Advising Clients in Later-Life Divorce

By Tracy Stewart, CPA/PFS/CFF, CFP, CDFA

Editor: Theodore J. Sarenski, CPA/PFS, CFP, AEP

Over the past two decades, the divorce rate has doubled for married Baby Boomer couples age 50 and older. For those older than 65, the divorce rate has more than doubled. And over 55% of those "gray" divorces involve couples married for more than 20 years. In fact, a shift has occurred in recent decades, and now a larger proportion of older adults are divorced than are widowed. However, the traditional focus of gerontological research on widowhood does not include divorces. Researchers have not been focusing on divorce in this age group and therefore know little about the consequences and predictors of later-life divorces.

CPAs are in a unique position to have a profoundly positive influence on the financial consequences of Baby Boomer divorces.Family law attorneys should not, and usually do not, give financial or tax advice. Many family law attorney engagement contracts specifically state that they do not give financial or tax advice. Yet those same attorneys often fail to refer their clients to CPAs providing tax or financial planning services. With a little effort, CPAs can make themselves available to family law attorneys, offering to help their divorcing clients with short- and long-term financial and tax advice.

Divorce causes a reorganization of family wealth and is considered by many experts as the most traumatic event in the life of a married person. A first divorce is often the clients' first experience with legal matters. They know they do not have enough time left to rebuild lost retirement nest eggs. When this concern is combined with age-related health issues, children's college expenses, and a reluctance to start over again, a divorce at this life stage can be frightening. For some couples, one spouse has never or only briefly worked outside the home. One spouse could be much younger than the other. There may be a wide disparity of earning power between them.

While an array of issues must be addressed in a later-life divorce, perhaps the least understood technical area is the maze of options for dividing precious retirement benefits and accounts. Retirement accounts have complex rules regarding division; in fact, some cannot be divided at all. This is a minefield for clients. While it may not be feasible to master all the details, CPAs who grasp the key concepts and issues in dividing retirement assets in divorce will be in a better position to advise their clients, and those clients will be deeply grateful for the assistance.

Understand the Account

The first thing to understand about retirement accounts that may be divided in a property settlement is the status of the accumulation of retirement benefits. The following three conditions need to be considered:

Nonvested and nonmatured: This situation occurs when the employee has terminated employment and only has rights to the amount of his or her contributions to the plan, plus interest. This is the most speculative of the three conditions. If the benefits will vest soon, it may be a good idea to delay the divorce until after the vesting date. Stock options can fit this description.

Vested and nonmatured: This situation occurs when the employee is terminated but can receive some benefits beyond his or her contributions. This entitlement to benefits begins after he or she reaches a certain age. Nonemployee spouses can be awarded certain benefits that may eventually turn out to be different from what they expected.

Vested and matured: This is the most secure of the three conditions. When the employee is terminated, he or she is currently entitled to certain benefits in addition to amounts previously contributed.

How Accounts Can Be Divided

Several issues affect the splitting of retirement assets. The first consideration is whether the asset will itself be divided or offset with another asset. If the former is the case, the next issue is the kinds of accounts that are to be divided.

Some retirement accounts cannot be divided. This is determined by the retirement plan's administration rules and/or by state or federal rules. For example, some state pensions pay benefits only to the state employee and not directly to the employee's former spouse. Some plans contain anti-assignment clauses that prevent the employee from transferring rights. This can conflict with the state's equitable distribution laws, thus leaving the state courts to determine the outcome. If state law does not allow the division of state retirement benefits, couples can choose to make up the difference in other ways, such as spousal support.

A couple may agree (or a court may decide) not to divide a retirement plan account but to use the offset method instead. In this case, the value of the undivided retirement account is offset with some other asset. The classic simple example of an offset is the dubious settlement proposal of trading a retirement asset for the marital home. One asset is fairly liquid while the other is not. One will be taxed at a later date, while the other may never be taxed.

This is apples and oranges. CPAs are well-positioned to convert such a trade-off to apples and apples by calculating the potential tax on the tax-deferred asset. This allows comparison of after-tax retirement assets with the value of a marital home. If the family assets allow for it, the CPA can provide value by suggesting that retirement accounts be offset with other similar retirement accounts, such as a traditional individual retirement account (IRA) offset with a Sec. 401(k) account.

With a pension benefit, the division can be accomplished by splitting the monthly payment, if allowed by law. An alternative is offsetting the value of the pension with other assets—if other assets are available. Since a pension provides a stream of payments during retirement, a CPA or an actuary can calculate the payments' present value. This present value is then used as the value to offset other assets. Due to the factors in the calculation, the present value changes daily. In lengthy divorce proceedings, the present value can be recalculated and updated several times over the term of the case.

When a retirement benefit contains a mix of premarital and marital portions, the coverture fraction is used to determine the portion of benefits earned during the marriage. The numerator of the fraction is the total period the employee (participant) was in the plan during the marriage. The denominator is the total time the participant was in the plan until the cutoff date (date of divorce, date of separation, etc.). In a defined contribution plan benefit division, the percentage result is multiplied by the account balance to determine the value of the account that is attributable to the marriage. To divide a defined benefit plan benefit, multiply the percentage by the monthly pension benefit to determine the portion of the monthly benefit attributable to the marriage. The same calculation is used to arrive at the present value of the pension benefit.

Qualified Domestic Relations Orders

If the retirement benefit can be divided and an offset is not desired or not possible, a qualified domestic relations order (QDRO) needs to be drafted, preferably by an attorney with experience in this field. QDROs are court orders directing a retirement plan administrator to pay benefits to an alternate payee. QDROs are used for qualified plans such as a 401(k), 403(b), or pension. These plans are subject to Employee Retirement Income Security Act (ERISA) rules, which include an anti-assignment provision. To get around this rule, the QDRO is used to divide the retirement benefit. QDROs also allow these plans to be divided without tax consequences.

QDROs are useful only for qualified plans under ERISA. Different documents are used to divide other kinds of retirement plan accounts, including federal retirement pensions, railroad retirement pensions, and military retirement pensions. Since IRAs are not qualified accounts and are not subject to ERISA, QDROs are not required to divide them. Generally, the only document needed to divide an IRA is an official copy of the divorce decree. However, some IRA custodians try to require their clients to provide a QDRO when dividing IRAs.

The QDRO cannot require the plan to do anything for the alternate payee that it does not already offer its participants. For example, the plan will not pay an alternate payee a lump sum if it does not offer a lump-sum payout to the participant. When a benefit is being paid to one alternate payee under a QDRO, a subsequent QDRO cannot require the plan administrator to provide that benefit to another alternate payee. CPAs advising a divorcing client who might divide a retirement benefit can read the plan's summary plan description, or SPD, section on divorce and division of the benefit. This is usually a short section and very useful for gaining an understanding of the rules and restrictions for the alternate payee.

The QDRO is signed by the court and then submitted to the plan administrator. The plan administrator then determines whether the QDRO meets the plan requirements. Some plan administrators will preapprove a QDRO. This saves time by identifying and correcting any problems with the QDRO before it is handed over to the court. The preapproval is not official, and the QDRO signed by the court must still go to the plan administrator for formal approval.

When possible, it is best to submit the QDRO to the court at the same time as the divorce decree. The alternate payee can secure his or her rights to retirement benefits only after the plan administrator has approved the QDRO. Thus, it is critical to follow up on a QDRO until the plan administrator has notified both spouses of its approval. Actually, until the order is approved, it is just a DRO. It is the plan administrator's approval that qualifies the DRO and turns it into a QDRO.

To protect the alternate payee's interest, the plan administrator will freeze the participant's account. The timing of the freeze is driven by the plan's QDRO procedures. Each plan has its own QDRO procedures. For example, the benefit could be frozen either upon receipt of a copy of the executed divorce decree or the receipt of a draft domestic relations order.

Exemption to 10% Early-Withdrawal Penalty

Another area where CPAs can provide added value for their divorcing clients is the exception to the 10% additional tax on early distributions from qualified retirement plans for a distribution to an alternate payee under a QDRO (Sec. 72(t)(2)(c)). This exception does not apply to IRA distributions. In a situation where the alternate payee under age 59½ needs cash and is being awarded a lump sum from a retirement account via a QDRO, the alternate payee can arrange to receive funds from the retirement account without paying the 10% additional tax on the early distribution.

The CPA provides value by calculating the distribution amount that will meet the client's need for cash. Simultaneously, the CPA can calculate the distribution amount the client should request so as to be prepared for the 20% federal income tax withholding. In addition, the CPA can help the client determine the optimal distribution amount that avoids pushing the client into a higher tax bracket. It is a balancing act that the CPA can provide to help the client access some liquidity while bypassing the 10% penalty. The client must take the distribution after the QDRO is approved but before the custodian transfers the retirement funds into the client's rollover IRA. Timing is critical.


With the unprecedented rise in gray divorces, CPAs have an opportunity to provide valuable advice to clients on the issues that are unique to later-life divorces. These clients will not have enough time to rebuild their retirement assets. Advising them through the maze of options for dividing retirement assets is a valuable service that will be greatly appreciated.



Theodore Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Tracy Stewart is the owner of Tracy B. Stewart CPA in College Station, Texas. Her practice focuses on the financial issues of divorce. Mr. Sarenski is chairman of the AICPA PFP Executive Committee's Elder Planning Task Force and is a member of the AICPA Advanced PFP Conference Committee and PFP Executive Committee Thought Leadership Task Force. For more information about this column, contact Ms. Stewart at


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