If you’re in the process of negotiating a divorce settlement, you might be focused on some of the “big picture” aspects of divorce (who will get the family home? how will debts be divided?). Yet, some couples get so focused on these “big picture” questions that some of the smaller, but important, details get overlooked. What are the things often overlooked in Seattle, Washington divorce agreements?
Unlike adversarial divorce processes where couples fight over their divorce settlement in court, the collaborative divorce process (and divorce mediation process) gives couples the ability to work through their divorce settlement using negotiations, conflict-resolution strategies, and other collaborative processes. The privacy afforded by the process allows couples to bring financial planners, tax professionals, accountants, and other professionals into the room to help them find the best divorce settlement possible, and to help them avoid things that sometimes get overlooked when couples choose the adversarial process.
In this article, we’ll explore some of the things that often get overlooked in Seattle, Washington divorce agreements.
Retirement Accounts and Benefits
One of things commonly overlooked in divorce agreements are retirement accounts and benefits. If you or your partner have a retirement plan, division of retirement benefits might become part of your divorce negotiations. If you plan to divide an existing retirement account or pension plan (like an IRA, 401(k), or other retirement plan) you may need a Qualified Domestic Relations Order in order to rollover, or deposit your portion of the retirement plan into your own IRA, 401(k), or other retirement plan without penalty. With a QDRO, you’ll have a limited time to open your own retirement plan or transfer withdrawn money to your own IRA or other similar retirement account without penalty. Without a QDRO, any withdrawal you make to a pension or retirement fund could result in major tax penalties, so you’ll want to check with your tax professional and collaborative divorce lawyer first, to get your paperwork in order before making any changes to these kinds of accounts.
What sometimes gets overlooked with tax-deferred retirement accounts and benefits is the fact that taxes will need to be paid when money is withdrawn. This can make the actual cash value of a tax-deferred retirement plan lower than a savings account (where money was placed in the account after taxes were paid). When retirement accounts and pension plans are part of divorce negotiations, many couples often choose to bring in accountants, financial planners, and retirement planners, and even tax professionals to help them understand the implications of dividing retirement accounts.
Your collaborative divorce lawyers can help you see how division of retirement accounts and pension plans fit into the bigger picture of your divorce negotiations. Some couples might choose to keep one partner’s retirement or pension plan untouched, and instead offer the other spouse investments, property, or savings accounts as part of the negotiation. You can read more about splitting retirement accounts on Truce Law’s blog, or speak to your collaborative divorce lawyer today about how retirement plans might impact your divorce negotiations.
Life Insurance
If you will be paying alimony or child support to your former partner, you may also be required to purchase life insurance to protect your children and former spouse. Furthermore, if you stand to receive alimony or child support from your former partner, you might want to make sure that your former partner also purchases life insurance and names you or your children as the beneficiaries to ensure that you and your children continue to receive support should your former partner pass away. Your divorce attorneys can help you negotiate what policy you’ll obtain and decide who will pay for the policy. Sometimes one or both spouses cannot qualify for life insurance or one or both spouses find life insurance prohibitively expensive. In this case, alternative financial arrangements can be made through financial planning, estate planning, or trust planning, to ensure that the spouse receiving alimony or child support will continue to be financially supported if their former spouse passes away.
During the divorce negotiations process, your divorce lawyers will also review any existing insurance policies you have and see if any changes were made to policies before you filed for divorce. Whether you choose to keep your former partner as a beneficiary will depend largely on negotiations as you divide property, debts, and assets as you settle your divorce. According to Forbes, some couples with cash value life insurance policies choose to terminate these policies and divide the proceeds. Other couples find other ways to divide assets equitably.
Issues can arise when one spouse is required to maintain or pay for a life insurance policy where a former spouse is a beneficiary. For example, there’s the risk that a former spouse could potentially cancel or alter a policy without informing you, change the beneficiary, or allow a policy to lapse. Divorce lawyers can help you and your former partner navigate these challenges. For example, your divorce settlement could include money set aside specifically so that the spouse receiving support can purchase adequate life insurance on their own. Another option would be to include third-party authorizations on an existing or new life insurance policy, allowing an ex-spouse to monitor the account for changes.
Another issue that is often overlooked is what happens to alimony or child support if one spouse becomes seriously ill, or disabled, and becomes unable to work. In some instances, divorce settlements allow for alimony or child support amounts to be revisited in these circumstances. In other instances, divorce settlements include provisions requiring the spouse paying alimony and child support to maintain a disability insurance policy, and may require the spouse paying alimony to keep a reserve of money set aside to pay child support and alimony in the event the paying spouse experiences temporary unemployment.
Health Insurance
If you are currently insured under your spouse’s health insurance plan, you may find you no longer qualify for insurance under your former spouse’s plan once you finalize your divorce. The good news is that if your children are currently covered under an insurance plan held by either spouse, the children will generally continue to qualify for coverage. If you stand to lose coverage due to divorce, you may have several options.
First, you can keep yourself covered under your former partner’s health plan through COBRA for up to three years, according to guidelines provided by Washington State’s Health Care Authority. You’ll need to pay the premiums yourself or negotiate the payment of premiums as part of your divorce settlement. COBRA is one way that you can keep your current insurance for up to three years, while you find other options after your divorce. You’ll only have a limited time (60 days) to apply for COBRA coverage after your health care coverage ends through divorce, and a limited time to pay your first premium amount. You can read more about required forms, deadlines, and payments here.
Another option could be to seek insurance through your employer’s health insurance plan, if this option is available to you. Couples might have chosen one spouse or another’s workplace coverage because one partner’s employer-offered plan offered better value or more options. Now that you’re planning your divorce, you’ll need to revisit your own employer-provided options.
If you don’t have insurance through an employer, and if you don’t think COBRA is a good option for you, another option is to apply for an individual health insurance plan through Washington’s special enrollment period. According to the Office of the Insurance Commissioner: Washington State, if you will lose your health insurance coverage due to divorce, you can qualify for special enrollment through Washington’s health insurance exchange, and see if you would qualify for Medicaid.
If one spouse has a serious medical condition, or long-term health condition, some couples opt for a legal separation instead of divorce to protect the vulnerable partner’s coverage. This option has its limitations, however, because if one or both or you choose to remarry, you can lose coverage. If you think you will struggle to pay for health insurance after divorce, you can speak to your divorce lawyer to see if your divorce settlement can include money set aside to cover your health insurance costs, or explore other options.
Other Insurance Policies
If you and your former partner plan to continue to share ownership of the family home, or other major property, you’ll need to discuss how you’ll also continue to maintain insurance coverage of these properties. If you are getting divorced, you might also find yourself no longer covered under your spouse’s car insurance plan and may need to secure coverage of your own. Finally, if you have children who drive, you might need to negotiate who will pay for the children’s car insurance coverage.
Tax Implications of Divorce
Divorce carries some serious tax implications that must be considered when you are planning your divorce. In fact, tax considerations could even impact the timing of your divorce. According to the IRS, you must file as single if you finalize your divorce before the end of the tax year. Some couples choose to time the finalization of their divorce settlement for the start of the new tax year to gain an additional year of married tax benefits, while others prefer to file single as soon as possible to avoid disputes during tax filing season. You’ll need to speak to your financial planner, tax professional, and divorce attorneys to determine what option might be best for you.
If you are in the process of getting divorced, but your divorce isn’t finalized by the end of the year, you’ll need to consider whether you want to file for your taxes jointly or separately. While some couples may choose to continue filing jointly because of potential tax benefits, it’s important to understand that if your former partner lies or makes errors on a joint tax return, you’ll be responsible for any mistakes. This can be an important thing to consider if you and your partner have already been living apart as you negotiate your divorce settlement. Some couples, choose to hire independent tax preparers, financial planners, and accountants to review their tax forms before filing jointly, especially when couples are in the middle of difficult divorce negotiations.
Finally, if you have children, one sometimes overlooked thing in the parenting plan and divorce agreement is determining which partner will be able to claim the children as a dependent on their tax returns. The ability to claim a child as a dependent comes with tax benefits, and the right to claim a child as a dependent isn’t always attached to parenting time. In fact, being able to claim a child as a dependent can be an important aspect of your divorce negotiations and financial settlement. Some couples who split parenting time might choose to alternate years, while others might grant the higher earning partner (who pays alimony and child support) the right to claim the children as dependent.
Another thing that commonly gets overlooked in divorce settlements are the tax implications of certain property settlements. For example, the value of your retirement accounts will depend on whether these accounts are tax-deferred savings accounts or not. Savings accounts where taxes have already been paid will generally be worth more than accounts that are tax-deferred, where tax payments must be made when money is withdrawn. If financial planners aren’t involved in the divorce settlement and negotiation process, individuals might fail to consider the tax implications and the real value of the accounts that they are dividing.
Finally, if you will receive child support, you don’t have to report this as income on your taxes. And, according to the relatively new Tax Cuts and Jobs Act, alimony payments can no longer be deducted from a paying spouse’s income and is not counted as income by the spouse receiving alimony. This can have tax consequences for both spouses. Individuals may want to consider these tax consequences when negotiating their divorce settlement, and some couples choose other options for structuring payments and spousal support that helps both parties enjoy greater tax benefits. This may require careful financial planning, tax planning, and divorce negotiation.
Divorce can bring many tax implications. Division of property during your divorce may not carry tax penalties, but if you choose to sell properties, stock, or other investment products later, these products may be subject to capital gains tax. If you plan to sell property, investments, or stocks during divorce, you and your spouse may have to pay capital gains taxes. Some couples might transfer ownership of investments rather than sell them, but couples with complicated financial investment strategies might want to speak to their tax lawyer or professional before making major decisions.
Wills & Estate Planning
If you are filing for divorce, you’ll also want to look at existing wills, trusts, and estate plans. If your partner is named as a beneficiary, you may need to speak to your estate planning lawyer to change named beneficiaries. Because divorce can also impact other aspects of your estate plan, like retirement plans and pensions, and your children’s inheritance, sometimes estate planning becomes a part of your divorce negotiations. For example, if one of you remarry, this could have inheritance implications for your children (if there are no clear estate plans in place).
Under Washington intestate laws (RCW 11.04.115), a spouse is entitled to half of the estate, and the children would be entitled to the other half. This means that without a will or estate plan in place, a new spouse could receive a significant portion of your former partner’s estate should your former partner pass away.
Spousal Maintenance
One thing that can get overlooked when it comes to spousal maintenance is the fact that if your partner’s financial situation changes, spousal maintenance could potentially be modified, unless you choose to make the maintenance “non-modifiable.” Because of this, some couples might choose to structure their divorce settlement or maintenance in other ways, either through a lump-sum payment made at the time of divorce, or through the transfer of assets during the divorce.
Pets
Under Washington law, pets are viewed as property, so there’s no concept of “pet visitation.” That doesn’t prevent you and your former partner from creating an informal agreement to allow for visitation with pets. Unfortunately, these agreements may not be enforceable by the court. This might be yet another incentive to choose the collaborative divorce process. When couples are able to amicably negotiate the legally enforceable aspects of their divorce, they might be more able to find solutions for pets that meet their needs.
Next Steps
These are just some of the things that can get overlooked in divorce. That said, every divorce is unique, and each couple’s needs will depend on their situation. What could potentially be overlooked in your divorce can differ from what might be overlooked in another couple’s divorce. For example, a financially savvy couple might never overlook tax implications or retirement planning, but might miss other important details, like the fact that “pet custody” can’t be legally enforced by the courts. Other couples might focus on child custody or pet custody matters and miss details when it comes to matters of insurance. The collaborative divorce team at Truce Law can help you cover all your bases.
More couples are choosing collaborative divorce to settle their divorce. With collaborative divorce, you and your partner, and your attorney and his or her attorney, become a team whose common goal is to reach a divorce settlement that is fair and works for you. You get the benefit of being represented by your own lawyer, but also the benefit of knowing that your lawyers have also agreed to work toward a common goal—to settle your divorce outside of court. To learn more about the collaborative divorce process, and to see whether it’s right for you, reach out to the collaborative divorce lawyers in Seattle, Washington at Truce Law today.
This article is for educational purposes only and does not constitute legal advice. Every situation is unique. For guidance specific to your circumstances, consult a licensed family law attorney in your area.