Just When You Thought You Were Through: Post-Divorce Mistakes and How to Avoid Them - Part 5

Mistake #8: You Never Got Your Share Of The Retirement Account

If you are entitled to a share of your spouse’s retirement account and the account is ERISA-covered, do not rely on your settlement agreement or your decree to effectively divide it. ERISA applies to private tax-qualified pension, profit sharing, and stock bonus plans, including defined benefit pension plans, 401(k) plans, money purchase pension plans, and employee stock ownership (ESOP) plans, but not government and church plans unless those plans elect ERISA coverage. If ERISA applies to the account, then the plan administrator cannot alienate and divide the account unless and only as provided in a qualified domestic relations order (QDRO). A QDRO is a court order that creates or recognizes the existence of an alternate payee (the other spouse)’s rights to receive all or a portion of the account benefits. The QDRO must also include, at a minimum, the name and the last known address for the payee and the alternate payee, the amount or percentage to pay the alternate payee, the manner of payment, the number or duration of payments and each plan to which the order applies. This may seem simple, but the key is the phrase “at a minimum.” Under ERISA, plan administrators may reject a proposed QDRO even after the court has signed it as an order if it does not comply with ERISA or the administrator’s requirements. As a matter of federal preemption, the plan administrator holds this power over your state court judge. It is common for attorneys and plan administrators to go back-and-forth, for months, revising the QDRO to the administrator’s liking. To avoid the time lost and fees incurred, be sure your attorney has contacted the administrator early in your case. Request sample QDROs from the administrator. Investigate all of the plan benefits. Are there early retirement benefits, for example, and will you be entitled to them? If so, what language do you need to include in your QDRO? Ask your attorney whether a QDRO preparation service will be more efficient and less costly than the attorney’s work to prepare the QDRO. If possible, have the administrator review and pre-approve the QDRO before you submit it to your court for signing as an order. If you do not have an attorney, you will be responsible for these tasks. Ideally, you will have an approved QDRO ready contemporaneously with your divorce decree to avoid second trips to the courthouse.

Mistake #9: Your Awards Are Unsecured

You negotiated a solid payment schedule, and your soon-to-be-ex has paid child support regularly throughout your case. As soon as you divorce, poof, finances turn for the worst, and your ex files for bankruptcy. What used to be reliable income has vanished. The problem is, you did not secure your awards. What can you do? If you are already divorced and your ex-spouse is bankrupt, be sure to protect your rights as a creditor in the bankruptcy case. Under the latest version of the federal Bankruptcy Code, child support, spousal support and property settlement obligations are non-dischargeable in bankruptcy. See 11 USC 523. Furthermore, there is usually no need to file a motion in the bankruptcy court to protect your rights to payment. However, the new laws will not stop a sneaky spouse from trying to discharge other debt (e.g. a joint credit card), which may have a financial impact on you. Be sure to speak to a bankruptcy attorney as soon as you learn of your ex-spouse’s filing to determine what, if anything, you should do. If you are not yet divorced, negotiate other payment security options. These may include purchasing a life insurance policy on your ex-spouse as adequate security for child or spousal support in the event your spouse dies prematurely, a perfected security interest in personal property, a mortgage on real property or a lien, which, as a secured creditor, you can pursue when your ex-spouse defaults in a payment. If you choose one of these options, be sure to describe the security (including legal descriptions and model numbers, if appropriate) and default terms (including any opportunities to cure and liability for deficiencies, if appropriate) in detail in your settlement agreement and your decree.  

Mistake #10: Your Decree Is Ambiguous

A mindless flick of the pinky finger so “party” reads “parties.” An extra click with cut/copy/paste. Mislabeled parties (“plaintiff” for “defendant”). Or just poor wording. These are all excuses for an ambiguous divorce decree. You and your ex-spouse might understand what “you really meant,” but do not rely on your agreement now to resolve any disputes in the future. Third parties might disagree with you, and years from now so might your ex. If your decree has a typo or is in any way ambiguous, fix it immediately, while the case is still fresh in your and your judge’s minds. If your ex-spouse agrees with you, then you should submit a stipulated amendment to your decree, properly worded and with both of your signatures, for your judge’s review and signature. If your spouse does not, then you will have to prepare a written motion (with a brief of the law, if appropriate) to explain to the judge why you think the decree has a typo or is ambiguous and what you think the decree should really provide.  The burden of presenting evidence to support the revision is on the party seeking the revision, so be sure to have ample evidence to support your position. Copies of your settlement agreement and any writings from your ex-spouse confirming or acting on the agreement are helpful. See, e.g. ER Brenner Co v Brooker Eng Co, 301 Mich 719; 4 NW2d 71 (1942).

I know of an attorney who recommends clients trust their attorneys and take time to rest and relax during the divorce process. Plan a trip, he says. You should trust your attorney, but you should also trust that Murphy’s Law is true. Mistakes can happen. A trip to the Bahamas is tempting but a BIG MISTAKE. Thorough planning and repeated review of your settlement agreement, your decree, and all of the related documents until the ink from your signature dries blue are essential to avoiding these common mistakes.

Once made, they are difficult to undo –Instead of having money for your trip to the Bahamas, you could end up like Frank, indebted to your ex and embarrassed in court for trying to wiggle out of a bad deal.

Just When You Thought You Were Through: Post-Divorce Mistakes and How to Avoid Them - Part 4

Mistake #5: You Thought The Economy Would Be Great

In today’s economy, this may be a less common mistake. However, be sure a glimmer of hope (a pay raise, a new job) that the economy is on the up does not give you a false sense of security. This was Frank’s problem in the adaptation from Marshall v Marshall. Do not count on maintaining your current income, or earning more, when you negotiate a support or property settlement payment schedule. To the extent the laws in your jurisdiction allow, build in automatic support review periods and/or make your payments conditional on another event, with a floor and a ceiling to the payments (e.g., you pay one-third of the money you receive for the sale of X, to a maximum of $Y and a minimum of $Z). Do not agree to non-modifiable, fixed support unless you are absolutely certain (and that is rare) you will have the income to pay it. Do not waive support, even if you gawk now at the thought of your spouse paying it. If your payments include interest, consider whether a variable interest rate tied to some external indicator is better than a fixed rate. If your settlement contains conditional payments (e.g., you pay your spouse one-half your home’s equity only if you sell the home in ten years), clarify whether the payee is entitled to an alternate award if the condition fails. Prepare a budget for your first post-divorce year to determine whether you will have an income sufficient to meet all of your personal and court-ordered expenses. If not, what can you trim? Most of all, have a financial advisor review your settlement before you finalize it and apprise you of any beneficial planning techniques.

Mistake #6: Your Spouse Is Still Your Beneficiary

State law treatment of beneficiaries for life insurance, annuities and endowments vary. In Michigan, unless the parties’ judgment of divorce provides otherwise, the judgment terminates each spouse’s interest as a beneficiary in the other’s life insurance policies, endowments and annuities. See MCL 552.101. This is true, in Michigan, even if the federal Employee Retirement Income Security Act of 1974 (ERISA) preempts state law with respect to determining beneficiaries because it does not preempt a nonparticipant interest waiver. See, e.g., Sweebe v Sweebe, 474 Mich 151; 712 NW2d 708 (2006). This is not true in all states, and you should not rely upon it even if it is true in your state because the laws in this area change. The best way to ensure your ex-spouse is no longer a beneficiary for your life insurance, endowment or annuity is to contact your insurance, endowment or annuity administrator and execute new beneficiary designations. A certified copy of your decree is helpful but not necessary unless you have limited rights to modify your beneficiary designations. Be sure to contact the administrator before you finalize your settlement agreement and your decree to learn whether the administrator will require any special language in either or documents from your spouse to effectuate the change.

Mistake #7: Your Estate Plan Is Old, Or You Do Not Have One

Divorce is also the time to review your estate plan. Who do you want to administer your affairs when you pass away? Who will receive the property you leave? Who should oversee your funeral and burial services and any expenses thereto? Who do you want to make your important medical decisions in the event you are unable? Discuss these issues with your attorney to learn what effect divorce has on your estate plan. Some attorneys are even willing to redraft or prepare your estate plan at a reduced rate as part of your divorce file.