Divorce, Finance and Retirement

Divorce can be emotionally devastating, and it may not be easy at such a time to concentrate on financial matters - but those who don’t may wish they had done so once the proceedings are final.

First, if you decide to withdraw funds from your traditional 401(k) or 403(b) account, by cashing it out, you’ll have to pay a 10% penalty (if you’re not at least 59½) on the amount withdrawn as well as the income tax (the funds were accumulated with pre-tax income) due on the amount.

While obtaining skilled legal advice is vital, getting good financial advice can be critical, too. There are abundant stories of spouses acting quickly and quietly to hide or move property that was obtained during the marriage and is, in fact, joint property. You don’t want that to be your story.

Separate Advisors

It’s common for couples to have received advice from the same financial advisor over the years. However, once the marriage is irreparably broken, it is vital that you secure your own advisor. He or she can help you make critical decisions that are entirely in your interest while guiding you toward a successful financial future.

Your attorney will take care of all the legal matters, from making any necessary changes in your will to getting court orders to guard your property rights. You might be advised to obtain a Qualified Domestic Relations Order (QDRO or “quod row”), a court order related to child support, alimony or your property rights. It can be used to instruct your spouse’s pension plan administrator how to pay you your share of the plan’s benefits.

Such orders only apply to IRS qualified plans, not to government pensions or military arrangements, which come under regulations from other laws. A QDRO will likely permit your former spouse to take his or her share of the retirement money and roll it over into his or her own IRA, then continue treating it as an IRA.

Without one, however, when qualified retirement account money goes to your ex, it is treated as though it were a taxable distribution to you – and you’re liable for the taxes. If you’re under 59½, you’ll also get stuck with the 10% penalty the IRS assesses for premature distributions.

IRAs and Other Plans

Retirement funds often constitute the largest single element of a couple’s financial portfolio. No special arrangements are required to divide IRA accounts, but due diligence is always recommended. If your divorce property settlement documents give you the responsibility of doing the rolling over, all you need to do is carefully set up a direct transfer into an IRA established for your ex, who can then manage the account and defer the taxes until the money is withdrawn. At that point, he or she will owe the taxes on the distributions.

The caution flag here is that divorce documents should be specific. You can’t simply give your ex part of your IRA or SEP account, because if you do, it will look like a withdrawal, and you’ll owe the taxes – as well as the 10% penalty if you’re under 59½. Your ex might be happy with these arrangements, but you’re unlikely to think it's a good deal.

Avoiding Complications

Early on, take steps to protect your credit. Close joint accounts without a balance; freeze those that are active.

Keep a record of your calls to credit card companies, and make it clear that you will no longer be responsible for additional charges after the date of your call. Ask the companies to inform credit rating agencies of the new status of your credit card accounts. Close joint checking accounts.

Keep a chronicle of all matters related to your financial life – separating your finances from all the other issues you’re likely to confront may help you maintain focus. You might want to assess how much you will need to live comfortably after the divorce, too. If you do, you’re likely to better be able to evaluate a potential settlement agreement.

Divorce can be distressing. Taking measured steps to protect your financial well-being may provide you with a more comfortable future.

Agreed Family Values May Help Preserve Family Wealth

It’s a staggering statistic that appears to validate a bit of folk wisdom – as many as 70% of wealthy families have lost control of their wealth by the end of the second generation; as many as 90% lose it by the end of the third. Those are figures from a 2009 study by the family wealth consulting firm Williams Group. The question is, “Why?”

The reasons are endlessly debated. Some point to faulty legacy planning, although it is acknowledged that however noble a plan’s intent, implementation depends on the actions of less than perfect human beings.

Communicating Values

A key to the success of the smaller percentage of families that do indeed preserve and grow their wealth across the generations seems to be an intelligent transference of family values. Passing along wealth without the family values that accompanied its creation is a formula for failure.

It is said that sustaining a family’s legacy across multiple generations depends on four distinct types of capital: human, intellectual, social and financial – all vital elements for success.

Wealth and Values

Preserving a family’s wealth is most likely if an agreed set of values has the support of multiple generations. Clearly, the figures show that accomplishing this goal is relatively rare – which is why experts in legacy planning encourage families to share information and to make sure that all interested parties are engaged meaningfully in the family enterprise.

The family vision may have originally been set by the founding generation, but as younger members become empowered, they may insist on modifications. As long as these support the values that go hand-in-hand with the family’s vision and wealth, the legacy may be counted among the small number that are preserved.

If I can be of help to you in your legacy planning, please don't hesitate to give me a call.

Avoiding the Unappealing Aspects of Sudden Wealth

As lottery sales around the world indicate – no matter what culture, country or language – people everywhere would like to be rich. If only we were rich, we imagine, we would be free to live life just as we order it. Our financial and other cares would be swept away by a sea of unimaginable wealth.

It’s a dream come true for some. And when it does, no matter how – through a lottery, the unexpected death of a relative or friend, a windfall when you sell your business, or good luck on a TV show – sudden wealth inevitably changes lifestyles and attitudes. It can tinker with emotions and put incredible stress on relationships. Happy stories exist, but there's often a darker side attached to the reality of sudden wealth, and you might need to summon considerable wisdom to deal with the realities if you are to overcome the perils that may confront you if you strike it rich.

A Deep Breath

If you’re the recipient of sudden wealth, you first might want to do as experienced financial planners suggest – that is, almost nothing. No red Ferrari, no vacation cottage in the mountains or new homes for your siblings or children, no massive bequests to your favorite charity. Later, perhaps, if the new wealth is substantial, but first, let your riches earn a small amount in an interest-bearing account while you take a breath and contemplate your future.

Take a moment to recall Beatle John Lennon’s aphorism that “life is what happens while you’re busy making other plans.” This is an opportunity to consider the meaning of your life, what you would like to accomplish and how you might satisfy those desires. It may suddenly be quite different from simply allowing the days to tick by as we rush to put dinner on the table, pay the bills and take the children to soccer practice.

As a recipient of sudden wealth, you now have time for introspection.

Guilt and Fear

Confusion and distress over suddenly changed circumstances are common. You’ll need to work through those thoughts as well as the not-unreasonable fear that scams and scoundrels may confront you. Even savvy investors can be taken in by clever villains who don a mask of legitimacy and put a plausible spin on fabricated strategies.

Professional Assistance

You can forestall fears and many other potential problems by lining up trusted professional help. Arrange to have your money safely and profitably parked for you while you contemplate larger issues and consider your future.

It may be in your interest to consult a top-notch attorney, an accountant and an insurance specialist. You might even consider talking to a family psychologist if you think you need one. Have your siblings begun to develop a sense of expectation of support from you? It’s not unknown for siblings to assume a sense of entitlement, sure that you will “share” with them, as you were told when you were children.

There's no magic pill that will cause every-one in your family to accept your new wealth with equanimity, but professionals experienced in such situations often recommend calling a family meeting to openly discuss your newfound wealth – it’ll hardly be a secret, anyway. Your team of professionals might explain to everyone how trusts, investments, insurance and charitable bequests are likely to be involved – and how they work.

You might also benefit from the advice of professionals if you need to make a choice in how you receive your newfound wealth. In some cases, it’s out of your control, but what if it is a lottery win offering you either a much-reduced cash payout or the full sum ladled out over years? And what about the tax issues your winnings will raise?

Sudden riches can complicate life in ways we never picture when we’re imagining how great it would be to be wealthy. In reality, it’s a time for cautious, considered thought and action.

Keep IRA funds out of the mix when settling divorce obligations. Not only will a withdrawal shortchange your retirement – unless done correctly, it will trigger a tax obligation.

Similar, Yet Different:
Asset Allocation and Diversification Are Commonly Confused

Investors are often puzzled by the use of these similar yet quite different investing concepts. Both are tied to portfolio construction, so it’s important to understand the relationship between “asset allocation” and “diversification.”

If your portfolio were a pie, asset allocation is what you do when you make those first large slices. In investment terms, you’re dividing your holdings between stocks, fixed income instruments and other asset classes in proportions suited to your needs, usually determined by your investment time horizon and your risk tolerance. Your pie is cut into large asset classes – but not yet suitable for serving.

Diversification results from further dividing the pie into types of assets within those classes. So, after deciding what suits your goals, you may choose various types of equities and divide the fixed income portion into various types of bonds, certificates of deposit, or cash in the bank. The concept stems from historical evidence that various kinds of investments act differently over time, thus tamping down portfolio volatility and giving the investor a better chance for long-term success.

Investment Myth:
Don’t Worry – This Time Things Will Be Different

Some say this is the most dangerous phrase in investing, because it usually is simply incorrect. Refusing to accept that market upswings often follow devastating lows can cost an investor appreciable gains; denying that market bubbles are likely to burst can result in significant losses. Be wary when you hear “this time, it’s different.”