Never Overlook the Details in Your Divorce Agreement:
Rosemarie Ferrante, Esq., is a family attorney focusing on non-adversarial divorce through mediation and collaborative divorce. She is the founder of The Divorce Mediation Center of Ridgefield/Danbury LLC, Karen Chellew and Catherine Shonahan, CDFA, are the founders of My Divorce Solution. The MDS Financial Portrait™ helps individuals and couples develop a transparent plan to optimize the outcome of their financial decisions. This article originally appeared on Rosemarie Ferrante’s blog.
You did it! You and your spouse mediated your full divorce agreement. You diligently and cooperatively worked with your mediator and Certified Divorce Financial Analyst (CDFA). The business valuations were analyzed and the tax ramifications of trading a retirement account for a brokerage account or an annuity were understood. You learned more than you ever cared to know about RSUs and how they are divided. You even dove deep into survivor benefits on your spouses’ pension. You are proud that you and your spouse worked together as a team and made decisions that were best for everyone.
How would you feel if all that hard work was formalized into an agreement containing poorly drafted, vague and /or potentially unenforceable provisions? Believe it or not, it happens all the time. Be your own best advocate, read your agreement carefully, and do not sign it until you are absolutely sure that it clearly delineates your intentions. Here are our top 5 details not to overlook to ensure your agreement doesn’t fall victim to the financial pitfalls of a poorly written divorce agreement!
Pension benefits and Qualified Domestic Relations Order (QDROs):
It’s not enough to simply say a pension will be divided equally as of the date of the divorce. Or even that each party keeps his and her own pension(s). Will the plan be divided using a shared interest or a separate interest? Are survivor benefits, early retirement options, and post-retirement COLA’s (cost of living adjustments), clearly defined? A QDRO preparer and the Plan Administrator will rely on explicit language provided in your agreement to draft the QDRO and administer your portion of the estate. Your agreement must mirror the language that you expect the Plan Administrator to effectuate. And if these details are not spelled out in your agreement, the dreaded “model” language may be used, which may be adverse to your best interests. Note: there is a cost for preparing most QDRO’s, as well as an additional fee that may be imposed by the Plan Administrator. Make sure responsibility for payment for these fees is also outlined in your agreement.
You’ve decided one spouse will remain in the home, but the mortgage is still in joint names. Refinance provisions have been put in place as part of the divorce agreement so that the spouse leaving the residence will be removed from the mortgage. We cannot tell you how often the timeline set forth in which the remaining spouse is to extinguish the other from the mortgage is just not attainable. Seek out a mortgage banker before signing your agreement to make sure you and your spouse understand the requirements necessary to refinance. Do not agree to a timeline that is simply not possible to meet. If the spouse leaving the residence has to remain on the mortgage longer than anticipated, make sure the appropriate language is added to protect both of you, i.e. what if the timeline is not met? What if timely payments are not made? What if a loss occurs to the home, or if an accident occurs on the property, will you be liable?
Retirement loans/ investment gains and losses:
Spouses divide retirement accounts all the time. Often, they back into the “equalization” amount owed to one party from the other after all other assets have been distributed. Sounds easy enough, right? Possibly, however, people overlook the fact that distributions often cannot occur until the divorce Judgment is entered which could be months after the agreement is signed. Agreeing to divide the retirement assets as of a specific date could alleviate the lapse of time, but what about market fluctuations? A way to avoid the market risk for both parties is to consider transferring the shares “in kind” or as a percentage of the total account instead of transferring dollar amounts. Otherwise, something that looked like a 50-50% division may look very different when you get your first “post-split” statement. And do not forget loans on retirement accounts, specifically 401(K) accounts. The CARES Act has made it easier for employees to take loans from their accounts without paying the usual penalties for early distributions, so these are more and more common. Make sure your agreement denotes whether any loans against the retirement account are excluded or included!
RSUs/ PRSUs/ Stock Options:
Restricted stock units or performance based restricted stock options are often misunderstood, or worse, forgotten assets. Discussions of grant price, exercise price, sales price, vesting schedules, qualified and non-qualified units are enough to make your head spin. It is not enough to just divide the assets, it is imperative to include specific information as to delineate the specific details. None of these issues can be addressed without a thorough understanding of the Plan documents. Obtaining a detailed analysis, with the help of a Certified Divorce Financial Analyst is imperative. If your agreement is that these assets will be shared “net of taxes,” be sure that your language very specifically provides that the taxes owed will be reconciled between your accountants as your tax brackets will most likely be different. It’s all in the details!
And the taxes:–
A past or current tax bill arrives post-divorce; does your agreement state who is responsible for that unexpected debt? Does your agreement specify who will be able to take the available exemptions, deductions or tax credits for your dependents? Which spouse will claim the deductions related to the home? If you received your portion of RSU’s, stock options or a bonus, was it specified that you are both obligated to reconcile these amounts with the exchange of each other tax returns between your respective accountants? Is there a provision obligating you to share future tax returns? Do not overlook these details, and be sure your CPA or CDFA has been involved in explaining these issues thoroughly to you!
You’ve done the hard work and are nearing the finish line. Don’t make the mistake of not following through. It’s so important that you persevere and make sure that the entirety of your agreement is protected and enforceable. Working out the details post-divorce may not be so easy. . Take the time to make sure your mediator, CDFA, and your review counsel guides you in the specific language necessary to properly effectuate your agreement. Consider adding frameworks for any potential post judgment disagreements so that you and your spouse have an avenue to take if an unexpected event occurs. Be aware, the devil is in the details so do everything you can to make sure your team has them covered for you.