On the newest episode of We Chat Divorce we’re speaking with Marianna Goldenberg, the Founder and CEO of Curo Wealth Management in Langhorne, PA. Marianna is a Certified Divorce Financial Analyst (CDFA®). Marianna was just eighteen years old when she left behind the oppression and dangers of living in the Soviet Union, with a mere fifty dollars in her hand. Seeking a better life and a safe place to rebuild where opportunity was the reward for integrity and ambition, she and her immediate family left everything and everyone they knew in Russia for a fresh start in Pennsylvania. Hard work, big dreams, and an undeniable determination to succeed led Marianna to UPenn’s Wharton School of Business. At Wharton she earned degrees in mathematics and finance, thus kick-starting the financial career she is so passionate about today.

 

Learn More >> https://www.curowm.com/

Connect with Marianna Goldenberg on LinkedIn >> https://www.linkedin.com/in/mariannagoldenberg

 

The We Chat Divorce podcast (hereinafter referred to as the “WCD”) represents the opinions of Shanahan, Chellew, and their guests to the show. WCD should not be considered professional or legal advice. The content here is for informational purposes only. Views and opinions expressed on WCD are our own and do not represent that of our places of work. 

WCD should not be used in any legal capacity whatsoever.  Listeners should contact their attorney to obtain advice with respect to any particular legal matter. No listener should act or refrain from acting on the basis of information on WCD without first seeking legal advice from counsel in the relevant jurisdiction. No guarantee is given regarding the accuracy of any statements or opinions made on WCD. 

Unless specifically stated otherwise, Shanahan and Chellew do not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned on WCD, and information from this podcast should not be referenced in any way to imply such approval or endorsement. The third-party materials or content of any third-party site referenced on WCD do not necessarily reflect the opinions, standards or policies of Catherine Shanahan or Karen Chellew. 

 

Karen Chellew:           Welcome to We Chat Divorce. Catherine and I are happy to welcome Marianna Goldenberg, CDFA®, to our podcast today. In this episode, we're going to discuss five critical considerations when dividing executive compensation in divorce. But, first, let me take a couple minutes to introduce Marianna. With thirty years of experience, Marianna is founder and CEO of Curo Wealth Management. Curo Wealth Management is a financial planning firm located in Bucks County, Pennsylvania. Curo in Latin means to take care, and this is exactly what they do for a select group of families, women, and busy executives. When it comes to her clients, Marianna takes care of everything relating to their finances. She loves teaching and empowering people to make important decisions for their financial future, helping to set them off on a better path than where they started. Marianna especially loves it when they bring their kids into the conversation so that they can learn, too, and she can help them save for their futures. Welcome, Marianna.

Marianna Golden...:    Thank you, Karen. Thank you, Catherine. Delighted to be part of your podcast today.

Catherine Shanah...:    Oh, we're so happy to have you. And boy, oh, boy, could we go on and on about this conversation because I don't think that there's a day that goes by that I don't get frustrated of what people overlook when it comes to executive compensation, so this will be a great conversation for people listening. So thanks for coming on board.

Marianna Golden...:    Of course.

Catherine Shanah...:    You are a wealth of knowledge and often a resource I go to when we're doing our financial portraits to get some more input from you because you really are an expert when it comes to executive compensation.

Marianna Golden...:    Thank you.

Catherine Shanah...:    It's my pleasure.

Karen Chellew:           I completely agree. What would we do without Marianna some days?

Catherine Shanah...:    The only thing I think was missing from your intro there, which was a nice long intro, Karen, thank you for that, was when you said, "She looks after families and teaching children." Where are the dogs? Marianna's always including her dog in something.

Marianna Golden...:    Absolutely.

Karen Chellew:           Lola.

Marianna Golden...:    It's a big part of our firm. The board of stress management.

Catherine Shanah...:    Oh, yeah. So let's jump into this, five things to consider. I know there's more than that, and we'll tackle five of them today. This is just such a topic that people are afraid of, their attorneys steer away from sometimes, and the individuals, the non-employees, in particular, and even the employees themselves sometimes, a little bit of it is over their heads on what's considered marital and what's not considered marital. So what's the first thing somebody should consider?

Marianna Golden...:    That's a great question, Catherine. What's really important to understand is, these days, a lot of companies change the way they reward their employees. They used to have lifetime pensions or cash bonuses, but the employers really tried to tie the success of the company to the compensation that they leave to their employees. Part of that is something that's called long-term incentives or executive compensation, and it's a really involved and very important concept. A lot of times, even the employees themselves don't understand how it works. Then you put divorce on top of that, and you have parties that are not privy to that, and it becomes a very complex issue that we always come across during the divorce and distribution of assets.

                                    There are various kinds of long-term care incentive or executive compensation, and the most common ones are restricted stock units, performance stock units, stock options, which are then divided into qualified and non-qualified, and restricted stock units or RSUs for short. Those are the kinds of executive compensation that we normally see.

Catherine Shanah...:    And how do you know if your spouse has that?

Marianna Golden...:    That's a great question. A lot of times, it's really overlooked because, as part of discovery, attorneys usually ask for tax returns or other documents that don't include this particular type of compensation. Really, if someone works for especially publicly-traded companies and they are of a senior management position, chances are a part of their compensation is executive comp or LTI. The best way to determine if someone has one is obviously to ask, but not everybody is going to be forthcoming in sharing that information. The best way I've found to understand if someone has this type of compensation is ask for a few documents. The first one is a total compensation package, and it's really a printout that the employee gets every year that shows everything that they receive as part of their overall compensation.

                                    The second one is to request their 1231 pay stub, and the reason I say 1231 is because different companies have different timing of when their executive compensation gets paid. Some do it in the beginning of the year, some do it in the middle, some do it quarterly, so it's really important. If you request 1231 pay stub, it will show up on that pay stub. It will not show up on W-2. It will not show on tax returns. So those are usually the two main documents that are requested, and if you just have those, you won't know. The other thing that's important, too, is to Google. We all know you can get any answer in Google these days. So part of discovery should be Googling the compensation for the company, and chances are you'll find out a lot about the plans by doing that in conjunction with the rest that I just mentioned.

Catherine Shanah...:    I want to just expand a little bit on that 1031, I mean, 1231 pay stub or pay statement or however you want to reference it. So often, Karen and I, when we're putting together the financial portraits for individuals, will hear, "No, I got this pay stub or I got that pay stub," and, "No, they said that we can look at a W-2 with it," or, "What's the big deal? I have this quarter's pay stub." It really is a big deal to get that last year-end statement. There's a lot of valuable information in there, you're saying.

Marianna Golden...:    Yep. There is additional bonus that was paid that wasn't outlined before this new project or patent or some kind of additional recognition, all going to show up there. It's such a great source for discovering compensation that wasn't disclosed.

Karen Chellew:           And I'm going just going to ask because this is really not my area of expertise, except I'm in the document collection piece a lot. You're identifying the existence of the executive compensation because I know a lot of the other party or the spouse with the executive compensation will say, "Well, it exists. Yes, I agree with that, and here is this spreadsheet defining what the it is." So, to your point, that compensation package is important as to how it plays out. I just wanted to make the differentiation there from the existence of it to the valuation of it that's two different perspectives.

Marianna Golden...:    So true, Karen, and it's a really valid point because a lot of people do just what you said, spreadsheets, and this is not a valid document from the company. Something that's called a stock or options ledger, which is the official document from the company, will identify... Once we know there is an existence of the executive compensation, it will be an official record that will identify what particular compensation we're talking about, all the particulars, the dates that they were awarded, the dates that they become available to the employee, and the taxes that will be taken. So it's really a wealth of information as well.

Catherine Shanah...:    Can you compare that to a screenshot of someone logging into their net benefits statement on the computer? Is that the actual ledger? Because, often, when we're... Karen, when you're collecting the documents, you'll see the screenshot or someone just logging into their net benefits on a certain date, and it'll show what's vested, what's not vested. Is that the same thing as asking for the company's ledger?

Marianna Golden...:    Depends on the screen and depends on the company, but I would say this is a good beginning because in order to be really fully disclosed, right, say, the screenshot is terrific. The other thing that's important is something that's called the summary plan description or SPD because that's going to really spell out the ins and outs of the specific plan. Also, if there are any historical vesting or exercise that happened before, we need those exercise invoice to determine if the actual shares were sold or kept after the vesting. So it'll show us if that happened, when it happened, what was the cost basis of those shares and the taxes withheld. The historical part of that, during marriage, during separation, and then the future are all important parts for the overall picture.

Karen Chellew:           I-

Catherine Shanah...:    That's great.

Karen Chellew:           Yeah. To your point there, too, Marianna, where you said that's a good beginning, I think sometimes it can stop there. As they're collecting documents, they get a couple pieces of paper and say, "Oh, this is a good beginning," whether it's the mediator or the attorney or whoever they're working with, and they assume that as they get closer to the agreement or to the trial or the master's conference or wherever they're going to be hashing out the logistics... No one has gone back to pull that ahead to get all the information. So I know when I'm working with clients, I'm saying, "Let's just get this out of the gate. It's easy to get. If you're getting one thing, you might as well get all of it," so that everybody has that fund of information from which to work. I think that's so important because, by the end of it, if you're not staying on top of it to collect all the relevant information, you've got a lot of information to collect and things get easily overlooked when you're trying to hash out a settlement.

Marianna Golden...:    I totally agree. I really believe in saying, "You don't know what you don't know." So in order to have the good understanding, you have to have all the documents and make the conclusions. But then you have the facts. That's what you need.

Karen Chellew:           Yeah.

Catherine Shanah...:    Yes. And it's much easier to get those facts, to Karen's point, when you're in the process of collecting and you're not getting fatigued by the whole process and just over it. By the time that you really need the facts, you just don't want ... You want to be done with it. So I totally agree with that. What's the next tip, number two, for you to consider?

Marianna Golden...:    So we just discussed how do you even know someone has that particular asset. The second one, once you determine if someone does have the executive compensation plan, you really have to understand what it is that you're looking at. As I mentioned, there is various types of executive compensation stock options, restricted stock units, performance stock units, long-term deferred comp. The important thing is to make sure you get a summary plan description for each document and really outline what it is that you're dealing with. If it's stock options, are they incentive stock options or they're non-qualified stock options? What are the terms? When do they vest? When you exercise, do you hold the stock or do you sell the stock?

                                    Each award is very different. And I see it a lot in the property settlement agreements where they use the word vested or exercise for the wrong time of the executive plan, so you really want to make sure if it's options, they're vesting and they're exercised. If these are restricted stock units you're talking about, they cannot be exercised. They can only vest, and you have no control with when, where with the stock options, you do have control when you can exercise. So it's very different terminology that gets often mixed up between different awards. So that's-

Catherine Shanah...:    Which seems like an easy thing, right? But now you've signed your agreement and you have to make sure that you're able to execute your agreement. So if the language is not properly written, how does that happen? So these are really good points, and I know if you're listening to this podcast right now, your head is probably doing a whole spin-around because you've mentioned a lot of big words like vesting and non-qualified and qualified. So it's really important, I'm hearing you say, to get that summary plan description so that you do not have to be a genius with this but you have to be able to have the document to actually outline what it is that you're doing with it.

Marianna Golden...:    That's exactly right because I often see the document that spells something out about the plan, something like let's divide this particular asset in half or the employee can do this or that, and it's really important to know that if your legal document says that you can do something but the document that the plan is based on doesn't allow for it, you can't do anything. The divorce document becomes obsolete if the plan document doesn't allow for a certain transaction. If you don't have the summary plan description that you incorporate into your divorce document, it's not going to work. It's just useless piece of paper at that point, and guess what? You have to go back and negotiate and pay additional fees to get it resolved.

Karen Chellew:           That's such a good point, Marianna. I know when we're compiling the MDS portrait for our clients and they have executive compensation, we'll put that in the table of recommendations and considerations. We'll say, "This is what you have, this is what you need, and this is who can help you," because a lot of attorneys frankly aren't financially trained. Of course, it takes a village. It takes a team when getting through any kind of difficult challenges. So even if your attorney may not understand how the executive compensation works or all the nuances of it or the complexities of it, you can take that to your financial planner, just like Marianna, who can help you know how that plays out so that your attorney has the information he or she needs then to get that agreement rock solid for you.

Marianna Golden...:    It's so true. I often work with couples where they do have their financial planners but these particular people are not specialized in the executive compensation. So they might say this is what they suggest, but it's not going to be really useful if that's not their specialty. I would highly recommend to talk to your financial professionals and see do you work with executive compensation, do you understand how it works, do you have specific companies and plans that you are really familiar with because although it's a common asset, but each plan might has its own specifics and you need to know those specifics.

Catherine Shanah...:    And let me piggyback off of what you were saying, Karen, because let's take a look at the downside to all of this, I guess. So let's just say I'm sitting here and I have this agreement and I'm listening to you guys speak and I say, "Okay, great, my language isn't saying what Karen just said." Now, Marianna, you're my financial planner and I bring you my agreement. Are you going to force me to go back to my ex-spouse to get this plan description because it was never requested before? How are you going to help me if I don't have that information?

Marianna Golden...:    That's a really unknown question. It really is because I did have situations where someone comes with a document and says, "Can you help me execute the terms?" It's really hard when the other spouse isn't open or amicable. It's really hard to put it for something that's not spelled out. So it might be case where you need to back and have the agreement rewritten if the other side is not cooperating with the terms. I often recommend for people even to have a separate agreement which is not part of the overall MSA that states how to exactly go about and execute the terms of the executive compensation.

                                    Also, a lot of times... And we might talk about it more. A lot of times, you have to understand that the executive compensation is only an asset when it becomes vested. So doing something beforehand, the employee even doesn't own that asset until it's vested, so it might take a couple years before it becomes a real asset. But then the considerations have to be made. Is it an asset subject to support, or is it an asset subject to equitable distribution? You can't double-dip, so that really has to be outlined as well in the property settlement agreement. So it really-

Catherine Shanah...:    Oh, boy, do we need to do a... We need another podcast just on that. I know that if you're listening, you might write in and give us some questions on that, and I'm sure Marianna will come back because that's such an important realization to make when you're negotiating. A lot of people don't really want to sit back in that seat and say no. They want to double-dip and the other party doesn't. And to round out what we just said a second ago, if you're listening, whether you're the employee spouse or the non-employee spouse, if you do not want to communicate after the fact, which is in most cases, make sure you give the documentation that's needed now and make sure you ask for the documentation needed now so that you can ensure that the proper language is in your agreement or that you have another agreement, which I love that idea, so that you do not have to communicate on these issues moving forward. Great point there.

Marianna Golden...:    Yep.

Karen Chellew:           And I'm just going to give a little case, I guess, summary of something that we experienced not too long ago, where the couple had an agreement and, for whatever reason, it said the spouse was supposed to give the other spouse a copy of the W-2. So that didn't happen, but the pay stub what was needed, Marianna, to your point.

Marianna Golden...:    Yes. Yes.

Karen Chellew:           And they only got the W-2. But the agreement didn't call for the W-2. I mean, the agreement did not call for the pay stub. It only called for the W-2. So that became a real issue because, now, the spouse was without the proper documentation for her accountant to work with.

Marianna Golden...:    Yep. And that's the thing. You need to know what to ask for because if you don't know what you don't know, the agreement will not be complete and filed properly.

Catherine Shanah...:    I totally agree. Can you all hear me? I thought I lost my audio there.

Karen Chellew:           Yes.

Catherine Shanah...:    Okay, great.

Marianna Golden...:    Nope.

Catherine Shanah...:    Sorry for the little delay.

Karen Chellew:           Can you hear me, by the way?

Catherine Shanah...:    A little low.

Karen Chellew:           Okay.

Marianna Golden...:    Yep.

Catherine Shanah...:    That's a little sidebar there if you're listening to us. It's technical day on Monday, right? So that brings us to your third consideration, which is really, really important, and, boy, I could go on forever about this one. A lot of times, you have an agreement written up or you're negotiating and your attorney or your mediator, they're leading that negotiation and they don't even realize if these awards are transferrable or even dividable. So how do you suggest somebody considers that?

Marianna Golden...:    Great question. I do see it quite a bit, where attorneys state in the property settlement agreement that here is options or issues or what have you, and they should be divided 50/50, 60/40, whatever that might be. As I said before, if the summary plan description or plan document does not allow for transferability, which is probably 90% of the time, you can't divide this. It doesn't matter what your document says. So the first thing, what's really important, is to, a., define what you're trying to divide. Don't just say stock option, which is a generic term. Put the stock options for restricted stock units. Attach the ledger that we discussed, which clearly indicates the numbers, what's the grant number, what's the date of the grant, the vesting schedule, and so forth so you have the exhibit outlining that. Then that exhibit should, and we didn't talk about it yet, but that should state what part of those options or issues are marital property and what are not. Because the ledger might show and will show all of them, you have to identify specific lots that are subject to division.

                                    Then, if you understand the plan document after you request it, you will know that it has to be done on the specific terms in order to be divided. So, as we mentioned, if they are non-transferrable, the only way you can give the non-employee spouse their portion is by non-employee spouse giving a written authorization to their ex-spouse of the action they wanted to complete. Is it an action of exercising their option after vesting? Do they want to keep the stock after they exercise? Do they want the employee spouse sell the stock and send them the proceeds and how much tax to withhold? So there is a lot of moving parts. They all make sense once you do it once, and they're a specific order. But that's the only way pretty much with few exceptions that transferability has to take place, and it has to be outlined very specifically in the document, which I, again, suggest to be a separate document aside from the property settlement agreement. Is that what you're asking?

Catherine Shanah...:    Boy. Again, we're throwing out a lot of terms. I know if you're listening to this and your head's spinning again, that's a lot to consider, right?

Marianna Golden...:    Yeah.

Catherine Shanah...:    So, again, we're going to go back to getting the documentation so you can absorb it all a little bit at a time, not when you're forced to go to a settlement hearing and not when you're forced to negotiate. If you can digest this information beforehand, you'll make smart decisions. So, really, the transferability and the division, because there's other things to consider and some of that money was taxed already, so now you don't want to be told that it's going to be taxed again, right? So it depends on the reward that's given. There's so much to consider.

Marianna Golden...:    Yeah, it's a very complex asset, if you will, but it could be used as a very rewarding asset if you know what you're doing because it's easily overlooked but it's also easily used improperly. Sometimes, it's by design. Sometimes, it's just because someone doesn't know or understand how it works. Even people that work for a company, they're busy executives. They keep running and building their corporate career, and they don't have, often, time to slow down and understand how it works. So they might not themselves understand what's involved, let alone someone who's not involved in the company.

Catherine Shanah...:    That's a really good point because often everyone takes the position that my spouse is lying to me about this or they're hiding this from me, and maybe we can look at it from a different point of view saying maybe they just don't understand it themselves, right? So, again, it goes back to really requiring the documentation so that everybody's working uniformly on the same information. Also, yes, this is such a complex asset, but, remember, a lot of wealth today was built off of this asset, so don't be afraid of it. Don't walk away from it and choose your home or something else because it's an easier solution. Take the time to understand what's on the table here before you make that decision.

Marianna Golden...:    And if you don't understand, work with professionals. That's really important because, just like you wouldn't want to make your healthcare decisions without going to different specialists and getting second opinions and really making an informative decision, it's the same thing in place here. If you don't know, ask. If you're not sure whoever you ask is giving you information that you can easily understand and process, go somewhere else. It's much easier and plus the fact that it's time-effective to do it all up-front than deal with it at the end.

                                    One of the reasons I became a CDFA fifty years ago was because someone came to me with this specific situation, where they gave up their rights to the executive compensation because it was something difficult and something they couldn't quite understand and decided to take their home as an asset and gave up the executive compensation. Guess what happened? 2007, 2008, when real estate market collapsed, they had an asset that they thought worth a lot of money that was not liquid. They couldn't refinance because they didn't have the income to get approved for a refinancing, and they couldn't really sell it because the prices dropped significantly. So they didn't have choices, and you always want to be in control of your financial situation. The only way you can, if you look at all the choices and then you make a decision that's based on data and your understanding, not because somebody said so.

Catherine Shanah...:    Exactly. If you ask a question once to your advisor... Marianna knows this for a fact. I must've asked 15 times the same question, just so I had complete understanding of something, and that's okay. That's really okay.

Marianna Golden...:    Yep.

Karen Chellew:           From the perspective of choosing your battles, this is one of them where you definitely want to lean in and make sure you have all of the documentation necessary so that you can make an informed decision. It is so important because it could be the difference of 100, 200, 300,000 dollars. It's to that level. I know a lot of people have a budget when it comes to divorce and they can only spend so much money, and I completely get that, and we respect that. But this is one of those assets that you definitely want to make sure you have the information and documentation you need to make that really good decision for yourself.

Marianna Golden...:    So true. So true. And another important consideration for that, if you already listened to us and you've done all the work and you've made the right decision, it's the follow-up or follow-through that I often see people overlook because once the proper documents are executed, then somebody actually needs to follow up and put them into work. If you are working with the incentive compensation that is going to stand over a number of years and you already moved on with your life, it's hard to remember, yes, you have to go back every year, and not only do you have to make sure that you give your ex-spouse instructions how to execute the share that you were rewarded, because it's done on the annual basis, you also have to make sure that the taxes or tax consequences are addressed, and that's on the annual basis as well. So who wants to be attached by the hip every year, which is true, but, also, if there is lots of money, like Karen said, involved, perhaps that's something you want to do.

Catherine Shanah...:    Well, that's one thing I love about you and your practice. You are diligent and almost sometimes probably a thorn in my side because you follow up so much on these kind of things, right? That's so important because time goes so quickly. Even myself personally, I can't believe I was divorced 11 years ago, I think it is, 11 years ago, or 10 year. You probably can't believe it, right? It goes so fast with the blink of an eye. So you can very easily let that vesting date or let that sales, if you had just sold the shares or whatever, and you're not following it... So if you don't have a good financial planner who's working on your team to keep you in line with this, then you can lose out. So, yes, I do think that's a great interview question when picking a financial planner. What is their expertise in this field, and how do you help me stay in line with this? Those are really good questions, and I know you really cover that quite well.

Karen Chellew:           Very true. Great question.

Catherine Shanah...:    So what is the timing and the tax consequences? I know that's another consideration and maybe the fifth consideration for handling these types of complex issues.

Marianna Golden...:    And yet another great question. So it's really important to go back to the beginning where we said, in 90% of the cases, the executive compensation is owned by the employee and it's not transferrable. What that means, that that employee will have to go through the steps of exercising or selling the asset or vesting, if it's related to restricted stock units. Any of those transactions mean the next step is taxes because when you are awarded executive compensation, they're not taxed at the time of the reward. They're taxed at the time of vesting when it's related to RSUs or at times of exercise as related to stock options. When those two events happen, that's when that taxation occurs.

                                    A lot of times, companies change their rules. They will do the mandatory tax withholdings on your behalf. When I say mandatory, that means federal tax, state tax, local tax, FICA, Medicare tax, Social Security tax. So all that is subtracted before the employee gets their net check. Some companies allow for the employee to increase their federal withholding if they already know they're in a higher tax bracket. Some companies are going to do it the same across the board. For example, I work with a lot of J&J employees. They're across the board. Federal withholdings is 22%. You can't increase it, you can't make it lower, so that's what it is. You have to remember that when you get that check, it's already net of taxes.

                                    Now, if they attached a 22% on the exercise or vesting, it's not necessarily means that what you pay at the end of the year or in the beginning of the following year when you do your taxes. If you are in a lower effective tax bracket, that means you're going to get some of the tax back when you file your taxes. If you're in a higher effective tax bracket, you're going to have to pay more. That's where the confusion comes in. The employee got taxed. They give the net proceeds to their ex-spouse, but it's on them to pay the tax. So the reconciliation has to be made every year where both parties should have their tax return side by side and they should see, okay, well, if the employee's spouse had paid 22% federal withholding but their actual effective tax rate or how much they've paid on their tax return is only 20%, they owe the difference of extra tax up-front to their non-employee spouse.

                                    I know it's really confusing, and I explain it to my clients every year, and I have to repeat it again. But it's so important because most people don't follow through with this. On the flip side, if the employee spouse paid 22% withholding but they are actually in the 35% effective tax rate because of other compensation or other income sources, the non-employee spouse now owes money to them. So some people, when they reconcile it, they sometimes split money in escrow so there is not much going back and forth. But it has to be all spelled out in the document because if it's not, who's going to enforce it?

Catherine Shanah...:    Exactly. And, really, it's important to use your own independent accountant to reconcile this from your spouse's accountant because numbers could be interpreted differently.

Marianna Golden...:    Yep. I've heard this phrase once and I really liked it. It made a lot of sense to me. Everybody's entitled their own opinion, but no one is entitled to their own facts. Facts are facts. So-

Catherine Shanah...:    I like that.

Marianna Golden...:    I really love it. So you're absolutely correct. Independent accountants because here's the fact, that's how you reconcile it. If you use the same accountant, in my opinion, it's a conflict of interest.

Catherine Shanah...:    And, in my opinion, don't be afraid that you might potentially owe back your spouse money because if your spouse is having that much more income that it's pushing their bracket up, it might be a reason for a support modification.

Marianna Golden...:    That is true.

Catherine Shanah...:    So they may not even ask you for that.

Marianna Golden...:    Very true.

Karen Chellew:           Good point. Good point. Well, this concludes our episode on five critical considerations when dividing executive compensation in divorce. Thank you, Marianna, for a great conversation.

Marianna Golden...:    Thank you, ladies, for having me. It's something that fascinates me. The more complex it is, the more excited I get. So I hope that I was able to communicate it properly so to give, at least, people a sense of if you don't understand, ask. You don't know what you don't know. So I hope I was able to convey that.

Catherine Shanah...:    And before we sign off, please tell us how our listeners can reach you.

Marianna Golden...:    Great question. So the best way to reach us is to go to our website. It's www.curowm.com, and Curo is spelt C-U-R-O. WM stands for Wealth Management. So it's www.curowm.com. Our email address, our phone number, all our social media platforms are there. So we'd be more than happy to hear from our listeners.

Karen Chellew:           Thank you.

Marianna Golden...:    Thank you.

Karen Chellew:           Okay. That's good.

Catherine Shanah...:    Okay.

Karen Chellew:           All right.

Catherine Shanah...:    Oh my gosh. It's so much information, and it's so... I know it's just so scary for a lot of people. Even when we had a case and the financial planner gave the recommendation that our joint client just negotiate away the LTIs and the RSUs just to keep the home, I was like, "What?" Sometimes, I feel like some financial planners do that because they know they're not going to invest that money for a long time so there's no income for them. They're not making any money off this advice or what have you, and that's so annoying to me.

Marianna Golden...:    It is so true. A lot of times, too, because they think it's complex, they don't understand it. They just want to give it away so they don't have to deal with it. It's really interesting because I had a case where they were dividing everything properly. I looked at the documents. Everything was properly executed. Then I said to both parties, because they were amicable, I said, "Look, it's really important for you guys to communicate and coordinate the timing of the exercise because the less taxes the employee will pay, the more it's going to go to your boss' pocket. Then that number will be higher, so it's in your best interest to communicate." What I suggested to do is, instead of exercising a lot in one year, split it over a three-year period. Their reaction was so interesting because the employee spouse said to me, "How come my advisor never suggested that? That makes all the sense in the world." I go, "Well, chances are he doesn't understand how it works."

Catherine Shanah...:    Right.

Karen Chellew:           Yeah.

Catherine Shanah...:    Right.

Karen Chellew:           I don't think it's that unusual, and I think, from my experience, because I'm typically over in the attorney's office with the clients, they're saying, "Well, we got this piece of paper from the other side, and so that's what we're using." That piece of paper can be completely missing a lot of documentation. It's routine that Catherine finds money that would've been just lost had we not dug in and said, "You really need this information to clarify the documentation that supports this data because that often is the missing piece."

Marianna Golden...:    Yep.

Catherine Shanah...:    Well, how about the client that we actually went to you for some advice on as well, your input? That attorney tells client, "Just go ahead and sell your RSUs and pay off your marital debt," and he ends up selling the non-marital portion to pay off the marital debt.

Marianna Golden...:    Yep.

Catherine Shanah...:    Crazy. Yeah.

Marianna Golden...:    So common.

Karen Chellew:           So, Marianna, do you see often where an employee spouse will work with their employer to change their compensation during divorce so that it's not on the table? Sometimes, I get that question, well, whether it's support or ED. I know we can cover that in another podcast. But, often, the non-employee spouse will say, "Well, can they change their compensation package so that this doesn't exist anymore or so that they're compensated in a different way that they don't have to share this with me?"

Marianna Golden...:    That's a good question. I feel that it would be really near impossible to do it for a publicly traded company. Obviously, if you're in a really high C-suite position, maybe. But, generally, you don't. This is how the company does this. They want to tie their performance with the compensation they give you, so they as well, your compensation. But I do believe that it can be easily structured if it's non-public, if it's a private company, and they still issue this form of communication. It's probably easily manipulated.

Karen Chellew:           Especially if they have a close relationship with their employer. Yeah.

Marianna Golden...:    Exactly.

Catherine Shanah...:    Right. Right.

Karen Chellew:           Yeah.

Marianna Golden...:    Yeah.

Karen Chellew:           Wow.

Marianna Golden...:    And that's why we need history. We need to see the pattern. Because it was never done before, then we know something's up, and so historical data is important just as the future data.

Karen Chellew:           Right. Okay.

Catherine Shanah...:    There's definitely a great follow-up podcast to this.

Marianna Golden...:    Yeah.

Karen Chellew:           Yeah. It's very complex. But it's complex for all parties involved, all professionals involved. It really takes a village to get to the bottom of a lot of these calculations and valuations. Yeah.

Marianna Golden...:    A lot of times, knowing that's my area of expertise, the more complex, the better. I thrive on that. I would get a call from an attorney or a client who's not even a client say, "Hey, I was told you understand this. Here's the document. Can you just make sure we didn't miss anything, or can you interpret this for me?" So it's just a piece of information that they wanted to make sure that they're properly handling.

Karen Chellew:           Yeah. Yeah. And-

Catherine Shanah...:    That's great. Keep at it.

Karen Chellew:           Yeah. All right.

Catherine Shanah...:    Yeah. It's so needed. You got to keep this as your thing because-

Marianna Golden...:    It's getting more and more popular.

Catherine Shanah...:    Yes.

Karen Chellew:           Yeah. Oh, yeah.

Marianna Golden...:    More and more companies, instead of doing cash compensation, do the performance type compensation.

Catherine Shanah...:    Yeah, because it's lowering their turnover. It's so hard now to get employees and keep-

Marianna Golden...:    …

Catherine Shanah...:    Yeah. Yep.

Marianna Golden...:    Yeah, because you give someone something today which they can't touch or feel, but if they stay for three or five years, all of a sudden, it becomes quite a sizable asset.

Catherine Shanah...:    Yeah. Yeah. Yep.

Karen Chellew:           Yeah.

Catherine Shanah...:    All right. Well, we're going to have to chat again.

Marianna Golden...:    Of course.

Catherine Shanah...:    Thank you so much. This was great.

Marianna Golden...:    Always a pleasure, ladies.

Catherine Shanah...:    This is so good. You look fantastic. This is really good.

Marianna Golden...:    Thank you. Thank you so much for having me.

 

On the newest episode of We Chat Divorce we’re speaking with Donna M. Cheswick. Donna has over 30 years of experience in the financial services industry. She is a Certified Divorce Financial Analyst (CDFA®) and a Certified QDRO Specialist (CQS). She is the owner of Cheswick Divorce Solutions LLC, located in Southwestern Pennsylvania, where she helps individuals, couples, and family law attorneys with all the financial complexities that arise during divorce to ensure the most financial advantageous settlement possible. Education is the backbone of her business. She frequently teaches workshops on a wide variety of topics relating to finance and divorce, as well as authors numerous articles for local/national print and online publications. Donna also is a trained divorce mediator and a collaborative financial neutral. She has also been drafting QDROs and other like orders for the last ten years.

Learn More >>  http://cheswickdivorcesolutions.com/

Connect with Donna Cheswick on LinkedIn >>  https://www.linkedin.com/in/donnacheswick/

 

The We Chat Divorce podcast (hereinafter referred to as the “WCD”) represents the opinions of Shanahan, Chellew, and their guests to the show. WCD should not be considered professional or legal advice. The content here is for informational purposes only. Views and opinions expressed on WCD are our own and do not represent that of our places of work. 

WCD should not be used in any legal capacity whatsoever.  Listeners should contact their attorney to obtain advice with respect to any particular legal matter. No listener should act or refrain from acting on the basis of information on WCD without first seeking legal advice from counsel in the relevant jurisdiction. No guarantee is given regarding the accuracy of any statements or opinions made on WCD. 

Unless specifically stated otherwise, Shanahan and Chellew do not endorse, approve, recommend, or certify any information, product, process, service, or organization presented or mentioned on WCD, and information from this podcast should not be referenced in any way to imply such approval or endorsement. The third-party materials or content of any third-party site referenced on WCD do not necessarily reflect the opinions, standards or policies of Catherine Shanahan or Karen Chellew. 

 

Karen:

Welcome to We Chat Divorce, Catherine and I are so happy today to welcome Donna Cheswick, owner of Cheswick Divorce Solutions LLC. In this episode, we're going to discuss the nitty-gritty on issues with retirement plan division in divorce. But first, let me take a couple minutes to introduce Donna. Donna has over 30 years of experience in the financial services industry. She's a certified divorce financial analyst. You will also hear the term CDFA. She's also a certified QDRO specialist. That term is a CQS. You may have never heard that one. She is the owner of Cheswick Divorce Solutions located in southwestern Pennsylvania, where she helps individuals, couples, and family law attorneys with all the financial complexities that arise during divorce to ensure the most financial advantageous settlement possible.

Education is a backbone of her business and she frequently teaches workshops on a wide variety of topics relating to finance and divorce, as well as authors numerous articles for local national print and online publications. Donna also is a trained divorce mediator and a collaborative financial neutral. She's also been drafting QDROs and other like orders for the last 10 years. Welcome, Donna.

Donna:

Thank you so much. I'm glad to be with you both.

Catherine:

Oh, always love having a fellow CDFA here, which is how we met. So happy to have you here. And I'm really looking forward to getting to the nitty-gritty of retirement accounts with you. I know I'm burning with some questions and I'm sure Karen is as well.

Karen:

Absolutely. And you are a wealth of information to us and our clients. And we're so grateful that we have you on our team live. So Donna, let's just start out with how are retirement accounts split in divorce? Let's talk about that.

Donna:

Well, there are two main classifications as I'd call it of division. You have dividing employer retirement plans and then you have dividing IRAs and other types of qualified plans. And the employer plans require a special document. It's called a qualified domestic relations order. You'll hear the term QDRO or Q-DRO, depending on what part of the country you live in and they both mean the same thing. And that is needed to allow the employer to actually divide an employer plan to an alternate payee.

The other process is basically transfer incident to divorce. When you have say an IRA account, you just need special language in your marital settlement agreement detailing how that transfer is going to occur. Both of these methods are done as a tax-free transfer. Nobody's taking out money from their account, writing a check to their soon to be ex-spouse. Everything can be transferred in a tax-free transfer from one party to the other.

Catherine:

So let's give a couple of examples about that. So, an employer plan would be?

Donna:

PPG, Google, pensions, a municipality - anywhere where you are working for someone else.

Catherine:

But that would be a pension…I'm sorry, that would be a pension, a 401k.

Donna:

Yes.

Catherine:

A 403(b).

Donna:

Yes. 403(b).

Catherine:

Okay. And then the other plans that you're mentioning are just IRAs, Roth IRAs.

Donna:

Correct. Correct.

Karen:

I was just going to say how many times do we see IRAs and Roth IRAs designated in the marital settlement agreement that they need a QDRO? I see it more than I don't see it.

Donna:

They do not. Only employer plans require a QDRO. However, if you put language in your marital settlement agreement that says you're going to divide an IRA by a QDRO, many times the plan administrator will want one because you've put it in your marital settlement agreement because you have to send a copy of the marital settlement agreement along with some paperwork to that IRA custodian. So you need to be careful not to put language in that you don't need because then ultimately-

Karen:

Spending another $500…(laughter)

Catherine:

Yeah. Yeah. That's a really good point because actually I never knew that. So I have an IRA. If you're listening, you have an IRA, your attorney just throws the language in there because they think they should throw the language in there, that plan administrator may require you to execute a QDRO, which is costly.

Donna:

Correct. Correct. Now you can put kind of roundabout language in there that says if the custodian or financial institution requires it, one will be you know what I mean. But if you say this plan will be divided by qualified domestic relations order, likely that plan is going to or that IRA custodian, they're going to be looking then for qualified domestic relations workers. You said you were going to provide one.

Karen:

Right. And they have to follow the order. They have to follow the marital settlement agreements. They don't have a lot of options.

Catherine:

I know you can say this, but Karen, you may recall this, but Donna it's the truth. And really, I wish I made this stuff up, but I don't. We had an attorney that charged a client a couple of hours because he did all this research to find out that her IRA did not need a QDRO.

Karen:

We're not sure what the research was either.

Catherine:

We asked for the research just out of curiosity, but we never received it. But she did receive the bill for it, which is upsetting. You also bring up something else when you mention the pensions meaning defined benefits or defined contributions like your 401k's, you must hear this just as we hear this. A lot of people feel like, well, my employer won't let you have that money. So that money is mine.

Donna:

That is not true. Even if the employer, because there are some plans, some employer plans that cannot be divided with the qualified domestic relations order. They're few and far between but that does not mean they are not marital property. And should be attributed, maybe one party is going to keep that asset, but the other party is not. But yeah, I hear that a lot of times too, my spouse says that's my pension not yours. That's not true. That's marital property. It doesn't matter that it's only in one party's name. If it occurred during the course of the marriage, all or some of it, because maybe there's a premarital component or post-separation component, it's marital.

Catherine:

Mmm-hmm.

Karen:

Yeah. And that means you have a marital interest in it. So while the one spouse or the other may technically own it, the other spouse has an interest when dividing the asset and when dividing the marital property. I think a lot of people are challenged with that concept. Yeah.

Catherine:

Yeah. When we talked about the details you mentioned the marital component and the non-marital component, but it's also really important, isn't it? To have details on what happens if one of the spouse dies before the QDRO is actually approved?

Donna:

Well, that's one reason why you don't want to delay getting these orders done because that's just one possibility that can happen. Now you can do post-death QDROs.

Catherine:

Oh.

Donna:

They can be divided post, not every plan, but any ERISA plan can be, but again, not 20 years from now when they've already distributed the assets, that's the problem that you run into. Say you have a 401k, the party dies, the qualified domestic relations order hasn't been processed. And the plan makes a distribution to whomever those beneficiaries are that the employee has on file and they send the money out. Then what?

Catherine:

Right.

Donna:

Then you may have to go to the estate of the deceased and a whole bunch of other legal issues that can arise.

Catherine:

What happens if you get divorced and there is supposed to be a QDRO and neither party initiate or follows up on the QDRO being processed because they're in their 50s, let's say or 40s and now they want to retire. QDRO was never initiated. Will the company know that one is required?

Donna:

Well, the company doesn't know anything until they're told, right. If the company does not know unless they have that legal document, they may not know. But one can still be prepared. Because I get a lot of attorneys come to me, more recently one from 10 years ago. Nothing was ever prepared and it was a pension and wife or ex-wife knew ex-husband was going to be retiring soon. She calls the company and asks, when am I going to start getting my pension? Well, what did the company tell her? We have no paperwork on file, which they didn't. Nobody did a qualified domestic relations order. I mean you can lose benefits if you…

Karen:

And the surviving spouse could have been changed by then as well.

Donna:

Yes. That's another problem. The party could go into pay status and pick single life expectancy. Meaning it's only going to pay out on that employee's lifetime. God forbid if that employee dies an early death, there's no, even if you get a QDRO submitted, the former spouse payment will die when the employee spouse dies. And that could be problematic.

Catherine:

What if the ex-spouse remarried in that scenario?

Donna:

Pardon?

Catherine:

What if the ex-spouse remarried in that ten-year period but the attorney didn't call you.

Donna:

Well, depends on the plan. But what happens is they may have chosen a joint and survivor benefit with a new spouse. Now that's different while they're living than when they die. Right. So as long as the employee spouse is living, there can still be a division. The court order is submitted for a former spouse, but potentially if that employee spouse dies and they were able to name a second spouse that could be problematic.

Every plan is different, there's different rules. You definitely want check that information out. But I would encourage people do not wait to get these legal documents prepared. They should be done. Actually, they should be done at the point when you're signing your marital settlement agreement in a perfect world or very shortly after the divorce decree.

Karen:

Right. And even asking your council or your attorney to take the steps, to notify the plan administrator that a divorce is pending because usually that'll put a hold on the account until they have further instruction. I know it's only temporary but sometimes that will create a lockdown of sorts until the divorce is completed, especially in these really long divorce scenarios. Yeah, that can be helpful too.

Donna:

Not all plans that will. So be aware. And sometimes it's only for 18 months. So five years goes by, there's no hold put on after.

Karen:

Right. Right.

Catherine:

You've brought up something really great. Of course, I run with this kind of information. I love the client who just called the company where she knew her husband worked and said, "Hey, when is my pension kicking in?" Because that can also bring up an undisclosed asset. So if they say we don't have any information, I think it's really easy for people to overlook because they don't ask about it. And because there aren't as many anymore it's just something that's overlooked, but why not? If you're out there and you know that your ex spouse is retiring and you don't have a pension, but you think they do call the company. I love that, Donna. And say, "Hey, can I receive my benefits?"

Donna:

Well, but the problem is if it's not been addressed in the marital settlement agreement, there may be no award to the former spouse because depending on the language in the marital settlement agreement, it may have only addressed certain retirement accounts that were disclosed and said the other party keeps all other retirement accounts in their name.

So if you know your spouse has worked for a company for at least five years, even if it was years ago, you should be checking if there's any type of pension or 401k type benefits that are kind of out there. The pensions are more problematic. You're right. Because you don't get a statement in the mail every quarter like you do with your 401k. You might get one annually if you're lucky and…

Catherine:

And now they're digital a lot. So you don't even see them if you don't have access to that information. And that brings me to a really good thing. Why is it so important to get actual account statements?

Donna:

Oh, that's a huge issue. So you want to get a complete copy of any type of retirement statements, not just a screen print, where a lot of people will go in they'll just print out, "Hey, today, my 401k is worth X." Well, that's good to know and you don't just want the first page of the statement because there's a lot of data that is forthcoming in page two, three, four, five and six that may not be showing on page one.

Donna:

You need to know if the participant's spouse, that's the employee's spouse is vested. If it's a 401k plan, so all of those dollars that are showing belong to the employee? Obviously the employee's contributions are always theirs, no matter what, but if there's some type of match from the employer, some employers have what's called a vesting schedule. Maybe they only give them 20% a year of that dollar that they're matching.

They have to work there for a period of time to get that whole amount. Loans are another big issue. Most account statements do not show if there's a loan on page one, that would be important to know. The other thing that's important to know is the different buckets of money. Most people are familiar with pre-tax, you put a dollar into your 401k. You're not paying any tax on it. But some folks worked for a prior employer, maybe they rolled in their old 401k into their current employer’s plan. That's a different bucket of money.

The employer has to segment that separately. Maybe their after tax contributions like a Roth 401k. A dollar and a Roth is not equal to a dollar in the kind of traditional bucket. So all of those things show up later on in the statement and I hate to even bring this up but it happens. With the technology age, it's real easy to sort of forge a screen print and manipulate it to be something that it is not. And so it's harder to forge a 12-page account statement. But you want that full account statement. There's data on there that you're going to need to see.

Catherine:

Oh, amen to all that. We have clients saying, why is it so important to get the whole statement? Here's the value. And for everything that you just mentioned, page three and four are missing, it's one of 12, okay, we want every page in one of 12, and then if it's not there we say why it's not there. But yes, gosh, if you're listening so important to have the statements.

Karen:

Mmm-hmm. It is. And you touched on the fact that a lot of people have prior employers with 401k accounts still remaining there. We run into that a lot and then they get to their divorce and now there's one, undisclosed 401k accounts and two, they're missing or they're faced with what their attorneys put in the marital settlement agreement. Now you've got five QDROs, the need for five QDROs. Can you talk about that a little bit? How to identify other 401k accounts that you wouldn't otherwise know about?

Donna:

So again, if you know your spouse has worked for an employer in the past, you want to be asking what your attorney should be asking on your behalf for discovery if there are any plans with those prior employers. Sometimes you can do some digging on the internet. Any ERISA governed plan has to file what's called a 5500, it's a tax document and those are public.

And you can see, does the plan even have a defined contribution plan or a defined benefit plan? Sometimes you can call the company and ask. Does your PPG, do they have a 401k plan? Yes, we do. Do they have a defined benefit pension plan? Yes, they do. And at least you will know there is a plan that exists. Does not mean that the employee is eligible for it but you at least want to know first the existence.

Catherine:

Exactly.

Karen:

I want you to highlight that because that happens a lot and I just wanted to reiterate that. Thank you for doing that.

Donna:

Mmm-hmm.

Catherine:

And it's really the big general question about these defined benefit plans that individuals don't necessarily have the privy to the information so they don't understand it. So when they do get a partial statement or they do get a screenshot or what have you, it'll say what your monthly benefit is at retirement. Now you're still working in most cases and then I'll give you a lump sum option. Can you explain to our listeners what the differences and what are the things to consider when you see that on a statement?

Donna:

Sure. So not all pension plans will offer a lump sum option but if they do it oftentimes is disclosed on that statement and that gives the employee or alternate pay if there's going to be a division, the potential option to either take a chunk of money and no further payments stream out into the future. You're almost kind of buying out your pension. You're taking that lump sum amount, you're transferring it into another retirement account, an IRA and then there's no more pension.

There are some pension plans that'll do kind of a hybrid. You can take a partial lump sum and it reduces that monthly benefit payment. Say without the lump sum, you're going to get $2,000 a month but if you take out the lump sum, now you only get $1,000 a month. You have to weigh those options. A lot of times it is in the plans benefit to offer a lump sum. They want to get the employee off their books. They want to get the liability off of their plate and push it over onto the employee's plate.

But if you do the math on what your monthly income stream would be over a theoretical life expectancy and then what the growth rate on that lump sum would be over that same life expectancy, you have to kind of weigh whether it's better to take the monthly payment or whether it's better to take the lump sum. And everybody's needs are different and everyone's concerns are different, but you definitely want to know all those options and what they mean for you and if it's beneficial or not.

Catherine:

So just as a follow-up to that, let's just say I get divorced and my spouse and I split his pension and now it's gone through a QDRO, will I now have the benefit of choosing a lump sum or an annual payment or do I have to get what my ex-spouse chooses?

Donna:

Well, it depends when the qualified domestic relations order is prepared. If it's prepared before they go into pay status, there are more choices available potentially. Once an employee goes into pay status, they have to choose what they're going to do right there and then. And usually those choices are irrevocable, right. You can't go back and say, "Oops, I didn't want to do that." Or "I [inaudible 00:20:53] do that." So that is important to know.

If it is before the employee goes into pay status, potentially you have the option of what's called on a pension plan at least, a separate interest QDRO, where in theory the pension is sort of dividing the pension into two parts, one for the employee and their marital portion and also any premarital or post-separation amounts. And then kind of one part for the alternate payee who's the former spouse and each spouse once that plan is divided can kind of take their piece and do with it what they want.

Catherine:

Hmm. So that's called a special interest QDRO.

Donna:

It's called a separate interest. So think of it riding on a train. Prior to the employee retiring and taking their benefit, usually most plans will allow, it's not a municipal plan or a government plan, they will allow for what's called a separate interest. That kind of division into two parts. And each person's on their own train kind of going forward into retirement.

If it's what's called a shared interest, everything is dictated by the employee spouse. The alternate payee doesn't really get to make any choices. They are stuck, not stuck, but with whatever the employee chooses. That's why you need to be sure proper language is in your agreement because you want to protect as many of those rights as you can. You don't want the employee electing something that might not be in your favor because it's permanent.

Karen:

Right. And if they have that shared interest, what happens when the participant passes?

Donna:

If they have put in language for survivor benefits, which is very important then the alternate payee or former spouse interchangeable kind of terms can continue on either all or a portion of that pension for their life expectancy. But those benefits have to be elected when the participant retires. Can't go back and say, "Oh, I didn't do that. We need to fix it." So it's very important to make sure those documents get in and that they're worded properly to protect those benefits for the former spouse.

Catherine:

Donna being a QDRO administrator do you often see, and I already know what the answer is, but if you're listening, this might be one of you, is that it's such lazy language and everyone's marital settlement agreement that you're just going to divide this or hire this person to do your QDRO, but all of these little points that you're bringing up, and I know Karen has experienced this a lot as well are things that could be negotiated. They're expecting this divorced couple to agree to this after the divorce, they're barely talking going through the divorce and these are major life choices that should be discussed before you sign your agreement. Isn't it true?

Donna:

Absolutely. And you are so right. Usually what happens is there's negotiation going on, the settlement agreement gets signed and then and only then do people start to get information about the plans that are going to be divided. And what happens is if you don't have proper language in your agreement, you may either lose benefits that you probably should have been entitled to.

And Catherine, like you said, if they're not even discussed during the settlement process, how do you know what your option is and what you're potentially giving up or not giving up. When you have a vague agreement it's subject to interpretation. Well, I might interpret things one way. Someone else might interpret things another way.

Karen:

Mmm-hmm.

Catherine:

Definitely.

Karen:

And I know I have prepared some QDROs as well. I'm not as experienced as a QDRO administrator as you are Donna, but I know that when the elections come through it's do you want to include gains or losses? And all of these, is it shared or separate and all of these questions that hosts the divorce agreement that the QDRO administrator is either picking for the clients or asking the clients to pick. And probably they have no idea what anything means at that point and a lot of times even their attorneys don't know how to interpret that specific type of language.

Donna:

Well, and sometimes it's done purposely, right. Sometimes if you have a real savvy attorney and maybe an attorney that maybe not as familiar with retirement account divisions, sometimes what you don't put in your marital settlement agreement favors one person or the other. And so one or two words can make a big difference. Are we going to include gains and losses or are we going to exclude them?

That can be a huge thing especially if there's a block of time that goes by before that order gets prepared and sent into the plan administrator for them to divide that plan. If the market's going crazy on the upside, and you're just dividing a plan 50-50 as of a specific date in the past that other party, there's going to be a windfall for one and perhaps a loss for the other and kind of vice versa. The market can go the other way too.

Karen:

Are you going to include loans, exclude loans?

Donna:

Yup.

Karen:

Are you're going to divide by shares or dollars? There's a lot of components there that people really are not aware of when they're dividing retirement plans and that the paragraphs and the settlement agreement is parties agree to split.

Catherine:

There's also another caution. You hear a lot about the gray divorces and the people in their 50s and 60s, and now even a lot of in their 70s coming to get divorced, but the ones in their 50s and 60s, some are eligible for retirement in earlier ages, right? So no one is anticipating a divorce they can go ahead and go into payee status before their spouse would know this and then file for divorce and you can't do something about it. So if you're kind of in the cusp of that time, this is something that you need to consider or put out there if there's a pension.

Donna:

A lot of plans but not all of them, if there is a spouse, a married spouse, not a divorced spouse and the participant, the employee spouse tries to go into payee status and chooses an option that's not a joint survivor benefit, many times the plan will require the spouse to be notified or to have a notarized signature or something. Not all plans, not all plans. But again, yeah, you want to know all those things. At least while you're married, death benefits usually are in place, right.

Because it's only the divorce that kind of severs that marital relationship. So if you're the beneficiary or even if you're just the spouse and it might be assumed, God forbid, if your husband or wife dies, you may still be covered up until the time the divorce decree is issued. Every state's different. Again, we're making some general kind of assessments today but you need to know all these things because you don't want to lose valuable benefits to which you're entitled.

Karen:

That's so true. Donna, how important is it to get a summary plan description? And can you describe what that is?

Donna:

Sure. So a summary plan description is basically the rule book that the company puts out in regards to their retirement account, right. If they have a 401k plan, whatever type of retirement plan that they have, there's a rule book behind the scenes it's called that summary plan description. That summary plan description though be aware, it's usually written for a single individual or a happily married individual. There's usually one little blurb in it that talks about, oh, by the way, if you get divorced see our written divorce procedures.

So the summary plan description is important because it does tell you when normal retirement is for a pension plan, it really becomes important more so in my mind, for pensions than for 401k type plans. They are pretty easy to divide. The rules are generally the same. Pensions are where things get tricky. You want to know how they calculate the benefit formula. When is retirement or cost of living increases something that the plan pays. Are there any supplemental type benefits that might need to be divided provided that they exist? And things like that.

Catherine:

So much information about these plans and people often times they just don't want to get involved with it. There's so many stress factors, as we all know, going through a divorce, dividing your home, dividing every asset and then you get down to this pension and you're just like, "Okay, you keep yours. I'll keep mine." Thinking it's easier thing to do. Where five years later you say, "Holy crap, why did I do that?"

Donna:

Well, even if you have two pensions that look the same, meaning they're valued roughly at the same, the rule book at each company may be different. Maybe one plan has survivor benefits, one plan does not. A lot of municipality kind of and union type plans have some odd kind of rules about police and firefighter, things like that. So even two plans that look on the surface to be similar, may have vast differences that if you knew what some of those differences were, you may want the right to either share them or give that right up to the other spouse and let them keep that plan.

Catherine:

Mmm-hmm. Great points. Such a great point. You're not always comparing apples to apples just because it looks that way.

Karen:

Mmm-hmm. That's so true marital assets, right?

Donna:

The devil's in the details ladies, you know that.

Catherine:

Absolutely. But if you're afraid to ask these questions, what are the best questions to ask?

Donna:

You mean for a divorce and client?

Catherine:

Mmm-hmm. If you're listening right now and you say, "Oh my gosh, we think my spouse has that. Or he has it somewhere else." What are the best questions to ask? A lot of people are afraid to even ask for that summary plan description. We've heard attorneys say, "Okay, we know what they made every year. We have it." Or "We have the screenshot." Or "We have this." How do you stand in your own confidence to ask these questions?

Donna:

Well, first of all, as we talked about earlier, definitely complete account statement. Don't do anything without that. A lot of times people can call the employer themselves, even if they're not the employee, right. I call all the time. And I ask for copies of the summary plan description. Some companies have them write on their online website, go onto their website, Google summary plan description or put QDRO or put divorced and see what pops up there.

But you can try to call the employer, especially if you are a spouse, because often times you can get that information. And you want to ask for three things. If there's a pension, two things if there's a 401k type plan. So if there's a pension, yes, the summary plan description. Even maybe more important than that is the client's written divorce procedures. Every ERISA govern plan should have them where they're not in compliance, but there's a document that kind of specifically talks about if an employee is getting, what is the kind of rule book there?

And then most plans have what's called a model or a sample qualified domestic relations order. You should ask for a copy of that too. Now I caution you there, don't just use it as a fill in the blank. You've got to know exactly what that means because you eliminate a word or you eliminate a paragraph it could have a huge financial effect, a windfall for one, not so much for the other. With 401k type plans which are called defined contribution plans, I usually only get written divorce procedures and a model DRO, obviously again, a statement, but I don't really get the summary plan description because nine times out of 10, there's nothing in there that I'm not going to already know.

Catherine:

Or you need the full statement.

Donna:

Yes. Full statement, no matter what.

Catherine:

Mmm-hmm.

Donna:

And keep asking if you're not getting it.

Catherine:

Yeah. Yeah. I love that. And don't sign until you have it. Don't sign, take pause. You deserve it.

Karen:

And these plans most of the time, if not all of the time cannot be divided until the divorce decree is in place. Am I correct on that?

Donna:

That depends. Most defined contribution plans will allow for division because the ERISA rule states, you can divide to a spouse, a former spouse, a child or a dependent of the employee. So a spouse is someone who is still married, a former spouse to someone who's not. Different from some pension plans they will require a copy of the divorce decree. When I say they meaning the employer before they will finalize the qualified domestic relations order. And again, that's just something to find out in advance so that you know.

Catherine:

This is really great information. Before we sign off, I want to touch on a little bit, incident to divorce. Can you explain the one-time withdrawal you're allowed to have from a plan?

Donna:

Yes. And that applies only really to defined contribution plans. So kind of throw pensions off to the side. It does not apply to pension plans. But if you are going to be receiving an award from your spouse who is the employee, you have the ability, once that money is divided at the plan level into your name, that you can take a one-time distribution. It's only once, you can't call every month and say you need $1,000, and it waives the 10% penalty you are under 59 and a half. So if you roll that money over into an IRA and then take the money out, you've lost that one time ability and you're going to be stuck paying that early withdrawal penalty of 10%. If you're under 59 and a half.

Catherine:

So you still have to pay taxes on the amount that you receive, you don't have to pay the penalty if you're younger than 59 and a half.

Donna:

Correct. The employer is mandatorily going to withhold 20%. They don't really care what your tax bracket is. The rule is they withhold 20%. If they withhold too much, you'll get it back when you prepare your tax returns for the following year. And if they don't withhold enough. So if you're in a higher tax bracket than 20%, you may owe a little bit more if you physically take the money out and spend it.

We're not talking about rolling it over to another plan, we're talking about if a lot of times you'll see it in divorce, maybe there's debt that needs paid off. And maybe there's not a lot of liquid assets. So one party will maybe take more from the 401k to agree to pay that debt off. And that's one way of getting some money out, still taxable money, but you can avoid that 10% penalty if it's done properly.

Catherine:

And I really want to bring that up because if you're listening, a lot of times you're being told, okay, you get this asset and you have this one-time withdrawal. Or some people don't even know about the one-time withdrawal, but you're thinking you're getting this and okay, you're trading away something else that might not have the same tax consequence. And you really need to consider what your needs are. Like you mentioned, you might be paying off a debt or you might be using that money to purchase a new home. But before you make that decision thinking that you're going to use those monies, yes you might be exempt from the 10%, but it's still taxable. And is that really equitable compared to what your spouse received?

Donna:

Well, that's why you'll hear the word thrown around where we're going to tax effect assets so that we're going to look at the tax consequence and theoretically pretend that that asset was liquidated. And if so, what would that tax consequence be? So, if I have a dollar, let's just use a dollar because it's easy. If I'm awarded a dollar, how much of that dollar am I going to keep?

It's in a savings account I'm going to keep 100% of it. If it's in a retirement account and I have to spend it, I'm going to be subject to some tax. So that dollar that I get, maybe I'm only receiving 80 cents. If my spouse is keeping a dollar but I'm only keeping 80 cents, how fair of a division do we have? Multiply that out to any type of asset size you're talking about.

Catherine:

Yes. So important and if you didn't get that rewind then listen again because once you sign that agreement, there's devils in those details that we discussed. If those details aren't there about getting the tax back, you're shit out of luck as my dad would say. So it's very important. Again, rewind and listen to that because I hate hearing these stories years later that you just didn't know, you were so emotionally drained at that point that you wanted to be done with it. And now you're stuck with that scenario.

Donna:

It's surprising too that some people out there that they physically have to take money out of their retirement account and give their spouse a check. That is not true either.

Catherine:

In fact, that's good point. Absolutely.

Karen:

That could be disastrous.

Donna:

Mmm-hmm.

Catherine:

Yes.

Karen:

So Donna do you prepare QDROs across the United States? Are you limited to a specific area?

Donna:

I am not limited to a specific area. My practice is located in southwestern Pennsylvania. Probably 90% of the QDROs that I draft are for attorneys in that locale. But I do draft for a few other states. I have some connections elsewhere. For ERISA plans, it doesn't matter where the plan is. The rule book is the same. For pensions you need to sometimes know a specific state rules and regulations.

For instance, if you have a government employee that works for the state or you have a teacher, each state has different rules and regulations. And so whomever someone is using to draft that document they do need to understand those rules and regulations so that they can properly draft that document to the party's satisfaction and know all the things and bells and whistles that need to be in all the oops factors that could happen if not done properly.

Karen:

Mmm-hmm. That's great. So how can our listeners find you Donna?

Donna:

They can find me by Googling my website, cheswickdivorce solutions.com. They can probably Google my name as well. They can call me. My phone number is on my website as well and send an email.

Catherine:

Or call us. We had to find you for sure because we're always looking for you.

Karen:

You're on speed dial with us, Donna.

Donna:

Oh, that's nice. Thanks.

Karen:

So this concludes our discussion with Donna Cheswick on the nitty-gritty issues based in retirement plan division. So thank you so much, Donna for being here with us and we look forward to more conversations with you.

Donna:

Thank you. Thank you for having me.

 

 

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