107: What Are Commonly Overlooked Money Issues When Splitting Assets in a Divorce?

Whether you’ve experienced it yourself or have seen it happen to someone close to you, you’re likely to agree that there aren’t many life events that are more emotionally taxing than divorce. Two lives that have been bound together — by law and through shared experiences — are severed, and with that comes the necessities required to complete that break. The emotional component, however, often makes every step in the process as contentious as it can be, with both parties not only going to the mat to look after their own best interests but sometimes — let’s face it — also inflicting emotional and financial harm on each other.

In a “50/50” state like California, where assets are required by law to be divided equally among spouses, it would seem like a cut-and-dry job, and in some respects, it is. But not all community assets are that easy to divide. The most obvious example of this would be the family home. You’re not likely to find many divorced couples willing to live under the same roof with spatial boundaries cutting the residence in half, and, of course, literally dividing a house in half would render both halves unlivable.

In reality, arriving at an equitable division of assets after a divorce is a very complex undertaking. There are plenty of considerations to be made — many of which wouldn’t even be on the average person’s radar. But, if you’re contemplating divorce or want to provide some insight to someone close to you who is, you’ll definitely want to tune into the latest episode of Absolute Trust Talk, as Kirsten welcomes Glenn Bittner, who is not only a financial advisor with Pacific Wealth Planning but also a Certified Divorce Financial Analyst. Glenn offers a unique blend of practical knowledge and experience that allows him to view the emotionally fraught issue of divorce from the rational, financial side. In addition to his CDFA® certification, Glenn obtained his FINRA Series 6, 63, 65, and 7 licenses. As a former mathematics major, he has a penchant for calculating the present and future valuations of a wide array of financial assets. He was born for this role!

In this episode, we’re going to discuss:

  • The importance for Glenn and any CDFA® is to ask the right questions and learn essential information about both parties in a divorce proceeding.
  • What a Qualified Domestic Relations Order (QDRO) is, its role in a divorce proceeding, and why it’s sometimes best to avoid a QDRO altogether?
  • Why dividing a pension earned by one spouse between both parties can be especially challenging, if not impossible.
  • The various emotional aspects of the family home often make it a particularly contentious part of the divorce process.
  • Why allowing emotion to dominate divorce proceedings may not only lead to a less than equitable settlement but also bring about unforeseen financial consequences for one or both parties down the road.

And more!

Unfortunately, as we all know, divorce is never easy, and many moving parts require us to set aside emotion so that rational thinking can take center stage – easier said than done, right?! We aim to help you walk away from this episode with a better idea of what needs to be considered when equitably dividing financial assets.

Big Three from Episode #107:

  1. While California is a “50/50” state, which makes dividing some assets, such as a joint checking or savings account, relatively easy, there are usually plenty of other financial entanglements that need to be resolved in the wake of a divorce. Since other assets can’t literally be divided in half, achieving a fair resolution not only requires a Certified Divorce Financial Analyst (CDFA®) to take the time to ask the right questions and glean important information from both parties, but also to keep the proceedings on track based on rational considerations and not emotion.
  2. There’s no room for improvisation where a divorce decree is concerned. Both parties must know and understand the financial consequences of their decisions so that the proper stipulations can be incorporated into the decree. Because these stipulations often carry substantial financial consequences — a residential capital gains tax exemption of $250,000 or more may hang in the balance, for example — both the present and future implications of these decisions must be thoroughly considered.
  3. Dividing a pension, as well as a number of other financial assets, can be particularly challenging. Each pension plan is governed by its own set of plan documents, so the strategy for equitably dividing a pension in one case may not work in another. It’s essential for a CDFA® to ascertain the right pension plan information in advance of finalizing a divorce decree, and certain “workarounds,” such as converting a 401k into an IRA, may be necessary to achieve an equitable financial outcome for both parties.

Time-stamped Show Notes:

0:00 Introduction

1:33 Most California citizens know they live in a “community property” state. Here’s what that really means.

2:30 How does a couple arrive at an equitable division of the assets that accounts for ALL of the complexity involved? By working with a Certified Divorce Financial Analyst like our guest, Glenn Bittner.

4:34 Glenn’s not only a Financial Advisor, but also a Certified Divorce Financial Analyst (CDFA®), someone trained to look at divorce from a financial perspective.

6;02 To start things off, Glenn tells us about QDRO, the instrument used to divide retirement assets – individual accounts that are named under one spouse through their employer.

7:46 While a Qualified Domestic Relations Order (QDRO) is required to divide assets in retirement accounts like 457s, 403bs, and 401ks, an IRA is one type of account where it isn’t needed — and, in fact, only adds unnecessary expense.

8:45 In terms of pensions, each plan has its own specific regulations which need to be followed in order to divide assets.

10:17 In reality, we want to limit the use of QDROs as much as possible. To do this, Glenn will typically see if the account can be exchanged for a like-kind asset that doesn’t have as many restrictions to save time and money.

11:35 The family home holds a unique position in the divorce process. Here’s what sets it apart.

12:50 Next, Glenn outlines the major considerations that people need to consider when figuring out how to allocate a home.

15:25 Did you know that if one party stays in the home with the kids to keep them in the school district, the other party can remain as part of the house to maintain a full capital gains exemption?

16:28 If you marry or divorce timely, there could be an extra capital gain advantage. Listen here to find out more.

17:07 Unfortunately, if both spouses remarry, it’s impossible to get $1 million in exemptions because of limitations about how long spouses have to live in the home.

17:40 One important point about all these items we discussed so far is that they must be written in the divorce decree. They don’t just happen.

18:08 There are some unique tax implications to taking retirement distributions in connection with a divorce. Here are the details.

20:22 When couples divorce, dividing a pension plan requires unique considerations, such as trading future income for assets now.

21:1 Glenn shares one scenario that underscores the importance of knowing all the tax implications of any major financial move.

24:01 Creating financial solutions that work over the long haul for both spouses is essential in Glenn’s practice. Listen in as he explains some common factors to consider.

25:30 Some companies have other employee incentives like stock options and RSUs. How are those types of things divided?

Get in Touch with Glenn!

Glenn Bittner, RICP®, CDFA®, CLTC®, AIF®
Financial Advisor
Pacific Wealth Planning
1111 Deerwood Road
Suite 175
San Ramon, CA 94583

Resources/Links Mentioned in this Episode:

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