Divorce Rich with Jacki Roessler, CDFA
Welcome to the Divorce Rich Podcast! Join your host, highly sought-after speaker and experienced Certified Divorce Financial Analyst, Jacki Roessler, CDFA in this engaging and down to earth show. Along with her guests, Jacki offers clear and detailed advice to improve your financial decisions before, during and after divorce so you can survive divorce rich! New episodes are posted every other Thursday! You can reach Jacki through her Michigan-based firm, Roessler Divorce Consulting, located at 600 S. Adams, Suite 300, Birmingham, MI 48009 or by email at jacqueline@roesslerdivorce.com.
Divorce Rich with Jacki Roessler, CDFA
The BEST Way to Divide Pensions in Divorce: One Canoe or Two?
Unlock one of the big secrets to dividing pensions in divorce with Jacki Roessler on the Divorce Rich Podcast. Ever wondered how a Qualified Domestic Relations Order (QDRO) could impact your financial future? This episode promises to simplify the complexities of pension plans, especially for those in Michigan's automotive industry, where pensions are a cornerstone of retirement.
One Canoe or Two? Imagine your retirement pension income as a river, which can be navigated with either one or two canoes. Your QDRO divides the pension using one of these division approaches. We examine these pension division methods, highlighting how each approach can affect your financial landscape. Whether it's the interconnected fate of the one canoe method or the separate paths of the two canoe strategy, understanding these options could be pivotal during divorce proceedings.
Delve into survivor benefits and other psychological advantages that may arise, ensuring you are equipped to make informed, fair decisions.
RESOURCES
- Click Here to listen to an episode with a former client about her own QDRO https://podcasts.apple.com/us/podcast/a-qdro-horror-story-with-former-client-brooke/id1735150222?i=1000651374846
- Click here to listen to an episode with QDRO expert, Dave Roessler https://podcasts.apple.com/us/podcast/qdro-time-bombs-with-expert-dave-roessler/id1735150222?i=1000648664578
Visit us at https://www.roesslerdivorce.com/ to learn more about Jacki's practice and to find valuable resources for your case.
Welcome to the Divorce Rich Podcast. I'm your host, jackie Ressler. I've been a certified divorce financial analyst for 28 years, helping clients and their attorneys navigate the often complex and confusing financial issues in divorce. If you're in the process of, or considering divorce, now is the time for you to take a deep breath and give yourself permission to find clarity on the financial issues you're facing. Rich means many things to many people. I believe the best definition of being rich is someone who has access to many resources. Along with my guests on this podcast, I will be bringing you a wide variety of information so that you can make sound and informed financial decisions for your financial future.
Speaker 2:Hey everyone, welcome back to the Divorce Ridge podcast. This is Jackie Ressler, your host, and I am super excited about the topic that I chose for today. One of the best parts of my job and one of my favorite parts is taking a financial topic that most people find confusing and making it easy to understand. While I've got you, if you could do me a tremendous favor and go into Apple Podcasts and give this podcast a review, if you like it, believe it or not. Apple reviews make it much easier for other listeners to find podcasts. While you're there, go ahead and follow and subscribe, so you'll be one of the first notified when we drop new episodes. There isn't any financial topic in divorce that is more confusing to attorneys, judges and clients than dividing retirement accounts in divorce with a quadro. I'm going to explain one of the most confusing and important aspects of the division of retirement assets today. By the time you're done listening to this today, by the time you're done listening to this, you'll see that it's not brain surgery and you will understand why this topic is so important if it applies to you.
Speaker 2:What I'm going to be focusing on are pensions and the division of pensions. I'm in Michigan and in Michigan we have a lot of people that work for the automotive industry and the automotive industry provides a lot of pensions. What is a pension? So? A pension is the type of retirement plan where your employer says I'm going to pay you X amount of dollars per month for the rest of your life, when you retire, no matter how long you live. So if you live five years in retirement and I agree that I'm going to pay you for your lifetime five years in retirement and I agree that I'm going to pay you for your lifetime, I won, if I'm the employer, because I had to set aside enough money to pay you over your normal life expectancy. On the other hand, if I live past normal life expectancy, then my employer lost and because they are on the hook, they're guaranteeing that they're going to pay me that income for the rest of my life as long as I live. So for most people that have a pension and those also include a lot of teachers around the country in the state of Michigan there's a teacher's pension. If you work for the state in another capacity, there's a different pension that you have. If you are married to someone or you are in the military or civil service, you have a pension. So many people have them, even though they've been phased out over the last several years because they're very expensive for employers to maintain.
Speaker 2:And there's a requirement set out by ERISA, which is the Employee Retirement Income Security Act that was put in place in 1974 and amended in 1984, that says that plans have to have enough money funded to be able to pay out their employees. The participants in the plan is what the employee who's in the plan is referred to as the participant. They have to have enough money on reserve to pay out those benefits. And every pension that's offered through a corporation it's a qualified plan and only qualified plans have to follow these rules. They have to have money set aside to pay out their benefits and every year they have to file a form it's called a 5500 form with the government showing that they have enough money on reserve in their plan. So again, a qualified plan is a plan through a private employer. So that's going to be GM, ford, chrysler, kraft, dow. Those are private employers that have a corporate pension plan for their employees.
Speaker 2:Those plans have to be insured by what's called the PBGC, which is the Pension Benefit Guarantee Corporation. They are required to make premium payments into that. And the PBGC says it's a government entity. As long as you make your premium payments, we will insure your pension holders up to a set dollar amount if your plan goes bankrupt. When I used to give lectures to attorneys about pension plans, I would always say this is many years ago. I would say all plans are insured. Can you imagine General Motors, for example, declaring bankruptcy? And then they did so. I couldn't use that example anymore. But all those pension plans are insured by the Pension Benefit Guarantee Corporation. So again there's that extra layer of protection. Of course, nothing in life is 100% guaranteed, but if someone has a corporate pension, you can be pretty well assured that they're going to receive those benefits because even if that plan goes bankrupt, then the pension benefit guarantee corporation steps in, like they did with Northwest Airlines. There are many companies that have turned over their pension plans to the PBGC and those plans, the participants, are covered. They're getting those payments. So that's what a pension is, and I'm going to be focusing on pension benefits today.
Speaker 2:So if you are getting divorced, or if you've been divorced and you have divided up a pension, whether it's yours or your former spouse's or you're planning to this is a really important episode for you to listen to. Again. I'm going to break it down to make it really simple and easy to understand. The only way to divide up a pension or a qualified retirement plan and remember a qualified plan is a plan sponsored by a company the only way to divide that when you get divorced is with a separate legal document called a qualified domestic relations order, or a quadro for short. So if you hear people throwing around the word quadro, that's what they're talking about and that is the only way that those benefits can be divided, and that's true for a 401k plan as well. So in a lot of ways it doesn't matter what your judgment says.
Speaker 2:As far as what you're going to get from your former spouse's retirement plans, if you don't have a quadro entered and approved by the company's plan administrator, you're not going to get those benefits. The only legal document in place that will get those monthly benefits to you, if it's a pension plan, is a qualified domestic relations order. So let's say you've been divorced for several years and you're not sure if you ever had that quadro done. When the divorce is final, a lot of people throw the divorce decree into a drawer, lock the drawer and they want to forget about it. I always tell my clients the very first thing you need to do is go get those quadros drafted, because if the employee dies, retires or gets remarried before you have that quadro entered, you may end up getting reduced benefits or no benefits at all. So it's really important that that quadro get done right away. So if you have been divorcing, you're not quite sure if you have the quadro entered.
Speaker 2:On the pension, you want to contact your attorney and make sure that that's been done. For most people, if they have a pension plan, again, that's the monthly income stream that's guaranteed by their employer. That is usually the largest asset that they have, larger than their home equity, because, again, it is a lifetime stream of income that you can't outlive as one of the most valuable assets that you have. It's often given the least amount of thought when you're getting divorced as far as how it's going to be divided, which is unfortunate because, again, for most people it is the largest asset that they have, if they are lucky enough to have a pension. Let's say that you are in the process of divorce and you don't have a final agreement yet. I will say that, even though the judgment of divorce isn't going to get you the money from some of your former spouse's retirement accounts, whether it's a 401k or a pension. The language that goes into your final agreement, whether it's a settlement agreement or your judgment of divorce. The language that goes in there. Whoever prepares that quadro, when the divorce is done they have to follow that language. If you and your attorney, during the divorce process you can negotiate the terms of your pension quadro, you are going to be so much further ahead than someone else who doesn't, because what will happen is a lot of times there's vague kind of gray language on how the pension is going to be divided and it really leaves it up to the quadro prepare.
Speaker 2:Most attorneys don't prepare quadros in Michigan. In some other states a lot of attorneys do. In Michigan most attorneys don't want to prepare quadros because they don't want to touch them with the 10-foot pole, because they're complicated and there's a lot of room for liabilities. They farm them out to experts. There are several companies in Michigan that prepare qualified domestic relations orders and one of the reasons why I know so much about this topic is that I used to co-own one of those companies with my ex-spouse, who now continues to run that business.
Speaker 2:I know a lot about quadros. In my former practice we drafted between 500 and 1,000 quadros a year. I have a lot of experience seeing all the mistakes that people make and helping make sure that they don't make those mistakes. There are two basic ways that those plans can be divided. I will also point out that there is no such thing as a neutral quadro. A quadro always benefits one side at the expense of the other, unless all of the terms are negotiated between the clients, which hardly ever happens between the clients, which hardly ever happens. So even cases that end in mediation, most often we're not really clients, are not negotiating the terms of how those pension plans are going to be divided. And again I want to emphasize, it is not a neutral process. There isn't just one way to do it, and this is a perfect example.
Speaker 2:Our topic today and there are several topics that I'm going to cover in the next year that relate to the division of retirement accounts through Quadros and how you can help yourself. Today we're talking about how the two different ways that a pension can be divided, and I like to make it simple. I didn't make this up, this analogy. I learned this many, many years ago from another expert who had. At the time that I met him, he was preparing quadros. He lived in Colorado and he used to be the plan administrator for the Air Force. His job was to approve all of the orders that came in. So he knew so much about drafting these orders, he saw so many mistakes that he decided he would go into private practice and he would draft quadros for attorneys and military orders. This was his analogy and I love it so I'm giving credit. His name was Ed Schilling.
Speaker 2:Visualize in your mind that retirement, when you're collecting a pension. We're talking about you jumping into the retirement river and there's two ways that you can divide a pension. We're talking about you jumping into the retirement river and there's two ways that you can divide a pension. One is what I like to call the one canoe method or one boat method, and then the other method is called the two canoe or the separate interest method, the two boat method, and you're not going to find this in any formal quadro paperwork from a company. This is just how I like to explain it, because it is easy to understand this way. Let's talk about the first method. The first method is that one canoe approach With the one canoe approach, both of the people's benefits are tied together.
Speaker 2:So let's say that John has a pension through Ford Motor Company and he got divorced and his divorce decree said that they were going to divide the pension using the shared benefit, or what I would call the one canoe method. So he told his attorney look, the most important thing to me is when I don't want my ex-spouse getting a penny of my pension before I retire, and so that's what the one canoe approach does. So John's wife, mary, is not able to begin her share of the benefits using that one canoe or shared benefit approach until John retires. So she can't jump into her retirement boat and float down the retirement river until John jumps into the front of the boat. Their benefits are always tied together in one boat. So that's one thing to be aware of with the shared benefit method of division, or what I like to call the one canoe method. Other things that are important to know about this one canoe method John's pension is $2,000 per month in his retirement date.
Speaker 2:So when he jumps into the boat, $2,000 a month is the amount that's going to be divided, and let's say that all of it was earned during the marriage. To make this example really simple. So he was married to Mary the entire time that he was accruing the pension and so 50% of it is hers. So he jumps into the boat in the front. She automatically pops up into the back of the boat. They're dividing that benefit 50-50. So 50%, or $1,000 per month, is going to go to John, and it's going to be paid directly from his company, and then the other 50% the other $1,000 is going to go to Mary, who's sitting in the back of the boat, and that's also going to be paid to her directly from the company, and that benefit is going to be paid to both of them the company and that benefit is going to be paid to both of them throughout John's life expectancy.
Speaker 2:So when John dies, the pension goes away. It's completely gone. And only if there is what's called a survivor benefit in place would Mary in the back of the boat get anything if John dies before her. So we have to provide for survivor benefits for Mary. So that needs to be part of that language that's used to divide up the pension is that she needs to get survivor benefits if John dies when they're standing on the dock before they jump in the boat and also she has to have survivor benefits in place when they're both in the boat. Have survivor benefits in place when they're both in the boat.
Speaker 2:Another thing that's important to know about this method of division is that, again, think of them they're always in that boat together. So also, if you can visualize if Mary dies before John, the money that she's getting that $1,000, if the boat capsizes on her side, it pops right back up to the front of the boat, back to John. This is the only asset that I'm aware of in a divorce, where you get your share and if you die first it goes back to your ex-spouse. So if I get my house in my divorce and I die before my ex-spouse, it goes to my beneficiaries or my heirs, doesn't go back to my ex. With the shared benefit method of division, if Mary dies before John, her $1,000 goes right back to him. So he now is getting $2,000 per month. So what are the pros and cons of that method for both parties? Well, obviously the pro for John in this case is he said I don't want Mary to get any of my pension until I retire. So there's that psychological component that is important to some people.
Speaker 2:Another benefit for John or the plan participant is they're tied together. If Mary dies first, he gets her money back, so his benefits go back up to $2,000 per month. That's a great thing for him. That is worth negotiating for, probably for him in his mind. Now, what are the positives for Mary? So one of the positives for Mary? Well, the negative is that she can't take her benefit until he retires. If she has a need for cash flow earlier, too bad, she has to wait for him. But one of the benefits for her is that for most plans, when they're using the shared benefit method, she is allowed to participate or she'll get a share of all of the different types of benefits that he would get.
Speaker 2:And a lot of pension plans will offer what's called an early retirement supplement or a subsidy or a temporary benefit added on top of the $2,000 a month for John because they want him to retire early. So they would love it. John's employer says you know what? We would love it if you retire early, because you make the top compensation, you've got a nice compensation package, you've got our premium health insurance. We would love to hire somebody in that's younger, that makes a quarter of your salary and we're not going to give them any benefits. So it's that important to us that we're willing to give you extra money in your pension for you to retire early, an early retirement supplement and sometimes those amounts can be really large, a large amount.
Speaker 2:In the shared benefit method, for most plans, the person in the back of the boat will participate, is allowed to participate in receiving a share of those temporary benefits, whereas in the other method they may not be. So that's the one canoe or the shared benefit method. The other method of dividing a pension is what I like to call the two canoe approach, or the separate interest method is the formal name for that. But it's really think about it. Visualize two canoes. So you, mary and John, are standing on the deck, they're looking down at the retirement river and there are two boats there and Mary has decided that she'd like to start getting her share before Don retires, that he wants to wait to retire. He still wants to continue working, but she could use the money now and he is eligible for early retirement now. So as soon as he becomes eligible to begin receiving his payments, whether he's still working or whether he decides that he wants to wait to commence the benefits, she can still jump into her own boat and go down that retirement river on her own. So that's really, really important. So in some cases that will make a difference between someone being able to keep their house and not being able to keep their house when they're analyzing their cashflow. So this again is a really important aspect of divorce for a lot of clients. So, but yet it's hardly ever negotiated.
Speaker 2:Let's go back to the particulars of the two canoe or the separate interest approach. So Mary jumps into her boat. They're going to take her $1,000 a month and they're going to say Mary, you're taking it a little bit early, so there's going to be a reduction for that. Plus, women live longer than men, so we're going to squeeze down or actually adjust your $1,000 a month to your life expectancy, so that $1,000 a month is going to become $800 a month. Mary says that's okay, I want that money. As soon as Mary gets into her boat, she is treated as if she is a participant in that plan and she will get that $800 a month for as long as she lives. So while she and John are standing on the dock waiting to get in pre-retirement, she still needs to have that life insurance policy, a survivor benefit in place, so she needs pre-retirement survivor benefits. But once she gets into her boat and she is rowing down the retirement river, it doesn't matter if John dies after that point, because she will continue to receive her pension benefit no matter what happens to John. So that's one aspect of it. Another aspect of the separate interest approach is that if John gets remarried, he can leave a second spouse and any remaining survivor benefits on his $1,000 if he wants to. So that is a positive Under the separate interest approach.
Speaker 2:For some plans the non-employee spouse or the technical term for that is the alternate payee. The alternate payee may not be entitled to get some of those extras, the supplemental benefits, temporary benefits. That's not always the case. Sometimes they can still get them, but for some plans they may not be able to get them. So I'm going to give you an example of this. They may not be able to get them. So I'm going to give you an example of this.
Speaker 2:I, for some reason, I have a whole bunch of clients right now that have a GM pension that they're dividing a General Motors pension, and General Motors has a particularly unique way of administering their pension plan and they continually change their rules every couple of years, which makes it even more difficult. So not only do we have complicated rules, but every company is allowed to have their own rules too, on how they might administer these plans. So this is what makes it so difficult, and this is the reason why a lot of attorneys don't want to touch these quadros, because it's hard to keep up with the changes that are made, even if you prepare quadros all day long, let alone if that's not the primary part of your business. So it's understandable that attorneys don't like to do these, but they still do need to negotiate these terms, because if you bring this up early in the case while you're negotiating, you can get the language in your settlement agreement or your judgment that makes sure that you get to either step in the boat early or you're going to wait until the participant retires. So with GM pensions, their current rule so I'm taping this in November of 2024, and the current rules that they have say that you can, they have. Every plan has to have these two methods Shared benefit is one canoe, separate interest is two canoes.
Speaker 2:General Motors says if you're the alternate payee, you are not entitled to get any part of the early retirement supplement, temporary benefit. They have what's called a level benefit. They're not entitled to get any of that if we use the two canoe approach. So for some people the supplement getting that supplement is so important financially that they would be willing to wait until their ex-spouse retires All of these things again. This is why it needs to be discussed.
Speaker 2:So questions that Mary should have to John when she's deciding let's say Mary, let's say John works at GM cost. So questions that Mary should have to John when she's deciding, let's say Mary, let's say John works at GM Mary. First question should be well, what's the monthly amount that we are talking about dividing? In a lot of cases people aren't even looking at the estimate from the company. Any GM employee can go onto their website and run a benefit estimate based on if I continue working today, what's the pension that I can get at my earliest retirement date, at my regular retirement date, et cetera. So you can compare the differences. That's a document that everyone should have in their divorce when they're negotiating. Your spouse won't give it to you. Ask your attorney to subpoena that document so that you know what is the amount of money you're talking about. That document will also estimate what an early retirement supplement or temporary benefit is for that particular person's pension. So now we can start to compare.
Speaker 2:Is it better for Mary to take that separate interest approach and be able to get the money now, or should she wait until John jumps into the front of the boat, have them tied together with the shared benefit method, but she gets to share in all of those monthly extras? Every company doesn't work that way, but General Motors works that way right now. So that is really important to discuss. I have some clients right now that we're analyzing that and we say you know, in this particular case it's more important. My clients decided in one of these cases it's more important for her to start getting the income right away and to wait until the husband retires. I have another case where the husband is quite a bit younger than the wife. The husband again is the participant. In that case the wife would really like to start that benefit before the husband does. We're going to go with the two canoe approach. I have another case that the early retirement supplement is really important to the alternate pay to get that and her spouse the plan participant. He works at GM and it's really important to him that if she dies, first the benefit goes back to him instead of going back to General Motors, which makes total sense. But again, in most divorce cases that I see, these types of things aren't negotiated.
Speaker 2:So what goes into your judgment of divorce? It's usually kind of vague and it might end up being decided by somebody who's the quadra prepare, not the participant, not the alternate payee, not the attorneys, not the judge, but the quadra prepare. Now a lot of good quadra prepares and all the quadra prepares in Michigan are good. We'll try to explain these differences to the clients and have them decide. But I will tell you, if there's not a lot of cooperation during the divorce about dividing the pension, there sure as heck is not gonna be a lot of open communication about this once the divorce is done. That is not the time to start negotiating when your divorce is final and your judgment of divorce is already settled.
Speaker 2:These are things that you want to bring up and talk about while the case is still pending. Now you know everything there is to know about dividing pensions and the shared benefit versus the separate interest approach of division. A couple reminders every single pension plan has these two methods available. Two make sure you have your spouse or you, if you're the participant, get a copy of your benefit estimate while you're negotiating the case, so you have that information. And three, make sure that this is a topic that you discuss with your attorney. There are times that you have to be your own advocate in a divorce, and this is one of those times. If this is the largest asset that you have and you're not talking about how it's going to be divided, and you know it's not neutral, it's always going to benefit one side at the expense of the other, don't you want it to be your side? So that is me on my soapbox for today. I hope that you enjoyed this episode and I will be doing other episodes throughout the next year on different aspects of dividing up retirement accounts that you also need to be aware of. Thanks for listening and have a great day.
Speaker 2:One other item to be aware of, or one other aspect to be aware of if you have a quadro from General Motors whether you are the participant, the employee or the alternate payee or the non-employee, and you've already had a quadro drafted, you may want to pull out your quadro and look to see if yours is using the separate interest or the shared benefit method, because currently General Motors is offering a lump sum buyout on pension benefits when they're also giving the employee an option to take a monthly benefit or a lump sum.
Speaker 2:That doesn't happen all the time. For most pension plans you can't get a lump sum, but General Motors is currently offering salaried employees a lump sum instead of the monthly benefit. There are certain restrictions on that that relate to whether or not you have a shared benefit or a separate interest quadro. So a lot of quadro preparers nowadays are getting hired to redo old quadros to allow for that lump sum to be taken. So again, if you have a GM quadro, pull it out if you're not already receiving benefits from it and you're waiting until the employee reaches early retirement date or retires and you may want to reach out to a quadro expert to see where you stand with your current order. The way it is, they can always be amended and re-entered.
Speaker 1:Thank you so much for taking time out of your day to listen to Divorce Rich Podcast. If you like this podcast, please follow us on Apple or anywhere that you download podcasts and share this link with any friends or family that you think might benefit from this information.
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