Some conversations are easier than others. Divorce is painful for many reasons and the financial implications are serious. Sadly many professionals make mistakes and poor assumptions regarding the division of assets.
Rarely does the U.S. Supreme Court rule unanimously and when they do we as professionals need to pay attention. Remember, under the U.S. tax code, if you receive bad advice from a professional, there may be some relief from penalties but the tax implications are still your responsibility.
Regarding the justices’ latest ruling with regard to divorce, here's the brief scoop. Gary and Patricia Langston married in 1964 but unfortunately divorced 29 years later in 1993.
The divorce decree gave the ex-wife benefits to Gary's pension upon retirement. The pension plan allowed Gary to elect survivor benefits and he was required by the courts to make Patricia the beneficiary.
To enforce this, Patricia was supposed to send a form to the pension plan called a DRO or Domestic Relations Order. The plan would then determine whether or not to enforce the DRO as a Qualified Domestic Relations Order. Either her attorney failed to know that or she simply didn't get around to it and that’s where everything started going south for Patricia.
Before Patricia filed the paperwork with the plan, Gary met Shelly James and they got married. In 2004, 11 years after his divorce from Patricia, Gary retired. Upon retirement he was required to make a benefit election and he chose a 50 percent survivor benefit and made his current wife, Shelly, the beneficiary.
He did not do what was required by the divorce decree and began to receive payments and planned to enjoy a happy retired life. Then he died in October 2005.
In short, after several appeals Patricia was unsuccessful in making a claim on Gary’s pension and Shelly was named as the spouse beneficiary. The ruling may seem tough but it fully exposes the complexity of the Employee Retirement Income Security Act (ERISA) programs, state laws and divorce decree capabilities. Had Patricia acted in a reasonable time frame, she would have been eligible to potentially receive the benefits.
Here's the takeaway. Divorce is messy, retirement plans are complex and the rules governing asset separation are not as simple as one might expect. Your takeaway as a person living through divorce is to make certain you are dealing with professionals covering all aspects of the situation — legal, tax and investment.
Over the last 25 years I have witnessed intended beneficiaries be left out, huge tax penalties needlessly assessed and planning that often lacks any long-term foresight. Similar to retirement planning, divorce planning should focus not only on the snapshot of the divorce itself but also the ensuing financial journey of both parties of the divorce.
To find the entire case information, refer to Langston vs. Wilson Machine Corp., Nos. A10-2219, A11-0683, A11-0684 filed originally in the Minnesota Supreme Court March 27, 2013.
Joseph “Big Joe” Clark, whose column is published Saturdays, is a certified financial planner. He can be reached at firstname.lastname@example.org or 640-1524.