Author Topic: Splitting financial assets in divorce  (Read 7565 times)

Travis

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Splitting financial assets in divorce
« on: April 15, 2024, 02:12:17 PM »
Not asking for a friend. This is happening.

I'm looking over the disclosures and I'm looking for advice on how I could/should/may have imposed on me the division of our investments.

Where everything stands as of right now:

Me: 43 years old, recently retired from the Army drawing pension and disability
Her: 42 years old, working at a school

Income:
$4300/mo military pension (taxed)
$2500/mo military disability (not taxed)
$3000/mo school salary (taxed)

I've been looking for work for months anticipating that this could happen, but haven't landed a job yet.

Household expenses: $5k-$6k/month (renting, living in CA)

Property:
About $36k worth of household items, furniture, and two cars.

Financial assets:
My Roth IRA (VTSAX): $256k
Her Roth IRA (VTSAX): $165k
My TSP (Traditional 401k)(C Fund): $741k
Joint brokerage (VTSAX,VTIAX,VFWAX,VFIAX): $1.1M
Life insurance policy on myself: $1M, 30 year
My checking: $20k
Her checking: $6k

She gets served officially on the 22nd so I still have plenty of time to figure this out. No idea what the living situation will become.

I have a plan sketched out that would divide the monetary value of our physical assets evenly. The divorce forms have room for me to make an offer on how our financials could be divided, but my lawyer also mentioned they have a company that can split it all up without it becoming a taxable event. I expect I'll leave it to them to make the actual transactions, but if I'm allowed to have input on how that goes down I'd like to explore those options.

Assuming our immediate post-divorce income becomes:
Me: disability+half pension (and a $90k/yr job at some point)
Her: school job+half pension

Are there any tax-related or long-term benefits to dividing our investments one way or another? The end result will be a portfolio of just over $1M each. Do I try to keep my entire TSP for myself and give her an equivalent amount from the brokerage? Split it all down the middle? Does she get a 401k built for her, or would she get half of my TSP in cash? I was also thinking about making sure I have enough of the brokerage available in case I need to dip into it for a few months. Also, I have no idea how the insurance policy is going to be treated.

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Re: Splitting financial assets in divorce
« Reply #1 on: April 15, 2024, 02:36:06 PM »
Sorry to hear about the divorce.

@Nords might be the person to help on whether there are any military specifics of your army pension and investments etc.

Does your army pension include a widow's pension after you die, and what happens to that when you divorce?  Does it disappear, or are there some residual rights for your ex?  On a similar subject, if you don't have dependents you don't need the life insurance.  Does it have a surrender value?  I suppose you could keep it if you think you might have new dependents in the future and it's better value to keep it rather than end it and start again.

It looks as though you will have pension of 2,150 and disability of 2,500 (if all of that stays with you, which presumably it should) for a total of 4,650 per month.  Plus assets of nearly $800k, so a potential investment income of $2,500 on top for a total of over $7k a month.  You are still FIREd if you want to be.

Nords

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Re: Splitting financial assets in divorce
« Reply #2 on: April 15, 2024, 03:15:21 PM »
I'm looking over the disclosures and I'm looking for advice on how I could/should/may have imposed on me the division of our investments.

Where everything stands as of right now:

Me: 43 years old, recently retired from the Army drawing pension and disability
Her: 42 years old, working at a school

Income:
$4300/mo military pension (taxed)
$2500/mo military disability (not taxed)
$3000/mo school salary (taxed)

Life insurance policy on myself: $1M, 30 year

Assuming our immediate post-divorce income becomes:
Me: disability+half pension (and a $90k/yr job at some point)
Her: school job+half pension

Also, I have no idea how the insurance policy is going to be treated.

@Nords might be the person to help on whether there are any military specifics of your army pension and investments etc.

My condolences, @Travis.  This is never easy, but I hope you and your to-be-ex can get along on the division of assets.  The faster the two of you can reach an agreement, the less of your combined assets you’ll end up paying the lawyers.  The legal team(s) have no incentive to move this to a conclusion.

You seem to be familiar with how the USFSPA gives the divorce court the legal power to divide your military pension, particularly the phrase “disposable retired income.”
https://militaryfinancialindependence.com/2013/05/06/military-retirement-and-divorce/

Your search-engine skills are probably at least as good as mine, but here’s the DFAS & TSP primers on the topic:
https://www.dfas.mil/garnishment/usfspa/faqs/
https://www.tsp.gov/planning-for-life-events/divorce-annulment-and-legal-separation/

Does your army pension include a widow's pension after you die, and what happens to that when you divorce? 
If your spouse elected SBP when you retired, that’s a powerful asset for the negotiations.  It costs you relatively little money to keep SBP in force (as well as the term life policy).  You may be able to negotiate a larger share of the rest of your non-military assets in exchange for her keeping her SBP.

Otherwise, unless SBP is specifically mentioned in the QDRO (or the divorce agreement), you still retain the right to cancel it during the 25th-36th month after you started your retirement.

Based on what I’ve seen during the last 40 years of my military career and coaching people on military personal finance, please make a note to yourself for after the divorce is finalized: 
Update all of your beneficiary designations on all of your remaining accounts to remove your ex-spouse’s name from them.  This is one of the most common mistakes after the legal bills have been paid.

Travis

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Re: Splitting financial assets in divorce
« Reply #3 on: April 15, 2024, 05:04:44 PM »
We declined SBP because our other assets were so high and the life insurance was much cheaper than the SBP premiums.

The forms asked about surrender value on the life insurance, but I haven't seen anything in my policy that looks like that. I have a teenage son to whom I am giving my GI Bill, and there's always the possibility of starting over somewhere down the road where I might need the insurance. Also, with my disability rating I imagine if I cancelled and restarted it I'd be paying double the premiums that I am now.

While back of the envelope it appears I might still come out of this FI, I still want to work for a few more years to buy a house and aggressively pay it off. Plus a job would be a bit of a security blanket as I restart my life. My lawyer thinks alimony and child support will be calculated based on my current income, but I don't want to get caught with a surprise.

Regarding lawyers, I had a free consult with the one I ended up retaining and the first words out of his mouth were "solve this on your own as much as you can, because here's how much it costs to go to court." Which is one of the reasons I'm jumping right into all of these forms and calculations. My goal is to present both my wife and the "system" with completed forms with reasonable and thought-out positions to negotiate as soon as possible. My two best friends are single parents and are already sketching out possible custody scenarios for me.

@Nords thank you for the link to the pdf. It mentioned that a portion of the TSP could be split off into a spouse's IRA and I'd owe taxes on that transaction which is why I'm trying to run that down. I'll keep digging and see if I can find anyone who has gone through that.

Nords

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Re: Splitting financial assets in divorce
« Reply #4 on: April 15, 2024, 06:39:39 PM »
@Nords thank you for the link to the pdf. It mentioned that a portion of the TSP could be split off into a spouse's IRA and I'd owe taxes on that transaction which is why I'm trying to run that down. I'll keep digging and see if I can find anyone who has gone through that.
I haven't run across a good example of a divorce TSP split yet. 

Next week I'm going to MilMoneyCon, where I'll nerd out with a couple hundred CFPs, AFCs, coaches, and paraplanners.  Almost all of them are military vets or milspouses, and a few are still on active duty or in the Reserves/Guard.  I'll ask around and learn more about the TSP's divorce rules & references.

secondcor521

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Re: Splitting financial assets in divorce
« Reply #5 on: April 16, 2024, 12:44:01 AM »
Condolences.

The attorney is right - work directly with your STBX (soon to be ex) as much as possible.  What is left over that you can't work out yourselves, try to work out with a mediator.  What is left over after that, try to work out with lawyers.  What is left over after that, is court.  Each step in that chain takes longer, is less certain, is more expensive, acrimonious, and stressful.  It may be strategically smart to flex/accommodate/give in to your STBX rather than pay lawyers $500 an hour to argue over smaller things.

There are three financial parts:  asset division, alimony, and child support.  In my state, they all operate independently of each other.  The also operate independently of "fault" - the court doesn't care.  They also put the welfare of any kids much higher than either parent's needs/wants/hopes/desires.

It may vary by state, but asset division in my state is assumed to be 50/50 regardless of who earned what and who spent what.  What we did, and I think is most common and easiest, is for you to take all of "your" assets, her to take all of "her" assets, and then make one equalization transfer to get to 50/50.  Equalization transfers incident to divorce can be made tax-free via QDROs, and depending on which asset you choose to QDRO could result in the other spouse ending up with a new retirement account at the "donating" spouse's custodian/employer.  So in your case, you get your Roth, your TSP, your checking, your life insurance, your car.  She gets her Roth, her checking, her car.  Then you probably split the taxable account in whatever way leaves you at 50/50 - it looks large enough to balance things out and you'd only have to deal with splitting one account and doing one transfer.

Asset division in our case was based on the current value of the assets at the time of the divorce.  Tax implications, cash flow implications, and risk implications were completely ignored.  Whether they come into play in your case probably depends on how financially sophisticated she and her attorney are.  My ex and her attorney never mentioned anything along those lines.  I thought about them and suggested asset splits which worked better for me; she accepted them.

Alimony in my state is rare and usually done lump sum.  My ex got some alimony because she was a SAHM and the mediator thought she could successfully argue for some in court.  If you're both college educated with jobs, and since your assets are large, you might be able to argue for no alimony.

Regarding child support, every state is required to have child support guidelines.  In my state, and I believe in most or all states, the divorce court assumes that the child support guidelines are correct and the formulas therein produce the "correct" amount of child support.  In my state, the formula inputs are the incomes of the parents, the number of children, and the custody percentages of each of the children.  The higher the income and the lower custody percentage, the higher the child support payment.  In my state, child support basically ends when the kids graduate from high school.

It mentioned that a portion of the TSP could be split off into a spouse's IRA and I'd owe taxes on that transaction which is why I'm trying to run that down. I'll keep digging and see if I can find anyone who has gone through that.

That doesn't sound right to me.  I would check with a tax person on that.  In my case, I did a QDRO transfer from my traditional IRA to my ex's traditional IRA and it was completely tax free on all sides.  The QDRO was written into the divorce and I may have referenced it when submitting the transfer request to Vanguard.  I don't see why a TSP would be treated any differently, although it's possible it might.

ETA:  Divorce laws and practices are state specific.  Except for the first paragraph above which I think is generally true anywhere, you should really only take input from people who know your state's laws - either people who have been divorced in your state or divorce attorneys in your state.  I live in and was divorced in Idaho, and some or all of the rest of what I wrote above may be different than your state.

HTH.
« Last Edit: April 16, 2024, 01:21:03 AM by secondcor521 »

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Re: Splitting financial assets in divorce
« Reply #6 on: April 16, 2024, 05:52:26 AM »
The forms asked about surrender value on the life insurance, but I haven't seen anything in my policy that looks like that.

If your policy is a term policy, it won't have a surrender value.  If you decided to close it down, there are outfits who may offer to buy it from you for something.  That puts another entity in your life for the duration of the policy, but it could be something rather than nothing.

lhamo

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Re: Splitting financial assets in divorce
« Reply #7 on: April 16, 2024, 09:07:44 AM »

Sorry you are having to deal with this


It may vary by state, but asset division in my state is assumed to be 50/50 regardless of who earned what and who spent what.  What we did, and I think is most common and easiest, is for you to take all of "your" assets, her to take all of "her" assets, and then make one equalization transfer to get to 50/50.  Equalization transfers incident to divorce can be made tax-free via QDROs, and depending on which asset you choose to QDRO could result in the other spouse ending up with a new retirement account at the "donating" spouse's custodian/employer.  So in your case, you get your Roth, your TSP, your checking, your life insurance, your car.  She gets her Roth, her checking, her car.  Then you probably split the taxable account in whatever way leaves you at 50/50 - it looks large enough to balance things out and you'd only have to deal with splitting one account and doing one transfer.

Asset division in our case was based on the current value of the assets at the time of the divorce.  Tax implications, cash flow implications, and risk implications were completely ignored.  Whether they come into play in your case probably depends on how financially sophisticated she and her attorney are.  My ex and her attorney never mentioned anything along those lines.  I thought about them and suggested asset splits which worked better for me; she accepted them.



This is pretty much how we worked things out.  We worked with mediators to come up with the initial financial split agreement, and then with a licensed legal technician when we actually filed.  The only major discrepancy between our financial "buckets" was that I had much more in Roth funds than him (I had utilized a Roth 403b at my last job so that was a large portion of my retirement).  That was mostly in IRA funds at Vanguard, where we also both have Traditional IRA accounts.  After some investigation, I learned that IRAs do not require a QDRO, so we will apply for a trustee to trustee transfer of the rough difference between the accounts once our paperwork is final in a couple of weeks.  It means I will have to do more work to get money back from the Trad IRA bucket into the Roth bucket over the next few years, but I am only 55 and 10 years younger than STBX so it should be easier for me to do in a tax efficient way before I hit RMDs. 

Be sure you consider how support for your child through college may affect things.  I asked to be allowed to keep DD as my tax dependent and I control her 529.  I am still working to maximize her financial aid and keep both of our health insurance costs low.  2024 is the last year I need to worry about FAFSA, so I'll have more flexibility with my own financial moves in the future.

Again, sorry you are having to work though things but hopefully this will lead to a better situation for all of you.  Do try to mediate whatever you can -- saving money on legal fees definitely contributes to a much better bottom line and working relationship for everyone going forward. You may also find, as I did, that once the financial details are agreed upon it becomes much easier to deal amicably with the STBX.  Not enough to stay together, but enough to make the wind-down period less stressful than it is for many couples.

Travis

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Re: Splitting financial assets in divorce
« Reply #8 on: April 16, 2024, 03:46:03 PM »
My son will be receiving my entire GI Bill benefit on top of a 529 that I've been adding to so he's taken care of on that angle. I'm pretty sure he can stay on my TRICARE plan through college, but I need to double check the details.

I was going to propose keeping my IRA and TSP and making up the difference to her from our taxable brokerage.  It would be a 90/10 split of the brokerage in her favor. It would be fewer financial buckets for her to keep track of and easier to access. The downside is I'll be very limited on accessible funds, but if I land one of these jobs I've been applying for I can fill it back up pretty quickly.

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Re: Splitting financial assets in divorce
« Reply #9 on: December 31, 2024, 02:32:05 PM »
Resurrecting this since we're finally at the decision point.

Lawyer asking for my input on the property proposal. I came up with three scenarios, and the differences seem to be how comfortable I am with having my eggs in particular baskets.

#1 - Everything split right down the middle. I would transfer enough of my IRA into hers to make those even.
Both of us
Vanguard brokerage - $570k
IRA - $217k
TSP - $384k (she'll keep her share in a Traditional IRA that she'll have to create for this)

#2 - I keep my IRA and TSP separate, and make up the difference with the brokerage

Me
Vanguard - $137k   
IRA - $265k
TSP - $768k

Her
Vanguard - $1MM
IRA - $169k

#3 - I keep my TSP and even out the IRAs.

Me
Vanguard - $185k
IRA - $217k
TSP - $768k

Her
Vanguard - $960k
IRA - $217k

In any scenario, she'll receive half my pension equaling $2167/mo after taxes, probably $500/mo in child support, in addition to some combination of the above. Her job pays her around $2500/mo.

I'm currently netting $5000/mo at my new job, plus $2500/mo in disability and $2167/mo in pension.

Splitting all assets evenly feels like more flexibility in financial options, but hanging onto my TSP and IRA in whole also has a simplicity to it. My long-term plans are to buy a house this summer on a VA loan and use this job to aggressively pay it off. I'm still renting for a few more months with a CoL of about $5000/mo. Whether I keep renting or I buy, that CoL is going up in 2025 due to child support, rent increase, or mortgage. I don't know if/when any new money is going back into the portfolio.

What would I lose out on from my TSP if I held onto a larger share of the brokerage instead? Can you think of why I might want to stick to one scenario another?

Nords

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Re: Splitting financial assets in divorce
« Reply #10 on: December 31, 2024, 04:58:00 PM »
I'm guessing that you have a lawyer and perhaps a CPA who understand military divorces.  Hopefully she does too.

For example, if either of your traditional TSP or Roth TSP accounts have contributions from Combat Zone Tax-Exempt pay, then that basis would have to be tracked during the division of assets and on future income-tax returns.  If you keep your TSP accounts then you can handle the income-tax returns on your own, as well as any Roth IRA conversions.

#1 - Everything split right down the middle. I would transfer enough of my IRA into hers to make those even.
TSP - $384k (she'll keep her share in a Traditional IRA that she'll have to create for this)

#2 - I keep my IRA and TSP separate, and make up the difference with the brokerage

#3 - I keep my TSP and even out the IRAs.

I'm currently netting $5000/mo at my new job, plus $2500/mo in disability and $2167/mo in pension.

Splitting all assets evenly feels like more flexibility in financial options, but hanging onto my TSP and IRA in whole also has a simplicity to it.
In addition to simplicity (for you), I can't think of a reason why an ex-spouse would care to have a TSP account. 

Unless she wants more ERISA-style federal protection from liability, litigation, or bankruptcy than an IRA would provide at the state level, to her the TSP is just another old 401(k) with higher expense ratios and limited fund choices. 

She could hang on to the traditional portion if she wanted to someday buy an annuity (instead of RMDs).  Maybe she could roll over a traditional IRA into the traditional TSP if she wanted to facilitate a backdoor Roth IRA conversion, but I don't know whether the TSP lets ex-spouses use the account for annuities or 401(k) rollovers.  If she doesn't have any strong feelings then you have more you could do with a TSP.

You could read through the issues in this post to see whether any of them apply to either of you, but maybe you want to keep the TSP (to simplify both of your lives): 
https://militaryfinancialindependence.com/2024/09/05/reasons-to-keep-your-tsp-account-or-not/

I'm currently netting $5000/mo at my new job, plus $2500/mo in disability and $2167/mo in pension.
Just to be clear (or to beat this into the ground), ideally your lawyer & CPA understand "disposable retired income."  For example, I'm guessing that you're receiving Concurrent Retirement & Disability Pay instead of offsetting a portion of your pension to receive your VA disability compensation. 

When you get CRDP, the divorce court can divide your pension however they see fit.  When you're offsetting a pension with VA disability compensation, then the court can only divide the part of the pension that's left over after the VA disability compensation offset.  If you ever lose CRDP (because your VA disability rating drops below 50%) then she'd lose a portion of your pension.

The divorce agreement should also state that she gets the same Cost Of Living Adjustment that you do on her share of your military pension.  If the divorce decree doesn't specify that she's entitled to the inflation adjustments then DFAS won't apply the COLAs to her share of your pension.  That divorce dirty trick has been around decades.

Finally, have the two of you discussed the Survivor Benefit Plan?  From your perspective it's a relatively inexpensive survivor annuity to give to her in lieu of other assets.  However if you two signed up for the SBP when you retired (before the divorce) then the SBP premiums also reduce your disposable retired income for her share of your pension.  Then when you reach the point of 360 monthly payments and you're at least age 70, your SBP premiums stop and your disposable retired income rises again for her share.

What would I lose out on from my TSP if I held onto a larger share of the brokerage instead? Can you think of why I might want to stick to one scenario another?
In your case, the only reason I can think that you'd care about your TSP would be for someday tapping CZTE contributions, and for the flexibility of rolling over a traditional IRA to your traditional TSP to set yourself up for a backdoor Roth IRA conversion.  Both of those issues are covered in that blog post.
« Last Edit: January 01, 2025, 11:40:31 PM by Nords »

lhamo

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Re: Splitting financial assets in divorce
« Reply #11 on: December 31, 2024, 06:50:45 PM »
@Nords is the expert on the military side of things.

Re: brokerage, this year I finally learned for real how awesome LTCG are for avoiding taxes when you are living off investments.  So if your goal is still to FIRE at a reasonably young age, then having a decent sized brokerage account to use for living expenses while you let the retirement assets continue to grow to age 55/59.5 (depending on when you plan to leave paid employment) can be a nice bucket to dip into.

If any of your retirement accounts are Roths, then you need to think about how to fairly split those, as well.  IN our case, I had a much bigger Roth bucket than TheX because I had maxed out a Roth 403b for the last 7 years or so I was employed.  TheX only had what we had been able to put in as US earned income while living/working overseas.  So what we ended up doing was transferring 160k of my Roth to him and him swapping back 160k of his Trad IRA funds to me.  Was easy to do with minimal paperwork at Vanguard.  That put us each at about 50/50 Trad IRA vs. Roth split in our individual IRAs.  I guess I have a slight advantage there because I am 10 years younger and have longer to convert my Trad funds -> Roth before RMDs kick in, but if that had bothered TheX he should have said something! 

Good luck getting it all sorted out.  In my experience, an amicable financial split goes a LOONG way toward a good co-parenting relationship post-divorce.  I had a nice holiday with TheX and the kids here for about a week, and then all of us at his new place for a few day.  Probably easier when the kids are nearly launched (mine are now nearly 20 and 23), but something to strive toward regardless of how old they are.

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Re: Splitting financial assets in divorce
« Reply #12 on: January 01, 2025, 10:49:30 PM »
In your case, the only reason I can think that you'd care about your TSP would be for someday tapping CZTE contributions, and for the flexibility of rolling over a traditional IRA to you traditional TSP to set yourself up for a backdoor Roth IRA conversion.  Both of those issues are covered in that blog post.

Nords, I completely forgot about the CZTE portion of my TSP. I just checked and 17% of my portfolio is tax-exempt. After reading your blog post, I'm leaning towards keeping the TSP and then slowly rolling it over to my Roth IRA. I'm going to make the offer for plan #3 which keeps the TSP, evens out our Roth IRAs, and keeps a little more of the brokerage on my side. It feels like enough of a cushion if I needed to tap into it.

I'll keep this updated as I get feedback from my ex on how this shapes up.

 

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