Is a 401(k) Withdrawal Pursuant to a Divorce Settlement Taxable Income?

Is a 401(k) Withdrawal Pursuant to a Divorce Settlement Taxable Income?

By Elizabeth J. Billies | Esquire

Yes!  A withdrawal from a 401(k) creates income for which the recipient of the withdrawn funds will be taxed.  For example, if the parties are contemplating transferring retirement assets from one spouse to the other, and do not want the funds to be taxed, they should transfer the monies from one party’s retirement account to the other.  Under this procedure, the money is not actually withdrawn from the original account. Rather, it is merely moved from one retirement vehicle to another following a procedure outlined by the retirement plans. Thus, as no cash has actually  been received by either party, there is nothing to tax.  However, don’t forget that when the receiving party withdraws those funds at retirement, those monies are taxed at that person’s income tax rate.  

In many cases, there is little cash available for division in a divorce settlement.  However, there are many instances when a party needs to withdraw monies from a retirement plan in order to satisfy debts, pay bills, etc. prior to retirement.  In that case, the transferring party should still transfer the monies to the other’s retirement account to avoid paying taxes. After the transfer, the receiving party may withdraw part or all the funds subject to income taxes and early withdrawal penalties. Unfortunately,  divorce is not a life event that makes these withdrawals exempt from IRS penalties.  It is best to consult your attorney and/or accountant before make such financial moves to best avoid any unnecessary payments to Uncle Sam. 

Understanding Prenuptial Agreements

Understanding Prenuptial Agreements

By Inna G. Materese | Esquire

When we hear the words “prenuptial agreement” or “prenup,” most of us think of wealth, celebrities, or even unreasonable demands we’ve seen in the movies. Prenuptial Agreements have had the misfortune of being seen as unromantic, fatalist, and unseemly. However, a prenuptial agreement – or a contract entered into before marriage that outlines the rights and obligations of both spouses in the event of divorce – can prove to be useful for individuals in a variety of financial circumstances.

Many clients wonder, “Why do I need to know about a prenuptial agreement now that I’m going through a divorce?” The answer is simple: A prenuptial agreement can help you reduce conflict in a future relationship and can serve as valuable financial planning tool.

You may be aware that Pennsylvania’s Divorce Code provides for a process, called equitable distribution, by which marital property is divided. In addition, our divorce and support laws provide for support remedies such as alimony pendente lite and alimony in the event of divorce. In the absence of a prenuptial agreement, these laws largely govern what happens to your finances in the event of divorce. Unsurprisingly, many of us are not too keen about how these laws are applied to our lives. A prenuptial agreement can help you predetermine how your financial circumstances will be resolved in the event of divorce.

A prenuptial agreement can assist you with:

  • Financial Planning – A prenuptial agreement is a vehicle by which you and your future spouse can determine for yourselves what kind of property is and will remain separate, and what kind of property, if any, will be marital. It also permits the spouses to designate whether income earned during the marriage remains the separate property of the person who earned it, whether and to what extent retirement accounts may be marital, and who gets what in the event of divorce. By clearly establishing these understandings prior to the marriage, you may be able to better gauge what your financial picture may look like upon divorce.
  • Estate Planning – A prenuptial agreement can be a critical estate planning tool, particularly if you have children from a previous relationship. Designating your spouse’s ability to inherit from your estate, and to what extent, can help you provide for your spouse, children from a previous relationship, and/or other family in your desired manner.
  • Debt Allocation – In a divorce action, the court will distribute and divide marital debts in addition to marital property. Many clients are frustrated by the idea that they must assume a portion of marital debts that may have been incurred solely by the other spouse. A prenuptial agreement can be an effective way of shielding you from debts incurred by the other spouse during marriage.
  • Support – Our support law provides for alimony during and after the pendency of a divorce, with factors and guidelines that often prescribe how income and support are calculated. A prenuptial agreement allows individuals the freedom to determine some of these support issues for themselves. However, it should be noted that issues of child support and child custody are not binding and are always modifiable.

Are Military Pension Payments Divisible in Divorce? SCOTUS says, "No."

Are Military Pension Payments Divisible in Divorce? SCOTUS says, "No."

By Elizabeth J. Billies | Esquire

Can your military benefits be divided in divorce? The United States Supreme Court has said, "no."

The United States Supreme Court recently issued a decision in Howell v. Howell finding that a portion military pension benefits that were mandatorily waived pursuant to federal law are not divisible by state courts in divorce proceedings. John Howell and SandraHowell were divorced in 1991 in Arizona while John was serving in the United States Air Force.  In resolution of their economics issues, the Court issued an order awarding Sandra fifty percent of John’s Air Force pension.  John retired from the Air Force in 1992.  Thirteen years later, the US Department of Veterans’ Affairs determined that John was disabled and was entitled to monthly disability benefits. 

Federal law requires that such disability benefits automatically reduce the veterans’ total retirement pension benefit and, in effect, result in a waiver of a portion of the final pension benefit equal to the disability payment.  Sometime thereafter, John began collecting his pension.  However, his monthly payment was reduced by $250.00 per month to account for his receipt of disability benefits, which, in turn, reduced Sandra’s fifty percent share by $125.00. 

As a result, Sandra filed an action with the Arizona trial court and requested that John be order to pay to her 50% share of the pension as calculated on the original amount and not the reduced amount.   Both the trial court and the Arizona Supreme Court agreed with Sandra, holding that the federal law requiring that pension payments be automatically reduced when a veteran receives disability payments cannot preempt a family court order regarding division of that pension. 

The US Supreme Court disagreed with this finding and held that a state court does not have the authority to divide the waived portion of a military pension when that portion was  mandatorily waived pursuant to federal law.  John did not chose to reduce his share of his pension.  Rather, it was automatically reduced when he began receiving disability benefits. The Court did opine that a family court can certainly take the possibility of such a reduction into consideration when crafting an equitable distribution or support award.    The Court also pointed out that it did not matter that the finding of disability occurred after the Order was entered as a right to a pension benefit is based on a future contingency and does not have a final value until the benefit begins being paid. Click here to read the full opinion.

How Many Marriages Really End in Divorce?

How Many Marriages Really End in Divorce?

By Elizabeth J. Billies | Esquire

We've all heard the statistic that 50% of marriages end in divorce. But, where did that statistic come from? And is it even correct? According to a recent report from Psychology Today, the divorce rate has been falling for decades, making this commonly cited factoid outdated.  In fact, only 25% of recent marriages are likely to end in divorce.  Moreover, the divorce rates vary based on whether you were divorced previously (higher probability) or your partner was also divorced before (even higher). Read more about the reasoning behind the higher rates if you or your spouse were previously betrothed here.

What is a Post-nuptial Agreement?

What is a Post-nuptial Agreement?

By Elizabeth J. Billies | Esquire

Post-nuptial agreements have become more popular in recent years but . . . what exactly are they? While a pre-nuptial agreement is an agreement signed before the marriage, a post-nuptial agreement is signed after the parties have already tied the knot.  Similar to a pre-nuptial agreement, a post-nuptial agreement sets forth how the parties will divide their property and/or if either would receive alimony in the event of a divorce.  Parties generally sign post-nuptial agreements for two reasons: one, they simply didn’t get a chance to sign a pre-nup before they got married or two, they have hit a rough patch in their marriage but aren’t quite ready to call it quits.  For more information about the rise of post-nuptial agreements and different states’ treatments of such agreements click here.

Is Your Marriage Being Impacted by the Trump Effect

Is Your Marriage Being Impacted by the Trump Effect

By Inna G. Materese | Esquire

Research from Wakefield Research, a marketing research firm, has found that one in ten couples (both married and unmarried) have ended their relationships over political disagreement. Among millennials, this rate of occurrence is 22%. 

Indeed, multiple dating websites and other online information gathering sources report that more couples than ever are arguing and breaking up due to opposing political stances regarding the current president. Read more...

The Ambition v. Marriage Trade-Off

The Ambition v. Marriage Trade-Off

By Inna G. Materese | Esquire

While our cultural consciousness may be changing, research shows the change may be slow. According to the Harvard Business Review, even today, research shows men prefer women who are less professionally ambitious than they are.

Given this perception, many single women face an age-old dilemma: Should I sacrifice my career for marriage, or vice versa? 

Research suggests that single women tend to avoid actions that would help their careers because of marriage considerations. The effect is seen not only macro decision-making, such as making schooling determinations, initial career decisions, taking on leadership roles and asking for promotions. Daily decisions such as speaking up at meetings, working late, taking charge of a project, even certain outfits, haircuts, and makeup may be impacted by a single woman's weighing of whether the choice will make her more or less attractive to a potential partner. Read more....

 

 

Can Posting Videos of Your Kids Get you in Trouble?

Can Posting Videos of Your Kids Get you in Trouble?

By Inna G. Materese | Esquire

In November, we explored how the life we post on social media can have serious consequences. Sadly, one need only look to recent news reports to see an example.

Youtuber "DaddyOFive" and his wife have recently lost custody of his children as a result of "pranks" the couple played on them, recording and posting the incidents for public viewing. The posted "pranks" ranged from  smashing the youngest child's Xbox with a hammer in front of him, to convincing the child that he was being adopted out of the family for his bad behavior, to cursing at him for spilling ink on his bedroom floor. In several of the videos, the child can be seen crying and seems to be visibly, and understandably, distressed by what has happened.

While these videos went viral and garnered the couple thousands of online views, the results were devastating. The couple lost custody of the children based on a court's finding that their behavior was abusive. Read more.... 

 

Come See Us at Lansdale Day!

Come See Us at Lansdale Day!

By Inna G. Materese | Esquire

Come visit Jon Young at the DBD booth at the 2017 annual Lansdale Day Arts and Crafts Festival! To learn more about the event, visit the information page.

DBD is proud to sponsor this family friendly event and the support the North Penn Rotary Club. 

Are You Entitled to a Child Support Raise?

Are You Entitled to a Child Support Raise?

By Inna G. Materese | Esquire

Whether you are paying child support or receiving it, a new revision in the Pennsylvania Child Support Guidelines may impact the child support amount in your case.

Child support in Pennsylvania is calculated according to state guidelines. The guidelines are based upon a statistical model that seeks to measure the portion of household income that parents in intact families spend on their children. Our laws then apply these models to divorced, separated and/or otherwise unmarried parents based on the idea that children in separate households should receive approximately the same resources as children in a single, intact-family household. The guidelines are revised every four years to keep up with the realities of our economic circumstances and the cost of living.

The most recent revision, which goes into effect on May 1, 2017,  results in a modest increase in the child support amount at most income levels, though it is not the same at all income levels. For example, in a family where both parents earn approximately $4,000 net of taxes per month, the increase due to the guideline revision may be approximately $30 per month.

It is important to remember that Pennsylvania Courts do not automatically adjust child support Orders to reflect this change when the guidelines are updated. Instead, a parent must file a petition to modify support to obtain a new Order. Though the petitioner (the person seeking a new support Order) must demonstrate that a change in circumstances has occurred that warrants a modification, a change in the guidelines qualifies as such a change if it results in a material change in child support.

Speaking with your attorney before filing a petition to modify is essential. While the revision may entitle you to a slight increase in support, it is crucial to remember that this change in the law is not considered in a vacuum. Once a petition to modify is filed, the court can consider changes to the each parent’s income, healthcare costs, extracurricular activities, childcare costs and/or any other circumstances of the family. It is possible that changes in these variables may offset any increase you might other see due to the guidelines revision. Furthermore, the cost of potentially litigating a child support modification case may outweigh the increase to which you might be entitled.

Discuss the new guidelines revision with an attorney to address the pros and cons of a  possible support modification in your specific circumstances. Having a full understanding of the possible outcomes of your case can help you make the best decision for your family.

We're Giving Back. Come Join Us!

We're Giving Back. Come Join Us!

By Inna G. Materese | Esquire

We understand that to really improve the lives of our clients, we must improve the communities in which we all live. That's why DBD is giving back to stellar organizations throughout our region, as a sponsor and participant. We've already given back to Knights for Life, NPUW Super Hero Event, and Beacon Mega Event. We've also sponsored the Montgomery Township Baseball and Softball Association, the Souderton Area Baseball League, Pottstown Little League, and Towamencin Ball Parks.

But we're far from done. Come find us at these great events, sponsored in part by DBD!

DBD Attorney Teaches Civic Education at Local School

DBD Attorney Teaches Civic Education at Local School

By Inna G. Materese | Esquire

At DBD, we believe that serving our community means more than providing legal representation - it's about giving back to even the smallest of our residents. Indeed, on Friday, April 21, 2017, DBD Partner Jon Young was one of six professional, including Judge Andrea Duffy, to teach civic education to students at Montgomery Elementary.