DOES SHE GET HALF MY SOCIAL SECURITY?: DIVORCED SPOUSE SOCIAL SECURITY BENEFITS

THIS LAW IS NO LONGER IN EFFECT AS OF NOVEMBER 2015

As if a trial, losing half of your retirement and a potential liability to support your wife long after your divorce is final were not enough,  you may be worrying about Social Security, too --

Does your wife get half of your Social Security when you retire? After all, she gets half of everything else you earned during your marriage, right? As we’ve explained in other articles, “everything” really does not mean everything (not gifts, inheritances, passive appreciation, etc.), and this is particularly true for Social Security. As a matter of federal law, your wife may receive Social Security based on your earnings, but not half of yours.

Your ex-wife may qualify for divorced spouse benefits. These are Social Security benefits based on the former spouse’s earning record. To qualify, the ex-spouse must have been married to the earning former spouse for at least ten years, must be at least age 62 and must not be entitled to a higher benefit based on his or her own earning record. The ex-spouse must also be unmarried, though there are limited exceptions for ex-spouses whose latter marriage ends by divorce, annulment or death and for ex-spouses who remarry to someone with a disability. Finally, the earning former spouse must be entitled to receive his or her own benefit, and, if he or she has not yet applied for it, the ex-spouse must be divorced for at least two years before divorced spouse benefits are paid.

The divorced spouse benefits your ex-wife receives have no effect on the benefits you receive.

But that is not all. Your ex-wife may also receive individual benefits or a combination of both. If your ex is eligible for benefits based on her own record, she will receive those first. But if she has reached her full retirement age, she can elect to receive the divorced spouse benefits now and delay receiving her own benefits until a later date, which could result in a higher benefit based on her own record due to the effect of a delayed retirement credit.

The maximum amount your ex-wife can receive, based on your earning history, is one-half of the benefit you would receive at full retirement age. These may also be reduced by her age if she is not full retirement age when she receives them. However, if she has the option to delay her own benefits, and the payments do not affect your own, she can hardly complain – she may even be in a better position than you, and that is worth a reminder when you are trying to settle your case or trying to reduce your alimony liability with a judge worried about long-term financial security.

Nine Major Money Mistakes In Divorce

The “simple and cheap divorce” is a myth.

Even simple divorces require work, such as divorce decrees that tie-up all lose ends (effective enforcement language, any one?) and post-divorce property transfer documents (deeds, notifications for COBRA, promissory notes, to name a few) to make those decrees work.        And cheap divorces should include money spent wisely.

I write should because the “cheap divorce” really refers to two divorces -- the cost-effective divorce and the avoided-costs divorce. Unfortunately, in pursuit of the cost-effective divorce, and under the mistaken belief that their wives are paying less and have, therefore, somehow “won the case,” too many men make major mistakes when it comes to their money – the very thing they are trying to avoid.

Make these mistakes, and your “simple and cheap divorce” will cost you a fortune:

1. SHE HAS TO PAY HALF THE DEBT, RIGHT?

            Most jurisdictions apply a rule called “equitable distribution” or “equitable division” to divide assets and debt. The rule sounds an awful lot like “equal” division, and, sometimes, it is. For example, retirement accounts (usually, the husband’s) that accrued during the marriage are divided equally between ex-spouses. However, the same is not true for debt. “Equitable” really means, do what is fair, and, for debt, that usually means the spouse who earns more pays more. Do not go racking up a credit card bill with the assumption that your wife will be responsible for one-half the balance. If she earns less than you, she won’t.

2. THE INHERITANCE IS TO ME, NOT US

            If you received an inheritance, you might think all of it is yours – after all, your name appears in your generous great-aunt-somebody’s will, not your wife’s. Not necessarily.              In general, any property  you acquire between the date of your marriage and the date of your divorce is considered marital property eligible for division (for those of you living in community property jurisdictions, the same rule usually applies). An inheritance might be your separate property, but only if you did not commingle it with marital property or treat it as marital property during your marriage. And that is tough to do. Imagine receiving an inheritance of $20,000 and just leaving it in an account, in your name only, sitting there, and not touching it at any time during your marriage. Most spouses don’t, especially in our economy. If you used that inheritance during the marriage, if you added it to a joint bank account, or even if the divorce court believes your wife needs a share of it, that inheritance is not yours – it’s your wife’s, too. The best thing to do, if you receive an inheritance, is title the property in your name only, deposit the money into an account bearing your name only, and do nothing but leave it alone – until you are safely divorced.

3. BUT THIS CAR HAS ALWAYS BEEN MINE

            It’s painful, but most guys’ precious belongings become prime targets in a property dispute. Some guys will buy a toy – an old car to fix-up, a train collection to repair – as a hobby  and diversion during a divorce. The problem is, those toys are property, too. Anything you do that causes the property to appreciate is work you are doing for your spouse, too. The best thing to do is leave all your precious belongings alone – don’t go fixing up that car or collection, because the more valuable it is, the more likely you will have to sell it, give it to your wife or fork over some cash to buy her out of “her share.”

4. I KEEP THE BANK ACCOUNT, SHE GETS THE RETIREMENT

            A bank account and a retirement account may have the same balance on paper, but that does not mean they have the same value. In the pursuit of a quick settlement with liquid assets, and hoping to avoid an expert’s fees, some guys will swap a bank account for a retirement account. The problem is, $50,000 in the bank now is not the same as $50,000 in a retirement account now. For one thing, to the extent you can access the retirement account, usually you must pay penalties and taxes for making a withdrawal. For another, there may be hidden costs, such as a loan in repay-status, tied to that account. On the other hand, a future stream of income is usually more value, the present day value, than cash. It’s worth a meeting with a CPA or other specialist to have those accounts valued.

5. SHE CAN HAVE ALL OF THE HOME CONTENTS

            The household furnishings and holiday decorations may seem insignificant to you, but agreeing to give your wife “all the home contents” or “whatever she wants out of the house” is like writing a blank check – for thousands. Think about it. The computers, televisions, china, entertainment systems, books, etc., all have a value. And that value really adds up. Don’t be afraid to have your home contents appraised so the value is taken into account in your overall property division. Otherwise, the divorce court is likely to assign no or a nominal value to those contents.  Obtain the appraisal before you make the argument to your wife’s attorney or in court, though – most judges, and even some attorneys, will dismiss an argument that all of that stuff has value until they have an appraisal in hand.

6. BUT WE GAVE HER THE HOUSE (SECURITY)

            You wife might want the house, and she might be able to afford it, by awarding it to her in your divorce decree does not release your liability to the mortgage company. You and your wife can make any agreement you want; the mortgage company does not care and, if she misses a payment, will pursue you for it. That means calls, collections letters and, possibly, a lawsuit. What are you to do if you have to make the payment for her? Most guys, while fearful that this will happen, do nothing in their decree to protect themselves if it does. Get creative – so long as the decree is not against public policy, the judge will sign it. For example, if she misses                a payment, you withhold alimony (more on that in the next mistake), or you get to assume        the payments and possession of the home, or you can demand the home be listed for sale and    the profits, after repaying you, divided, or you keep them. Better yet, require her to refinance     the mortgage and provide you with proof of her attempts on a regular basis until she does so.     The worse thing to do – and also what many guys do – is require her to “refinance.” This means nothing if you don’t have the enforcement language to back it up.

7. I REFUSE TO PAY ALIMONY

            Alimony is not all that bad – really. Many guys refuse to pay alimony because, they think, writing a check every month for years to an ex (who is an ex for a reason, after all) is tantamount to relieving the divorce every month for year. However, alimony is tax deductible from income to you and taxable as income to your ex-wife. You should think of it as a tax planning measure. If you have a choice of paying $5,000 a year as a “property settlement,” which is not deductible to you, and $5,000 a year as spousal support, which is, go for it. Just be sure the support amount is not modifiable upward; otherwise, your ex could reap the benefit of your pay raises post-divorce.

8. SHE NEEDS SUPPORT NOW, SO I’LL PAY IT

            If you pay child support, you will get the sob story: I haven’t received the check, I need extra money for clothes, etc. It’s tempting to make a direct payment, lest you leave a kid without food to eat and a bed to sleep on. But this is a trap. Make a direct payment, and, in most jurisdictions, you will not receive a credit toward the child support you should have paid unless the paying parent keeps a copy of the payment (no cash, please!) and a receipt and both parents agree the payment was intended to replace that support. In many states, the direct payment is        a gift – no ifs, ands or ors about it. That means, you must pay the same support twice.

9. I DON’T NEED A CPA

            Too many men would rather save costs by figuring our tax consequences on their own, maybe with one of those programs you can buy at the grocery store, or, worse yet, ignoring them altogether. However, a divorce is not just about dividing property, venting over who cheated or lied or whatever else went wrong, and making provisions for child welfare. It is a complex transaction that is rampant with tax consequences. What can I deduct? How can I avoid an assessment for property awarded to me? What happens to investments? What filing status do we use? Who claims the children as dependents? What if we owe taxes? You can make agreements in your divorce decree to answer all of these questions. Spend some time with a CPA, in addition to your attorney, to strategize.

But cheap out, and you will make a major money mistake.

WHAT TO DO WITH YOUR TIMESHARE

Timeshares are one of the most difficult assets (or liabilities) to divide at divorce.  Sometimes, the vacation spaces are so luxurious that spouses cling to them like a lottery ticket arguing over who gets to go on those vacations after divorce.  More often, however, those promises of luxury and affordability in the heyday of the timeshare business have bellied-up, and what once looked like a good idea has turned out to be years riddled with taxes and fees, strict usage schedules and a vacation no one wants and you cannot sell.  In other words, this is not something you want to deal with every year with your ex-wife.

Then what can the two of you do now with that timeshare so that neither of you have to deal with the other later? Talk to your lawyer, and consider these options –

Award It – If one of you wants the timeshare more than the other, and can afford it, then award it to that spouse. It makes little sense to fight over a timeshare you really do not want. However, keep in mind that the timeshare is either an asset or a liability. Have it appraised, and include equity, if any, to be divided between the two of you. If you keep the timeshare, then one-half goes to you spouse. If your spouse does, then one-half goes to you. If there is debt, then make sure your agreement has very specific terms for how that debt is paid and when. At a minimum, require your spouse, if she keeps it, to refinance or otherwise remove your liability within a set period of time, otherwise the timeshare goes to sale, and you may have first dibs to buy it.

Sell It – If the two of you absolutely cannot agree, or your spouse want the timeshare but cannot remove your liability, then sell it ASAP. Ideally, this will occur while your divorce is pending and not yet finalized so that the two of you can pay whatever costs are incurred from your joint funds before you divide them. If this is not possible, then whoever pays the costs should be reimbursed post-divorce (e.g., by taking less or more of a bank account, home equity, etc., or receiving a promissory note and pay back with interest). If there is a loss the two of you must pay, then consult with your lawyers and a financial advisor to determine if you can free funds from a retirement account o pay it and, if so, how.  If there is a gain, then, again, consult with your lawyers to determine what the tax consequences are and how to divide it.

Share It – In exceptional circumstances, you and your spouse may be able to share the timeshare post-divorce.  This is rarely done, and we would discourage it for all but the most exceptional, good-natured divorces. Your agreement must specify who receives the vacation time when (e.g., year by year, two years in a row, equally  each year), as well as who pays what fees when and what happens when that person fails to pay. Consequences for nonpayment are key. For example, if the person who is suppose to pay fails to pay timely, then that person should forfeit the vacation time and the now-exes must meet to decide how to address nonpayment going ahead. A one-time nonpayment may be OK, but a repeated failure to pay essentially award the vacation –and the debt – to one ex who may not have anticipated it, and this should cause both to sit down and reevaluate options  1 and 2 above instead.

Whatever you do, do not wait for the eve divorce to decide what to do with this timeshare. There are a lot of contingencies, intricacies and fees involved with these timeshares that need thorough investigation and consideration. But, have that discussion early and often, and you may be the one enjoying a vacation after your divorce.

WHAT HAPPENS IF SHE DIES FIRST? AND OTHER QUESTIONS TO ASK

If you and your wife are like most divorcing couples, one or both of you obtained or contributed to a retirement account during your marriage. In all states, retirement accounts are marital property eligible to be divided between the spouses at divorce, and, in most states, the rule requires a fifty-fifty division for the amount that accrued during the marriage – regardless of which spouse actually contribute in work hours and pay to the account. Yes, there are some, limited exceptions to this rule, such as a prenuptial agreement and circumstances of financial or marital fault – but these are rare exceptions. And that’s a hard reality to face for a guy who’s spent several decades working to retire peacefully only to learn that the wife who is divorcing him is taking half of his work efforts with her.

“Fifty-fifty,” however, only begins the inquiry. Whether settling your case or preparing with your attorney and financial advisor for trial, be sure to ask these essential questions:

1. What if I am already in pay status?  If you are already receiving payments from your retirement account, then your and your soon-to-be-ex’s options for dividing the account are limited. Generally, she must receive her share of the payout as you receive yours. In other words, she cannot liquidate her share or wait to her retirement age to begin receiving her share. One or both of you may also be precluded from naming survivors, other than each other, to receive benefits upon each of your deaths.

2. How will pre-marriage amounts be treated? While your during-marriage work efforts are all marital, the amount of your retirement that accrued prior to the date of your marriage is yours, unless the court finds compelling need to invade that share. Be sure to identify the “date of division” as the date of marriage through the date of divorce (or separation, or some other date the divorce judge selects), rather than the date of commencement of the account, to keep that premarital share all yours.

3. What happens with the money I contribute after divorce? Similarly, the amount of your account that accrues after your date of divorce is your separate, non-marital property. Be sure your agreement specifies the end-date for your fifty-fifty division as the same date of divorce, date of separation or other date set by the divorce judge to preserve those later contributions.

4. Can I divide this the way I want? Retirement accounts come in all types of complex set ups, some being tax-deferred, others not, some guaranteeing lifetime benefits, others not, and so forth. Under federal law, plan administrators for many of these plans have exclusive authority to determine what types of divisions are permitted. Also consider timing and the tax consequences for withdrawing funds, rather than transferring them incident to a divorce judgment. For example, some of the Big Three in the automotive industry require specific trusts for survivors or irreversible selections of benefits. Therefore, before finalizing your settlement offer or trial brief, consult with your plan administrator to determine which options are actually available to you and your spouse.

5. What happens if my ex predeceases me? If your retirement plan allows, you and your spouse may agree that each other will be the beneficiary for survivor benefits (rather than a new spouse or someone else). Or, you may decide that your then-ex will not receive any survivor benefits, or will only receive a portion so that you can name someone else (a child or second spouse) as survivor for the rest. Check with your plan for the options available to you.

6. Can we equalize? Some retirement accounts require specified orders, called domestic relations orders, or DROs, to divide. These orders can be expensive to prepare, and some plans require pre-approval, at an additional cost to the spouses, before account division. If you and your wife have multiple retirement accounts, consider having a financial advisor equalize the accounts –that is, determine which ones each of you will keep and how much to divide so that you each have an equal amount of retirement - so as to minimize the number of DROs to purchase and approve.

7. Is a life insurance policy better? Depending on your ages and whether your retirement is already in that pay status, you might find that the premium for a life insurance policy on          your wife is cheaper than the cost to divide your retirement and allocate a survivor benefit to your then ex to receive after your death. Always check with your financial planner to determine the best policy, if any, for your family. And be sure to address the costs for this policy in your divorce judgment.

            Most of all, do not accept “fifty-fifty” and move on. Yes, it is often a bitter pill to swallow, but if you are going to divide your retirement, you must make sure you are dividing it in the most financially effective manner.