’s pension from the state and a supplemental retirement plan at work that she contributes to monthly. They both earn about the same amount of money in wages and they both have medical insurance. They pay their credit cards in full every month. They owe $6,500 on Mary’s car and $11,500 on Jon’s truck.
Jon and Mary’s goal in getting financial advice prior to divorce is to agree to a fair settlement between both of them and move on separately without one of them being totally disadvantaged by the other one. Mary would prefer to keep their home, which is ok with Jon, and he would like to keep the classic car, but he would also like to be able to buy his own home post-divorce.
The settlement that has resulted from pre-divorce financial planning with OCP is based on assets of:
$157,000 home equity
112,000 401-k Jon
68,000 IRA Jon
29,000 ROTH Jon
28,000 Joint savings account
136,000 Supplemental plan Mary
40,000 classic car
$570,000 total this list of marital assets
A 50%/50% split would entitle each of them to assets worth $285,000, not including Mary’s teacher pension, which will be handled separately. More on that later in this example.
Settlement agreed to by both Jon and Mary:
Mary will get the house with equity of $157,000. She will refinance it at a lower rate than it now has, for 15 years, and remove Jon’s name from the mortgage, which he requests. She will also get $128,000 of her supplemental plan. Total to her will be $$285,000 of value.
Jon will get $8,000 from Mary’s supplemental plan, which will be rolled tax-free into Jon’s IRA, all of the joint savings of $28,000, all of his ROTH at $29,000, $112,000 in his 401-k plan, $68,000 in his IRA and the classic car worth about $40,000. Total to him will be $285,000. He will use the $28,000 from the joint savings account as a down payment on a house he has decided to buy post-divorce.
Mary’s teacher pension is also a marital asset subject to a split upon divorce. Based on their years of marriage (20) and her plan to work until she has 32 years of service, Jon is entitled to 50% of the marital portion of her pension plan. For example, the marital portion of 20 of those 32 years is 62.5%, so Jon is entitled to 50% of 62.5% of the pension that will be paid out, or 31.25% of Mary’s pension at retirement. This split of future pension benefits is accomplished by a specific and carefully written court order issued at the time of the court proceedings. It is called a Qualified Domestic Relations Order (QDRO. The $8,000 from Mary’s supplemental plan is also accomplished via a QDRO. Pension and supplemental plan benefits cannot be split without a properly written QDRO, so this is a very important part of a fair settlement in a divorce or dissolution case.