After the Decree is Final

August 15, 2019

You and your client, Belinda, have struggled through 3 months of negotiations and a final decree is in place. Belinda is happy with the settlement and leaves your office with a big smile. As you are waving goodbye, don’t forget to remind her that she’s not done yet – now the instructions in the decree need to be carried out. Accounts need to be retitled or divided in a timely manner to avoid future problems. Here are some examples of problems that arise when couples wait too long to divide their assets.

Chuck and Sue were divorced in February 2018 and Sue was awarded $350,000 from Chuck’s IRA, which was valued at $400,000. Sue never took the steps necessary to create her own IRA and transfer in her funds. She figured she’d get to it sometime in the next year or two, when she retired and needed the account for income. Flash forward 10 months to the end of 2018, after the stock market suffered a 3-month decline. Due to the aggressive stocks Chuck was holding, his IRA was down 20% to $320,000. Now Sue’s decided to retire and wants her money, but there isn’t enough value in the account.

Barry and Linda were divorced in 2001 but they never bothered to retitle the house into Barry’s name. Barry died last week, and legally the house now belongs to Linda. To complicate matters, the decree did not explicitly state that the house was “awarded” to Barry but instead gave him “use, possession and control” of the house. Linda is adamant that the house is hers and she has no intention of giving it up to Barry’s heirs. In addition to the ambiguous language in the decree, another problem arises from the fact that the house was not retitled within 6 years of the divorce. According to the IRS if Linda were to give up the house to Barry’s estate now it could be considered a gift and count against her lifetime gift tax exclusion.

Mark and Denise were married in 1998. They divorced in 2004 and Denise was awarded half of Mark’s 401(k). Within 8 months of the divorce they were back cohabitating, and eventually remarried in 2007. They never divided the 401(k). In 2019 they are divorcing for a second time. Now there is some ambiguity around exactly what portion of Mark’s 401(k) is marital. Should they carve off the portion awarded to Denise in 2004 as well as account for its growth?

In all of these examples the couple must return to the table to work out a new solution. In Chuck and Sue’s case, Sue has the option of taking less money now or waiting for the markets to rebound and the account value to go up. Recovering that value could take years, during which she has no control over how the account is invested. Chuck might continue to hold aggressive stocks leading to much volatility in the returns.

In Barry and Linda’s case Linda may be forced to contend with a legal fight from Barry’s estate. This undoubtedly will take time and money.

In Mark and Denise’s situation they will need to come to an agreement on the amount of the 401(k) that belongs to Denise.

It is critical to have very clear language in the decree that leaves no ambiguity as to the direction of an asset. But it is equally important to make sure your client follows through with the steps to separate their estates after they walk out your door.

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