I’ve been playing hooky, and my colleague Andrea Dunbar has stepped up to complete her series on points to consider in gray divorces.
DIVIDING RETIREMENT ACCOUNTS
There are important differences associated with dividing retirement plans that are already in pay status and those that are not. Some people divorcing later in life are already retired, and thus are most likely already collecting from a retirement plan. This limits the options available for dividing some plans in divorce. Different plans have different options, so it is imperative to know the rules of the plan you are dealing with.
Pension plans, as opposed to 401(k) plans or 403(b) plans, once in pay status, pay a fixed sum of money each month for the rest of a participant’s life. The amount of the payment is typically based on the income the person earned over a period of time. The payment amount will also depend on whether there was a survivor beneficiary named at the time of retirement and the extent of the continued benefit.
Some pension plans can be divided two ways: either by a Separate Interest Qualified Domestic Relation Order (QDRO) or a Shared Interest QDRO. A Separate Interest QDRO divides a pension so that one spouse’s share is set aside from the other’s, meaning the non-participant spouse’s receipt of benefits is not contingent upon the participant spouse’s receipt of benefits. In the case of a Separate Interest QDRO, the non-participant spouse is treated as if he or she had been an employee of the company. Most plans will not allow a separate interest to be awarded after a pension is already in pay status.
A Shared Interest QDRO provides rights to the non-participant spouse that are derivative of the participant spouse’s rights. In this case, the pension share of the non-participant spouse will be based upon the life expectancy of the participant spouse. Most shared interest plans will not allow the participant spouse to name a survivor beneficiary if one was not named upon retirement, nor can the participant spouse cancel a survivor benefit if one was provided for when the plan went into pay status. In order to waive a survivor benefit at retirement, a spouse must sign a form. When divorcing later in life, it is important to verify whether the survivor benefit was waived at the participant’s retirement.
The recently passed Massachusetts Uniform Probate Code (MUPC) expands transfers that are revoked upon death. Divorce has long partially revoked the wills and unfunded revocable trusts of divorcing spouses, so that property transfers to an ex-spouse as well as nominations appointing the ex-spouse as executor or trustee are cancelled. The MUPC broadens the current divorce rule so that it now expressly applies to non-probate transfers such as life insurance and trusts, whether funded or non-funded. The MUPC also operates to revoke bequests to relatives of an ex-spouse as well as appointments of such relatives as executor or trustee under certain circumstances. Instead of relying on revocations that occur as a matter of law, it is always best practice to update a will after a divorce, whether divorcing later in life or otherwise.
It is also important to update durable powers of attorney and health care proxies upon divorce. A durable power of attorney gives a person of your choosing the ability to manage your finances and access your assets in the event you are unable to do so. A health care proxy empowers someone you trust to make important decisions regarding your medical care if you become incapacitated. Most likely, you do not want your ex-spouse in charge of these decisions, so updating these documents is imperative upon divorce.
It is important to understand your rights and options with Social Security, Medicare, dividing retirement accounts and estate planning, and to sit down with a knowledgeable and experienced divorce attorney when divorcing at any point in life.