Women Business Owners Take Heed….

Did you know that incident to divorce, your divorce judge can order you to sell your business… and force you to comply?

You’ve worked hard to build your business, sacrificing untold hours and enduring stress, and you’ve made it… your company is a success! You’re a standout and a role model for other women business owners in a nation where fewer than three percent of women-owned businesses gross a million dollars or more.

And yet divorce proceedings can all too easily put the existence of your business at risk… whether your husband was involved in the company or not, regardless of who initiated the divorce.

It seems incredibly unfair, but if your business grew in value while you were married, the amount of increased value must be included in the pot of marital assets to be  divided between you and your husband. It doesn’t matter who operated the business or how it’s titled. Regardless of the judge’s sympathies for your position, your judge is legally obligated to ensure the percentage of marital assets owed to your husband is paid. If your portion of the marital asset pool cannot meet that obligation, choices become limited.  Can you raise the money by tapping into your relative’s assets?  Can you go to the bank and ask for a loan?  Considering court ordered time constraints, selling the business becomes a far more common scenario.  The money resulting from the sale of your business—usually at fire sale prices, again due to court-ordered deadlines, will help make up the difference.  Because a privately owned business is often the most valuable asset of its owners, this is all too common.

Your husband’s role in your business can also force its sale, even if your marriage has assets sufficient to meet his court-ordered portion. If he’s a business partner or is entitled to an ownership interest as ordered by the divorce judge, you may want a unilateral (undertaken or done by only one side or party), not mutual right  to buy out his share.  This unilateral right becomes  particularly important if you’d rather not have your ex-husband and his future wife as business partners. To do so, you might use your share of other marital assets or propose a long-term payout at interest. However, if your business represents the vast majority of your marital assets there may be no other way to buy him out than to sell the company, dividing the proceeds.

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Top Ten Divorce Tips

Barry Weissman, CDFA, Certified Divorce Financial Analyst, offers these tips to help you sidestep some common divorce-related problems. 

1. Copy Your Records

Before your divorce, be sure to make copies of all of your financial records. Keep them in a safe place away from your spouse. These records include, but are not limited to, personal and business income tax returns (last three years), business records, recent statements from investment firms, banks, and pensions, pay stubs, life insurance information, annuities, credit card statements, stock certificates, and receipts for a recent purchase of larger items. Copy anything you feel might be relevant.  If you have the misfortune of being in litigation, having this information at hand might save literally thousands of dollars in Discovery expenses.

2. Obtain Copies of Credit Applications

Obtain copies of any credit or mortgage applications from your bank or creditors, particularly those having been completed 12 months prior to your separation. If the application was jointly completed, it should list assets, liabilities, and income for both spouses. Those applying for loans or credit tend to list all possible assets and income in order to qualify. If you are in litigation, this information might be a good source of asset discovery, saving you money.

3. Identity Check

Verifying accurate personal, financial, and business information is critical to maintaining your identity. Verify such information from data reporting services including Experian, TransUnion, and EQUIFAX, as well as banks, investment houses and insurance companies. Confirm your name, address, and other personal information. Google yourself.  What information about you is available on the internet? Contact the site’s “Webmaster” where you discover inaccuracies. Provide a forwarding address to the USPS and applicable utilities immediately after you or your (ex) spouse plan to move.

4. Marital Debt

Debt(s) that were obtained in the name of both spouses before your divorce remain the obligation(s) of both parties after a divorce. Creditors are not party to your separation or property settlement agreement; a court order will not relinquish the responsibilities the debtor(s). In other words, if your ex-spouse does not pay a joint debt, a debt that he or she was responsible to pay according to your divorce decree, then you remain responsible for that debt.

5. Cancel “Joint” Lines of Credit

If your divorce settlement makes your ex-spouse responsible for the payment of a “joint” debt, continue to monitor that account verifying that payments are being made in a timely manner and in accordance with the terms of the creditor. If your ex-spouse is late or defaults on a payment, it can adversely affect your credit.

6. Understand Your Social Security Benefits (U.S. Rule)

If you have been married 10 years or more, you are entitled to half of your spouse’s benefit or 100% of your accrued benefit, whichever is greater. This does not impact your spouse’s benefit in any way; this is not a negotiation point in a divorce.

7. Follow the 5 Ds for Alimony Deductibility (U.S. Rule)

If you want a deduction for alimony paid by you, it must be paid in dollars under a court decree or written agreement. Such payments end either as specified by the court decree, on the date of your former spouse’s death, or remarriage. Remember:  Alimony received is taxable income to the recipient, deductible to the paying ex-spouse. Further, when payments commence, you must maintain your distance. You cannot reside in the same household as your former spouse.

8. Guarantee Your Child & Spousal Support

When receiving child or spousal support, be sure your former spouse is covered under long and short term disability insurance.  Own and be the primary beneficiary of a life insurance policy on your soon-to-be-ex spouse.  Either transfer ownership of an existing term policy or cash value life insurance contract.  Before transferring a cash value life insurance contract, check with your accountant to determine any potential tax consequences.  Once in your name, you should pay the premiums. You may be able to negotiate an increase in support to cover such premiums. Be sure your ex applies for and is issued coverage before the divorce is final.

9. Dividing Marital Property

Generally, judges expect divorcing couples to have figured out on their own, perhaps with the help of a divorce mediator, the division of marital possessions. Be as specific as possible in the Property Settlement Agreement; who gets what. Attach a comprehensive list clearly identifying the item and the recipient thus avoiding confusion later. 

10. Review Beneficiary Information

After your divorce, remember to review the beneficiary information on your company 401(k) and other employer provided retirement benefit plans, individual retirement plans, annuities, life insurance policies, individual designated beneficiary accounts and so forth. Often we re-title assets but forget about changing beneficiary information on accounts that are not directly impacted by the divorce. If you are naming minor children as beneficiaries, assign a custodian of your choice – remember, minors are not legally allowed to own securities. You must revisit all of your estate planning documents specifically include in this review your Will, Trusts, Advanced Medical Directive, Financial Durable Power, and General Durable Power of Attorney.

 

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Sesame Street on Divorce: Little Children, Big Challenges

click here

On December 11, Sesame Street premiered a 13-minute segment that deals directly with the issue of divorce. This is the first time the famous children’s show has released a segment explicitly about divorce. In 1992, the show tested a scene on the topic before an audience of pre-schoolers with disastrous results: the children misunderstood the scene and became very upset.

The idea was shelved for almost two decades. A couple of years ago, a team of researchers, writers, and producers in the outreach department of Sesame Workshop began working on a new segment featuring “Abby Cadabby”, a sparkly pink fairy whose parents have been divorced for some time.

Part of a massive multimedia kit called “Little Children, Big Challenges: Divorce” that includes a storybook (“Two Hug Day”), a guide for parents, and an app, the video tackled the topic in a way producers hope is understandable and comforting to young children.

Sesame Street writer Christine Ferraro, who wrote the script for the video, spoke about the difficulties of writing stories about such a sensitive topic. “We never want to go too into detail with any of these,” Ferraro said, “because every kid’s situation is different. Every divorce is different and every family’s situation is different. We want to keep it a little bit ambiguous so it’s applicable to all children, but it’s also Abby’s story. Abby is talking about the fact that her parents are divorced. She’s already at a place where she has accepted it, and that made a big difference emotionally.”

To learn more about “Little Children, Big Challenges: Divorce”, or to watch the video, click here.

Reprinted from IDFA Newsletter, (c) December, 2012.

 

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Transferring IRAs Incident to Divorce

When an IRA is transferred from one spouse to the other spouse in a divorce, the interest in the IRA is treated as the recipient spouse’s IRA; the transfer between the spouses is tax-free. [IRC 408(d)(6)]

Three Methods of Transferring IRAs:

First, change the owner’s name on the IRA.  If the entire IRA is to be transferred, change the name of the IRA on the records of the financial institution holding the IRA.

Second, complete a trustee-to-trustee transfer.  The financial institution holding the IRA account is the trustee of that IRA.  You are allowed to transfer the IRA in whole or in part to either a new trustee, new trustees, or a new IRA account with the same financial institution.

Third, complete an IRA rollover to a new or existing IRA account in the name of the recipient spouse.  Or, take an IRA distribution in the form of cash, give that distribution to the recipient spouse, and the recipient spouse is responsible for contributing the distribution to a new or existing IRA in the recipient spouse’s name.

Finally, The owner of the IRA can withdraw the assets, roll these assets into another IRA in the IRA owner’s name, and then change the name to the recipient spouse’s name.

Remember:  The mandatory 20% withholding does not apply to transfers between IRAs.  However, rollover distributions from a qualified retirement plan to an IRA involve the mandatory withholding.  Also, in the case of a cash distribution, the funds must be back in any IRA account within 60 days.  If not, the distribution is fully income taxable and, if  you are under age 59 1/2, subject to penalty.

Before doing anything with you IRAs please consult with a professional financial advisor, CPA, and your attorney.

 

 

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Using Term Life Insurance to Guarantee Spousal Support: Basic Concepts

A Term Life Insurance Contract offers the simplest form of an insurance product that can grow, or be “built” as the insurance professionals say, to become a very complex product.  Term Life Insurance means the consumer is contracting with an insurance company to buy a Death Benefit.  As long as premium is paid, and anybody can pay the premium, the insurance company will pay the Death Benefit, under the terms of the contract.  In so many situations, I have found Term Life Insurance a simple way to guarantee full value of awarded spousal support.  This guarantee is effective regardless of the duration of the support or whether or not the awarded support is modifiable.  The Term Life Insurance contract guarantees the payee spouse receives support in the event the payer spouse passes during the duration of the awarded spousal support.  As an example, say the award is $2,500/month for ten years.  The Death Benefit, also called the Stated Amount would  be $2,500 x 12 months = $30,000/year x 10 years = $300,000.  Please remember when completing the Insurance Application, the payee spouse, the spouse receiving the support, should be titled as the Owner as well as Primary Beneficiary of the contract.  Secondary Beneficiaries are at the discretion of the Owner.  The Insured should be the payer spouse.  Premium is typically paid directly by the Insured, the payer spouse.  Premium is not to be included as spousal support.  In the event payment is not received by the insurance company, notification will be sent to the owner of the contract.

Other solutions to guarantee the payment of Spousal Support could involve reallocating certain higher risk asset classes, such as equities, to lower risk asset classes, such as shorter term US Treasury securites.  After reallocating, these assets can be titled exclusively to the recipient spouse.  Or, perhaps title these reallocated assets to some kind of trust?  I feel confident saying most of these other solutions carry significant costs, including but not limited to legal fees, transactional fees, investment advisory fees, and taxes.  Adding these up serve to reinforce the advantage of using a term life insurance contract.  However, the Net Present Value of the reallocated assets might well offer an advantage, especially to the payer spouse.  Let’s go back to the example above, $300,000 total spousal support over ten years.  Net Present Value has to do with the current value of the future sum by adjusting for interest rates and inflation.  The payer spouse will say, “I can put away a certain amount of money today, less than the $300,00, earning a certain interest rate, that will grow over the ten year period into the full amount.”  So, the higher the interest rate the payer spouse feels can be earned, and/or the lower  inflation rate assumed, the less money needs to be allocated at the present time.  Perhaps only $200,000?  The payee spouse will usually say, “Is that truly a safe rate of return?  But what about Inflation?  What will things cost, assuming even a low rate of inflation, over the next ten years?”  These are both valid positions.  The deciding factor can initially be determined considering the age and health of the insured, the payer spouse.

Term Life Insurance offers the consumer an opportunity:  For a certain amount of money you can buy a specific Death Benefit for a period of time.  This is common sense, no need for actuarial tables:  The payer spouse, for example, is 55 years old and needs to guarantee $300,000 for the next ten years.  Of course the 55 year old is more likely to pass within the next 10 years than, say a 30 year old.  The insurance company will certainly base premium on the likelihood of the insured dying within the time frame of the contract.    Age, health. family history, high risk activities, smoking, and several other factors enter into the decision as to whether to insure, how much of a Death Benefit to offer, and how much premium to charge.  The 55 year old might not qualify for $300,000.  Or, the premium for a 10 year contract might be very high.  If this is the case for the 55 year old, clearly premium for the required death benefit should be compared  to costs associated with alternatives.  One alternative is described above, reallocating asset classes; other alternatives are available.

Caveat:  When making tax and investment decisions, including but certainly not limited to reallocating assets, financial or otherwise, please be sure to use Licensed and/or Certified highly qualified professionals.  Life Insurance, even the relatively simple Term Life contract, can become extremely complex while not being very transparent.  Again, please be sure to retain a highly qualified licensed professional, preferably a multi-line life insurance broker.  For your protection, please be sure your agent or broker carries Errors & Omissions Insurance.

 

 

 

 

 

 

 

 

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Intro to Pension Plans

What are Qualified Plans?  What are Non-Qualified Plans?  What does “Qualified” Mean?  Please keep in mind this is not an in-depth discussion, just an introduction to some concepts and terminology:

One way to look at Non-Qualified plans is to look at IRAs, Deferred Compensation, various Incentive Bonus and Stock Option Plans.  Plans without a Plan Administrator, or any plan that does not fall under ERISA regulations would be considered Non-Qualified.  But what exactly does “Qualified” mean?  Very simply, if the plan carries a Plan Administrator, that plan is going to be qualified, literally by this Plan Administrator.

For instance, say you own a 401(k) or 403(b) plan provided to you as a retirement benefit by your current employer.  That plan is required to be “Qualified” and is regulated by ERISA.  So, somebody manages or administers the 401(k) or 403(b).  Plan Managers or Administrators might include Great Western Financial,  Met Life, Fidelity, Vanguard, TIAA-CREF, among a host of others.  These managers or administrators can be looked at as having two major components, administrative and investment.  The investment managers do just that, manage the investment options.  Fees are included for their management in addition to the internal fees charged by each mutual fund or investment option offered through the plan.  The administrative component includes all overhead and administration expenses that might range from sales personnel, office space, telephones computers, to the Statements issued directly to you.  The administrative component is also responsible for compliance with regulations and providing you with what is referred to as a “Summary Plan Description.”  This SPD is a very important document provided to the owner of the 401(k) or 403(b) plan by the Plan Administrator.  This Plan Administrator is the person responsible for “Qualifying” the plan under ERISA.  This person literally signs off on the plan.  Thus the term “Qualified Plan.”

Incident to a divorce, when dividing pension plans such as 401(k) or 403(b), Qualified Plans can be divided once an equitable agreement has been reached by the divorcing couple.  To effect this division of the Qualified Plan you or your attorney must request a Domestic Relations Order (DRO) be issued by the court.  Under ERISA this DRO must be approved by the Plan Administrator.  The Plan Administrator might even be able to provide a model document in compliance with their specific Summary Plan Description.  Once approved, the DRO becomes a QDRO, a “Qualified” Domestic Relations Order.

Getting back to IRAs, a non-qualified trust, since there is no Summary Plan Description and an IRA does not fall under ERISA, you would be hard pressed to get a DRO “Qualified.”  Yet, on occasion the financial firm holding your IRA might demand a QDRO, would you believe not even realizing they act as Trustee, not as a plan administrator.  Rather than fight their policies, offer a DRO to split the IRA as needed.

We will discuss Roth IRAs and other non-qualified retirement plans in upcoming postings.

 

 

 

 

 

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Dividing Unvested Pensions and Stock Options

I found this very interestesting article citing a Minnesota divorce case addressing issues surrounding stock options that vest after the marriage is disolved:

“Unvested stock options have both marital and nonmarital aspects which must be apportioned. There is a marital value to the options since the options were granted during the marriage. There is also a non-marital element since they are likely to vest after the marriage has been dissolved”  However:

Does anyone take into account the tax implications, perhaps assign a discount or adjustment for a possible AMT?   Is treatment different for ISO or NQ stock options?   Your comments are welcome.

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