Use of a QDRO

This stands for Qualified Domestic Relations Order. It is the legal document that is sent to the plan administrator which tells the administrator how much money from the retirement plan to send to the ex-spouse. It is the only way for the ex-spouse to get payout from a qualified plan such as a 401k. It is typically drawn up by your attorney or a specialist who drafts QDROs.

Some problems with QDROs

If your Qualified Domestic Relations Order is not properly drafted, you may be the loser.

What if your spouse dies after you start receiving your portion of the benefit? Will your portion continue to come to you?

What if your spouse dies before the benefit starts? Will you still get the portion you were entitled to?

What if your spouse takes early retirement with a large buyout package? Does your QDRO say you are entitled to a portion of it?

What if you are to receive half your spouse's 401k but before it is divided the market goes up sharply? Are you entitled to half the increase?

These are some of the many issues that are sometimes ignored when the QDRO is drafted. Be sure to talk to your attorney about these issues.

Don't pay the 10% penalty

There is a way to escape paying the 10% penalty when you have to withdraw cash from a qualified retirement plan such as a 401k before you are age 59 1/2. It has to be done before the money is transferred out of the 401k. (More on this subject next time!)

Value of household goods

Household goods are valued at garage sale value. that means all furniture, pots and pans, sheets, etc. The exceptions would be: antiques, art collections, etc. They may need to be appraised if you feel there is greater value to them. Autos are typically valued by the Blue Book value.

Use of property settlement note

Sometimes there isn't enough cash or other assets to 'buy out' the other spouse. One example would be the family business. In that case, you could do a property settlement note or equalization payment. It is like a note at the bank - you determine the number of months, amount of payment, interest rate, etc. These payments are considered a division of property and therefore are not taxable to the person receiving them, nor deductible by the person paying them.

Appraise family business

The family business is more complicated. It is sometimes difficult and costly, to appraise a business. But it is necessary. So, get out of that poverty mentality, and hire the experts who will help provide the best information for you to make an informed decision about your final settlement.

Capital gain on the house

The 1997 revised tax law says we can no longer roll over capital gain in the family home. The one-time exclusion of $125,000 is also gone. Instead, we have something even better. Now, each spouse can take up to $250,000 exclusion if they have lived in the house two of the past five years.

If your house has a very large capital gain, you should consult with a CPA or a financial divorce specialist to see how to handle this the best way. It is possible for both spouses to take the $250,000 exclusion for a total of $500,000 if it is handled properly.