Qualified Domestic Relations Orders (QDROs) and Beneficiary Designations
Without exception, our clients want to move on with their lives as quickly as possible after their divorce. Moving on includes taking control of their own finances. There is a long list of things to do in order to take control of post-divorce finances that are beyond the scope of this article (we would be happy to send you a guide upon request). Our recommendation is to enlist the services of an experienced Certified Divorce Financial Analyst® (CDFA™) professional before the divorce is final to ensure that the final agreement does not have negative long-term consequences.
We regularly engage with clients to complete these items and there is one simple (to us) but infuriating (to clients) road-block that almost all face: retirement plan beneficiary designations.
If the divorce is not yet final and the Qualified Domestic Relations Order (QDRO) is in process, our clients will need to obtain a signed consent from their current spouse to name someone else as beneficiary. Most financial institutions require spousal consent for a non-spouse beneficiary designation. Experts believe this is simply a policy protection from beneficiary-related litigation for custodians.
For example, an agreement awards 50% of Jim’s 401K account to Sally via a Qualified Domestic Relations Order (QDRO). In order to receive the funds, we are opening a Rollover IRA account in advance of the QDRO in Sally’s name. This way, we can tell the 401K plan administrator exactly where the funds should go and avoid any potential hiccups in the transfer process. However, custodian policy requires that an individual name their spouse as beneficiary of retirement funds, and our client is not yet officially divorced. As CDFA professionals experienced in the intricacies of account transition, we will inform Sally that she has three options to remedy the situation:
- Obtain her former spouse’s signature as a spousal consent on the new account paperwork. Jim must effectively agree to allow Sally to name her children as the beneficiaries of the funds she was just awarded in the divorce.
Client Quote: “You mean I just spent 18 months and X dollars fighting over this money and I still need his permission to do what I want with my money?!” Practical Consideration: What if the relationship has deteriorated to the point where Jim refuses to agree to the change in beneficiary? It may cost X dollars in attorney fees to force him to do so. Practical Consideration : What if Sally doesn’t want Jim to know who her financial advisor will be post-divorce? Name the former spouse as beneficiary temporarily. Although, If Jim and Sally no longer communicate, she could simply name Jim as beneficiary with the intent of updating the beneficiary designation as soon as the divorce is final. Client Quote : “You mean we have come all this way and I have to keep him as my beneficiary and he will inherit my money if I die?!” Practical Consideration : What if we decide to postpone but somehow forget to change the beneficiary designation once the divorce is final? Does the judgment awarding the 50% to Sally protect her? Practical Consideration : What if something happens while the judgment is pending? Who inherits Sally’s money? Delay the transfer of funds. QDROs take time: the QDRO cannot be carried out until the final judgment is signed by a judge. Client Quote : “But you said ‘Taking Control Now’ was the most important part of my financial transition after the divorce! Now you are telling me to wait?! Wait for what?!” Practical Consideration : So what is the harm in waiting? One major concern is the management of investments inside of the account. When transfers are delayed, the funds are often managed by the former spouse or his/her investment advisor. The advisor used by a couple during marriage is rarely appropriate for both parties to work with after a divorce. Either they will be aligned with one party, unfamiliar with the specific needs of one spouse, or unable to provide the necessary services. In addition, there is often a lack of trust. Practical Consideration : The account could lose value during the dissolution proceeding. Guess who gets blamed for the losses? Usually the former spouse – which means the client may not trust anything they have to say and turn into X dollars of additional unnecessary discovery efforts. Practical Consideration : We may want to obtain authorization and consent from the former spouse for our client to take over managing his/her portion of the funds.
The financial transition following divorce offers the opportunity for clients to remake their financial lives in a way that supports their ongoing comfort, security, and dreams. Most importantly, it offers the opportunity to take control of their finances as a single individual. The complications of such simple things as paperwork, as evidenced above, can have prolonged and lasting effects on our clients’ lives when the power struggle continues after the financial agreements are reached. Enlisting the services of an experienced CDFA™ professional during the process will help clients obtain the most financially advantageous settlement possible and support their financial independence far beyond divorce negotiations.
At BRR Divorce Advisors we are experts and leaders in the field of Divorce Financial Planning. Contact us today for an experienced and professional guide through your post-divorce transition and help consider your beneficiary designations. Also follow us on twitter at https://twitter.com/BRR_AmyWeldele or @BRR_AmyWeldele.
Amy Weldele, CFP®, CDFA™ SeniorWealth Manager