Your 401k and Divorce: 10 Facts

One item that people frequently worry about most when they find out they are getting divorced is their 401k. The prospect of sharing their retirement savings, whether in a 401k, IRA, pension, or other retirement accounts can cause a lot of anxiety. I have always found that the best way to alleviate anxiety in divorce is with accurate information. So, here are some basics of what you can expect regarding your 401k if you are getting divorced.

  • At least in North Carolina, only the marital portion of the retirement account can be divvied up by a court. Typically, that is the portion of the account that accrued between the date of marriage and date of separation. 
  • Many, if not most retirement accounts can only be divided by way of a special court order called a “Domestic Relations Order”. 
  • Dividing retirement accounts without a court order or a properly drafted and executed separation agreement can result in expensive penalties and taxation on the withdrawals to the account owner. 
  • Most 401k companies will not allow you to give your spouse specific parts, shares, or assets of a 401k. For example, it is usually impossible to give your spouse just the Apple stock out of your 401k.
  •  There are big differences between Roth and non-Roth retirement accounts in taxation when the funds are withdrawn later.
  • Some retirement can be divided such that your spouse gets their own separate account. But, some can only be divided such that your spouse gets a portion of your payment once you start receiving benefits.
  • Annuities are difficult to divide and therefore payments from the annuities may need to be divided when they begin.
  • When dividing pensions, there are important and tricky survivor benefits that need to be considered and addressed.
  • Some retirement plans have online services for researching and drafting domestic relations orders to divide the accounts.  
  • The “coverture fraction” or “marital coverture fraction” is the most common technique for determining what part of a “defined benefit” (e.g. pension) plan can be divided. This is the fraction representing the years of the marriage during which you earned the benefit, divided by the total years you earned the benefit. If you earned the entire benefit while you were married, then the fraction is 1/1. If you were not married for the entire time you earned the benefit, then the fraction will be less than 1. 

Dealing with retirement accounts in divorce can be complicated and the details of each plan and case are important. But understanding some of the basics can help reduce anxiety in the early stages. 

important.  But understanding some of the basics can help reduce anxiety in the early stages. 

The Thoughtful Divorce

One of the core tenets of my practice is that people need to be very thoughtful and very intentional about how they are going to go through the divorce process.  If they don’t want a big nasty fight, then they need to take the steps necessary to avoid a big nasty fight.  If they want to fight, so be it; that can be a valid choice.  But that needs to be an intentional choice, not something you fall in to. 

The point is that you don’t want to fall into a certain kind of divorce by accident.  You want the tone, tenor, and structure of your divorce process to be the one you and your spouse choose, not the default process of your attorneys.  

But to do that you have to start with the end in mind.  What kind of relationship do you want to have with your spouse down the road?  What kind of relationship do you want to have with your kids down the road?  What kind of relationship do you want your kids to have with the other parent?  Do you want to stress your kids out when they are planning their wedding because you and your ex never healed?  Do you want to lose out on time with your kids and grandkids because they have to divide their family time between divorced parents who can’t be in the same place? Do you prefer to fund your children’s college or your attorney’s children’s college?

I think these are the concepts that the divorce attorney to the stars, Laura Wasser, is touching on in her recent interview about the new movie Marriage Story.

In discussing a character’s super aggressive divorce attorney she says “If you don’t want to end up like these people, and have somebody like this representing your spouse, you ought to really think carefully about how you embark upon the road to divorce.”

She goes on to describe the trend of divorcing couples finding more peaceful and reasonable ways to get through their divorce: “I definitely think that, in the last five to ten years particularly, we have seen a shift in terms of more divorcing parties going to mediation, communicating more effectively…joining communities, reading things, getting educated about the process”.

Part of the reason for that is the fading of the misconception that aggressive and attacking behavior helps a client’s cause.  She says she doesn’t recommend clients “…exercising bad behavior as a way to get ahead. I don’t think judicial officers find that to be something that’s worthy of being rewarded.”

Laura Wasser is just one attorney but she’s an attorney who deals in many cases where privacy is paramount, there are big financial issues at stake, and emotions run high.  If she is telling her clients to be very thoughtful about their divorce process and to keep the end result in mind when choosing a process, then perhaps that’s good advice for everyone else.   

Value for Your Attorney Fees: Avoiding Future Disputes

The cost of divorce is top of mind for almost every client that I serve.  In my experience the amount of income and net worth have very little impact on how much someone worries about this issue.  

The reality is that many divorces involve complex emotional, financial, and legal issues and therefore take some time to problem solve to resolution.  So, it is very important that clients get as much value from what they pay for their divorce process as possible.  

One of the best ways that attorneys can add value to a client’s use of resources on their divorce is to help them avoid future expenditures on legal issues.  When I was litigating adversarial family law cases in court, clients almost always grossly underestimated the amount that they would spend in the years after their first round of court hearings.  This was because the adversarial nature of the court process planted seeds of anger, resentment, distrust, and vindictiveness that I knew would sprout into fields of future conflict.  And, this future conflict often costs multiples of the amount spent in the initial round of conflict.

The best way to prevent this, in my experience, is to resolve the first round of conflict in a way that prevents, or at least greatly reduces the likelihood of future adversarial conflict that would require legal fees.  That is essentially the main goal of Collaborative Law. 

While this is a core tenet of my practice, it came to mind most recently while reading a study on shared parenting which stated:

“Shared custody – like any other parenting arrangement – can work well or poorly depending on a range of factors.  Moreover…life changes may eventually present new challenges, and helping parents understand and be more prepared for future issues that would need to be addressed if they are to continue sharing parenting could prevent future difficulties.” The Growth in Shared Custody in the United States: Patterns and Implications, Meyer, D, Cancian, M., and Cook, S. Family Court Review, V. 55, No. 4, October 2017

I have previously discussed the difference between answers and solutions in legal matters. Answers give you an immediate instruction of what you will do now.  Solutions give you not only an immediate answer, but a plan and process for handling the “future issues” that invariably come up for families after their separation agreement is signed.

In a collaborative divorce, communication patterns are identified, modified to be more productive, and new communication and conflict resolution skills are learned.  These underlying issues are rarely addressed in a court proceeding or traditional negotiation. So, while courts can give families an immediate answer, they are far less able to provide the tools and solutions that will help avoid future legal fees.

The aim is that, when future issues arise, the parties feel competent and confident in finding their own solution instead of calling an attorney to re-ignite the adversarial process.   If that doesn’t work, they can enlist their collaborative attorneys, financial neutral, or child specialist to help them over a rough spot without falling into the endless pattern of litigation or incurring high legal fees.  Those fees saved are the same as extra money earned.

As the saying goes, the only constant is change. Changes will happen after your separation agreement is signed and your divorce is finalized.  In order to get the most value from your time and money spent, choose a process that will help both of you handle future issues more productively down the road so that you won’t need to involve courts or attorneys for the “future issues”.  

Don’t Let Old Dynamics Cost You Time and Money in Divorce Settlements

My last post talked about one of the highly valuable services that I, or any skilled and experienced collaborative attorney, provide to a client; namely, helping them understand the conceptual agreements they reach at the kitchen table.
I want to cover another of the highest value services that I provide to clients in a collaborative process: Preventing old relational dynamics from undermining a settlement.
It has been said that the definition of insanity is doing the same thing over and over while expecting a different result. While it is a bit simplistic, it highlights the idea that if a dynamic has not worked in the past, then it is unlikely to work in the present or future.
Every couple has established relational dynamics. This includes the way they speak to each other, interpret each other’s statements, assumptions they make about each other, and expectations they have for each other’s behavior, among others. However, from my perspective, the most important relational dynamic in divorce is the way a couple handles conflict with each other.
Some couples simply don’t talk about conflicts. Some confront it immediately, head-on, with volume. Sometimes one person wants to confront it head-on and the other wants to avoid it and hope it goes away. There are almost as many dynamics for handling conflict as there are couples. Some are quite helpful and productive, but many are counterproductive.
It is often true that the way a couple handled conflict during the marriage played a significant role in the breakdown of the marriage. And yet, couples frequently want to conduct their divorce negotiation using the same dynamics that got them to the divorce.
It makes sense; these dynamics are deeply rooted and highly ingrained. They are very difficult to escape because they feel “natural” and even, ironically, comfortable in some ways.
And yet these dynamics can and do torpedo rational settlement conversations before they have a chance to gain traction. Even if they don’t prevent a settlement they unnecessarily prolong the negotiations and multiply the costs of the divorce if not managed effectively.
Fortunately, there are attorneys specifically trained to help clients manage these dynamics. Collaborative attorneys have unique skills to identify counterproductive dynamics and then mitigate them so clients don’t spend unnecessary time and expense getting hung up in old patterns.
These techniques start with training in how to listen to clients and their spouses. Once a pattern presents itself collaborative attorneys can help short circuit the pattern and adopt a new dynamic before frustration, deadlock, and the dreaded “Battle of Wills” set in.
This ability to identify and mitigate counterproductive dynamics between divorcing spouses is perhaps the key to the effectiveness of the Collaborative Divorce process. Having skilled attorneys who can see the dynamic objectively and short circuit it saves precious time and money for clients.
Without attorneys that can do this, the old dynamics lead to increased anger, frustration, suspicion, and mushroom-cloud conflict. That, in turn, leads to skyrocketing legal fees, animosity, and delays.
While it may be hard to see from the inside, the conflict dynamics that you and your spouse have used in the past may not serve you well in your divorce. Understanding that and hiring an attorney that is trained to identify and handle those dynamics will save you untold time and money.

We know what we want to do. Why do we need lawyers?

Some couples can have productive conversations at the kitchen table and agree on how they want to handle the financial and co-parenting issues of their separation and divorce. And I am all for couples having these conversations as long as they are productive. I believe that the more couples are able to sort out on their own, the better for them, their families, our court system, and society in general.

These couples understandably wonder why they need an attorney if they can figure things out on their own. It is a reasonable question.

There are many reasons, but I want to focus on one in this post: the difference between what you think you have agreed to, and what you have actually agreed to.  

This came to mind while reading a blog post from a financial planner about pension divisions (I know, this sounds insanely boring).

This blog points out that “Even in amicable separations, and situations in which spouses largely agree conceptually on how assets should be divided, it’s not uncommon for there to be an innocent misunderstanding at the time that, once more thoroughly understood in the future, creates animosity or financial hardship. And, in some cases, both.”

The author frames this situation as the “We agree, but don’t really understand what we’ve just agreed upon” scenario.  

This is a very real risk. Clients (both collaborative divorce clients and non-collaborative divorce clients) frequently come to me with at least a partial outline of some agreed big-picture terms. However, part of my job is to dig into the details of those agreements because I am responsible for taking these conceptual agreements and turning them into fleshed-out enforceable legal agreements. And once I start asking about details, and explaining the consequences of the conceptual agreements, clients frequently realize that they did not actually understand what they were agreeing to do.

In my mind, one of the most valuable services I provide to clients is helping them to truly understand their conceptual agreements, and to help them tweak them where necessary to reach a full and detailed agreement that is legally enforceable.

Some clients are frustrated to learn that there is more work to be done and that their conceptual agreements are not the end of the journey. I certainly understand that. After all, even the conceptual agreements take energy and those conversations can be emotionally draining. It is just one of the frustrating parts of separation and divorce.

But, without that work, the innocent misunderstandings that come with conceptual agreements become the seeds of the animosity and financial hardship that everyone is trying to avoid.  

So, to answer the question “We know what we want to do. Why do we need lawyers?”: The answer is that a good lawyer is there to help you truly understand what you have agreed to conceptually and find and address the innocent misunderstandings before they create animosity and financial hardship down the road. 

 

 

Legal Separation Defined (Or Not?)

One of the most common points of confusion in my first conversations with clients is helping them understand what constitutes a legal separation in North Carolina.  

The legal definition of what it means to be “separated” is different from state to state.  So it is crucial to understand what it takes in your state, in my case, North Carolina.

The problem is that the definition is murky.  It is easy to know whether someone is legally separated on the ends of the spectrum, but difficult to determine whether that is true for couples somewhere in the middle. Essentially, a couple is legally separated in North Carolina if they are living under separate roofs with the intent (only one spouse need have this intent) for that separation to be permanent.  If a couple is living in the same house, then they are clearly not legally separated.  If a couple is living in separate homes on different lots with the intention of beginning the 365 day waiting period, then they are physically separated. That sounds simple enough.  But what about everything in between?

What is a roof?  Which roofs count? How far away does that roof have to be?  What if intent for things to be permanent changes over time?  When does a trial separation become a permanent separation to start the 365 day clock for a divorce?  Do you have to tell everybody that you’re separated?  Is some announcement necessary?

And, there is another pesky little aspect that comes into play that is hard to nail down.  Roughly speaking the couple can’t seem to be married in the eyes of other people.  Or, as the Court of Appeals put it:

“Separation, as this word is used in the divorce statutes, implies living apart for the entire period in such manner that those who come in contact with them may see that the husband and wife are not living together. For the purpose of obtaining a divorce under . . . G.S. § 50-6, separation may not be predicated upon evidence which shows that during the period the parties have held themselves out as husband and wife living together, nor when the association between them has been of such character as to induce others who observe them to regard them as living together in the ordinary acceptation of that descriptive phrase.” Young v. Young, 225 N.C. at 344, 34 S.E.2d at 157. Tuttle v. Tuttle, 36 N.C.App. 635, 244 S.E.2d 447 (N.C. App., 1978)

That last sentence says a lot without clarifying much.  But, I interpret it to mean that the separation has to give outside observers the clear indication that the spouses are no longer living together. 

There are infinite permutations of a legal separation and many lie somewhere between the obvious ends of the spectrum.  So, it often takes an attorney to determine whether a couple has been legally separated for the mandated period in North Carolina and are therefore eligible for a divorce.

If you’re not sure whether your plans to separate or your current separation qualify as a legal separation in North Carolina, call an experienced family law attorney to help you sort it out. 

The Problem(s) with Online Separation Agreements

I noticed recently that one of the most common Google searches in the divorce realm is for online separation agreements. Most divorce attorneys don’t need Google to tell them that many clients are looking for faster and cheaper ways to get through the divorce process. They answer calls and emails every day telling them as much.

Online separation agreements are a seemingly obvious way to get what you need without the time and expenses of an attorney. Why pay a lawyer to write words on paper when the internet will give it to you for very little cost or even free?

Well, it turns out there are some good reasons. The online agreement forms that I have seen and have reviewed for clients typically have many holes, and frequently include terms that would not be advised by an attorney. They suffer from both over and under inclusion.

Here are three of the more common and problematic issues that I see:

  • Life insurance: Many if not all of the online forms I have seen leave out any mention of life insurance. Life insurance terms are commonly used in North Carolina to secure long term payments of child custody and spousal support. These missing terms leave spouses receiving support payments vulnerable.
  • Filing or recordation of the Separation Agreement: Many online agreements include language that contemplates the agreement being filed with the court or recorded with a register of deeds. However, at least in North Carolina, filing an agreement with the court and/or recording it has serious consequences that clients don’t foresee and don’t realize will have serious implications in their case. It might be appropriate in a case, but that needs to be discussed with an attorney to make sure you are making an educated decision about this issue.
  • Approval by Court: Similar to the filing of an agreement issue, many of these online agreement forms contemplate a court needing to approve or review the agreement. North Carolina law is different than many other states in this regard and many online forms do not track North Carolina law.
  • Overly general language: There are some issues under North Carolina law where very specific language is required. These online forms rarely focus on individual state law and therefore frequently omit the more particular language.  

These issues do not necessarily make online forms unusable or worthless. These forms can be useful to help people identify many of the issues and details that they will need to figure out to reach a comprehensive separation agreement. They often serve as a useful guide for the initial framework for couples that want to begin the conversation at the kitchen table. And productive conversations between divorcing spouses are the very best way to save money with attorneys; the more clients can figure out on their own, the less they pay attorneys to figure out for them. 

However, the holes and problems with many online forms make them risky for use without review by an attorney to identify and fix the problems before they are formalized.

Reptiles Have Bad Divorces

Most of us have heard of the “fight, flight, or freeze” responses that we are pre-programmed to experience in the face of a threat. This is often attributed to the “reptilian” part of our brain or the part of our brains that evolved first and have the oldest programming.

Many people experience the news of divorce as a huge threat, if not an existential threat. So, it is only natural that an impending separation or divorce would trigger our reptilian brains and cause us to respond with a fight, flight, or freeze response.  

The problem is that reptiles have really bad divorces. (If you can find one that had a reasonable divorce, I’d love to hear about it).

Engaging in a fight, flight, or freeze response upon learning that your spouse is considering ending the marriage prevents you from doing the most important thing you can do at that moment: Think. 

Some people choose to fight immediately. This looks like someone seeking out the “toughest”, “meanest”, most “aggressive” divorce lawyer they can find. This move is protective in some ways, but also frequently leads to highly adversarial and needlessly expensive wars. The fight responses is often a self-fulfilling prophecy. You think there is going to be a fight, so you create one.

The flight response is no better. Some people simply avoid the situation and reality of what is happening. They refuse to engage an attorney or discuss things with their spouse. They simply try to pretend that it is not happening. This also leads to needless cost and fighting because their spouse has no choice but to ask a court to intervene when someone refuses to engage in the divorce process. The court is the only thing that can force someone to engage, or at least impose a high price for non-engagement.

Freezing is also a bad plan. Things begin to happen legally, financially, and practically when separation and divorce are on the horizon. If you cannot actively participate and shape those events then you may suffer negative consequences for a long time.  

So, what is better than following our reptilian brain down one of these counterproductive paths? I believe that the best first move is to educate yourself. That does not have to mean talking to an attorney immediately. But, it should mean doing some research into your divorce process options, including negotiation, mediation, collaborative divorce, and even litigation. You can choose from many methods and processes to resolve your divorce issues. It is not a one size fits all area of the law. But, you should know which processes are a good fit for you, your spouse, your family, your resources, and your goals. A good lawyer can help you identify your goals, educate you about different methods, and help analyze what process is the best fit for you and your situation without pressuring you into the one they prefer. 

Everyone will likely have some form of the fight, flight, or freeze response to the news of a divorce. It is only natural. But, that is not the part of your brain that should be making decisions in these important moments. The key to making sure the more evolved parts of your brain are in charge is to educate yourself on your options as quickly as you can.  

 

Ways to Make Better Decisions Faster

The following is from an email that I received from Chip and Dan Heath, authors of the books Made to Stick, Switch and Decisive some time ago.  I have read their books and attended some of their speaking engagements.  I think that they have some really valuable ideas to share about how to make good decisions in difficult situations. And, let’s face it, in separation and divorce, decision making skills are hugely important.  Separation and divorce typically force very difficult decisions upon us, decisions that require us to assess risk, analyze potential future events and outcomes, and prioritize competing needs. I have used the questions that the Heath brothers discuss below, and have found them to be helpful for my clients and often in my personal and professional decision making.  I hope that that they are helpful for you.  Here is their email: SIX SIMPLE QUESTIONS THAT YIELD BETTER DECISIONS Have you ever “fixed” a malfunctioning toy or appliance by giving it a healthy slap on the side? The One-Whack-Repair strategy works far more often than it should. (Though we have not had much success applying it to forgotten passwords.) In that spirit, we offer the following six questions to improve your decisions. All of them rely on a sudden impact: a quick shift in perspective or a forced reframing of a dilemma. (For a full treatment of why these “tricks” work, see Decisive.) If you’re struggling with a decision, see if any of these questions provide a useful jolt to your thinking. (And if so, reply to this email and tell us about it!) 1. Imagine that the option you’re currently leaning toward simply vanished as a feasible alternative. What else could you do?  → Why this question works: A very common decision-making trap is “narrow framing,” which means we get stuck in one way of thinking about our dilemma, or that we fail to consider other options that are available to us. By forcing ourselves to generate a second alternative—we CANNOT do what we originally thought—we can often surface a new insight. 2. Imagine that the alternative you are currently considering will actually turn out to be a terrible decision. Where could you go looking for the proof of that right now? → Why this question works: Probably the most pernicious enemy of good decision-making is “confirmation bias,” which is our tendency to seek out information that supports what we want to be true, while failing to be as eager in hunting for contradictory information. This question compels you to search for disconfirming information. 3. How can you dip a toe in the decision without diving in headfirst? → Why this question works: When deciding what will be good for themselves, people typically make a guess. Think of the undergraduate student who enrolls in law school, thinking she’ll love the life of a lawyer, or the information worker who quits his job to get a graduate degree in social work, convinced it will allow him to live a more meaningful life. But there’s no reason to guess when you can know. The student can spend 3 months interning in a law firm (or better yet, 1 month each in 3 different firms), and the information worker can shadow a real social worker on the weekends or evenings. In the book, we call this an “ooch”—an experiment that arms you with real-world information about your options. 4. [For personal decisions] What would you tell your best friend to do, if he/she was in the same situation? → Why this question works: This may be the single-most powerful question we discovered for resolving personal decisions. It sounds deceptively simple. But we’ve witnessed firsthand the power of this question: We’ve consulted with people who were agonizing about a decision for months, and when we ask them this question, an answer pops out of their mouth in 10 seconds. It often surprises them. The psychology underlying this question is too subtle to explain quickly, but if you’re intrigued, read Chapter 8 in Decisive. 5. [For professional decisions] If you were replaced tomorrow, what would your successor do about your dilemma? → Why this question works: This is the professional version of the “best friend” question. Like that question, it relies on a simple shift in perspective to help you detach from short-term emotion and see the bigger picture more clearly. In his autobiography, Andy Grove, the former CEO of Intel, tells a great story about using this question to resolve one of the most difficult decisions of his career—see the first chapter of Decisive for the tale. 6. Six months from now, what evidence would make you retreat from this decision? What would make you double-down? → Why this question works: One curious thing about our decision-making is that we treat our choices as permanent when, in virtually all cases, they’re provisional. For example: We think (but don’t know) that a certain employee is the right fit for an open position. We think (but don’t know) that we’d enjoy starting our own business. We think (but don’t know) that John’s social media plan will be effective. So, given that our decisions are simply our “best guesses” at a particular point in time, shouldn’t we pay more attention to the circumstances that would make us reconsider? And a bonus RED FLAG:  Beware “whether or not” decisions.  → Here’s why: If a friend or colleague comes to you with a “whether or not” decision—“I’m debating whether or not to quit my job,” “I’m deciding whether or not to buy a new iPad”—that’s a sign that they may be caught in a narrow frame. (They’re only considering one option when, chances are, they have many.) Try prodding them with question #1 above.

The Danger of Premature Certainty in Divorce

Dewey Defeats Truman
I recently heard a reporter and author discuss his team’s process for determining which stories to pursue, and which ones to shelve. He said that in their process “premature certainty is the enemy.” I had never heard the term “premature certainty” before, and maybe he invented it on the spot (a quick Google search found it in one lone discussion of software development). But, it struck me as exactly what the collaborative divorce process is designed to avoid. A general definition of premature certainty might be thinking that you know the facts or solutions before the prerequisite information has been determined or proper analytical steps have been taken. In a divorce context, one or both spouses commonly try to figure out the solutions and answers to the legal, financial and practical challenges as soon as they realize what is happening. They frequently do this in their minds, before and without input from the other. That is, they become prematurely certain of the best way to resolve the issues. That is a perfectly natural response to the new and unknown situation that spouses find themselves facing in separation and divorce. It is not a bad thing to begin thinking of those issues. But, there is an important difference between initial thinking and premature certainty. One is thought and analysis, the other is a conclusion. Why does it matter? Premature certainty negatively impacts the negotiation process by:
  • Closing the door to alternative, potentially better, solutions before they can be analyzed
  • Truncating the information and fact gathering and therefore eliminating necessary information from consideration
  • Creating dangerous blind spots
  • Entrenching thought processes and creating “positional” bargaining that often leads to the creation or increase of hostility and destruction of basic trust
  • Creating a dynamic in which any challenge to one spouse’s premature certainty feels like a challenge or criticism; i.e. “I’m not sure that will work” is heard as “your idea is terrible/wrong/dumb”
  • Making the other spouse feel as though their input is neither wanted nor valued
All of these issues extend a negotiation, fueling increased costs and stress. When it comes to divorce negotiations, haste really does make waste. The collaborative negotiation process is designed to combat premature certainty by placing the certainty phase at the end. In the collaborative negotiation structure, we only seek certainty about solutions after we have gathered all of the necessary relevant information, figured out what is important to the spouses and children (if any) and thoroughly explored potential options for resolution. Before completing those three steps, certainty is premature. That is not to say that those three steps cannot be completed quickly in appropriate cases so that certain solutions can be chosen. After all, the goal is to achieve certainty in your resolution, just not prematurely. If you find yourself in a separation or divorce situation, make an effort to resist premature certainty in favor of a structured information gathering and analysis process. And consider a process like collaborative divorce that is designed to combat premature certainty. The resilience and quality of your ultimate solution will benefit.