Approximately 50 percent of all marriages in the U.S. end in divorce. Unfortunately, divorce decrees are not easy to deal with, especially when it comes to splitting up retirement assets. Following these basic guidelines will help to ensure an efficient transfer of assets from one spouse to another. Most firms require two documents when transferring assets: a Letter of Instruction and a proper Divorce Decree or Separation Agreement.
Letter of Instruction (LOI)
Make sure you address the LOI to the Financial Institution. Reference the account numbers of each spouse that will be involved in the transfer. Most firms will not send a check for the benefit of the accepting spouse; the spouse must have an established account, for the transfer to take place. Spell out the assets involved in the transfer. Specify a certain percentage, a specific dollar amount, or a share amount.
Both spouses must sign the LOI. Be sure both signatures are guaranteed.
Separate LOIs from the spouse relinquishing the assets and the spouse accepting the assets are acceptable, but the language in each must be identical. If you are unable to get a signature guarantee, request a Signature Guarantee Authorization Form with the LOI.
Divorce Decree or Separation Agreement. The IRS does allow individuals to make a non-taxable transfer of an IRA to their former spouse pursuant to a divorce decree or legal separation. The IRS reserves the right to determine whether the agreement between both parties constitutes a legal separation or a divorce. For instance, a property settlement agreement may not qualify and a distribution under such an agreement could subject the client to tax liabilities and penalties. In order to have funds distributed from an IRA, the court order must contain the following: Reference the IRA owner and financial institution. The financial institution must be directed to ‘transfer’ the assets. Include the percentage, dollar amount, or number of shares to be transferred. The court order must be signed and stamped by the courts. An original copy is, usually, not required as long as all stamps and signatures are clearly identifiable. When transferring IRA assets please do not make any reference to “QDRO.” Qualified Domestic Relations Orders pertain to qualified retirement plans (such as 401(k)s, profit-sharing plans, etc.), not to IRAs.
For more information or a complimentary consultation, please call Tim Shaner, president of Capital Consultants a Wealth Management Group at 661-259-1644. Visit our website www.capitalconsultants.org or drop me an e-mail at tjshaner@capitalconsultants.org .