Planning Ideas for Life Transitions

Life has a funny way of creating stressful activities for us. During the span from birth to death, we experience many different situations that require the best in us at the worst of times. Consider the change in life caused by divorce. Many people face this difficult event and do so without proper advice and consultation from a CERTIFIED FINANCIAL PLANNER™ professional. This could spell disaster for the person.

A divorce requires a marital balance sheet from the litigating couple with appropriate titles of the assets disclosed to the court. In many families, one of the two parties has a significantly higher employer plan account such as a 401(k) plan and the other party may be entitled to a portion of this account during property settlement. The best method of transitioning this asset to the other party is through a Qualified Domestic Relations Order. This document, when properly prepared within the IRS regulations, allows the receiving party to accept the funds on a tax-deferred basis in the same manner the account owner held the funds.

The primary issue of this type of transfer is that the recipient of the funds must pay tax to remove funds from the receiving IRA. This may trigger additional penalties, depending upon the age of the recipient, and significant taxes. 

A better approach to property settlement is to allocate taxable and tax-deferred assets in a ratio that allows the receiving party to access needed cash for the transition of life without incurring penalties and taxes. The receipt of assets in a divorce are not taxable to the transferee party or deductible by the transferring party.

We believe it is a win-win for the divorcing couple to amicably allocate the assets in a manner that allows each party to continue life with the least amount of disruption. Further, you should request your attorney engage a Certified Financial Planner™ professional to assist in cash flow and income tax planning before the documents for property settlement are prepared. This approach saves the individual money, time and frustration in the process of getting on with life.

Another transition in life is the passing of a spouse. This is a different approach than the separation of a couple by divorce. It is necessary that proper titling of assets and structure of the estate be performed. Changes are being considered by Congress and the president that will require reconsideration of existing estate planning documents. For example, the estate exemption may be lowered considerably from its current amount of $11,700,000. Many families that previously assumed their assets would pass to their beneficiaries tax-free may find themselves with a rather large tax burden.

Benjamin Franklin stated it best, “In this world, nothing can be said to be certain except death and taxes.” If Mr. Franklin, and his heirs, would not be offended, I offer to include in his eloquent statement “…and changes in the tax laws of the United States.” 

Key points for your consideration are: 1) consult a CERTIFIED FINANCIAL PLANNER™ professional if considering a divorce; 2) if in divorce at the present, seek an analysis of the types of assets owned by the married couple; and 3) prepare a plan for post-transition that will allow you to minimize taxes and maximize cash flow so that you may achieve a lifestyle of your choosing.

Life may present you challenges but you don’t have to face them alone. Contact a CERTIFIED FINANCIAL PLANNER™ professional to help you plan for the best outcomes in your life. See you on the jogging trail!

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Help for those that are “Suddenly Single”

The sudden realization that you alone are responsible for all of your household, financial and health matters can be a shock. Life changes even the most detailed of plans for the future. Many people suffer financial discourse during times of life change due to a lack of preparation. Not to discount the emotional trauma resulting from a sudden loss of a spouse, divorce or the incapacity of your partner, but confidence can be gained by understanding a few simple strategies to maintain your lifestyle.

Start today by discussing with your spouse/partner the complete financial picture of your family. Include such mundane tasks as identifying your insurance agent, where to pay utility bills and the location of the safe deposit box key. I have experienced too many client situations in my career where one spouse has controlled the finances for the family without much input from the other spouse.

Next, obtain copies of all of your bank statements and review the disbursements from your account. Do you know the company/person to whom the payment was tendered? Do you know why you pay this company/person? Look for any “automatic drafts” that occur without your knowledge and determine if it is a continuing valid need.

In matters of divorce, it is critical to correct beneficiaries on life insurance policies, retirement accounts, etc. once the divorce has settled. One horror story comes to mind. A client of ours divorced and when we inquired about his life insurance beneficiary designations, we were informed that he “had taken care of the matter and changed them to his current spouse”. The client unexpectedly died about two years later and during the process of administrating his estate, the life insurance policy and beneficiary designation form was discovered. He had not changed the beneficiary to his current spouse! Imagine the difficulty of explaining to your current spouse why the decedent’s former spouse is receiving $1,000,000 of tax-free life insurance proceeds. 

Property titles should be correctly titled after the loss of a loved one through divorce or death. Estate documents must be reviewed and amended for your current situation. This process may seem overwhelming but it is, in fact, very simple. See out a Certified Financial Planner registrant or attorney that can guide you through the changes and execution of the documents. You will be glad you did.

  • Action #1: Know where your income is deposited and where your money is spent.
  • Action #2: Review all IRA, qualified plans and life insurance statements for proper beneficiary designations.
  • Action #3: Consult an attorney or CFP® practitioner to confirm your property titles correctly reflect the appropriate individuals or entities.

Ignoring the situation is the worst action to take in these matters. What you don’t know, can truly hurt you.

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