3 Helpful Divorce Terms to Know

3 Helpful Divorce Terms to Know

March 05, 2019

I've read article after article and there is not cut and dry answer to the question, "What is the true divorce rate in the US?" According to Divorce Magazine, the divorce/annulment rate is 3.2 per 1000 total population (44 states reporting) and another article stated that the rate lies somewhere between 42 and 45 percent.  Regardless of the exact number, it is fair to say that so many marriages with good intentions of lasting for a lifetime will end up in divorce.  That's a hard and true fact to swallow. 

If your marriage is heading down the path of divorce, there are a few divorce terms you should be familiar with, especially if you and your soon to be ex-spouse have accumulated assets in a retirement plan or real estate. Let's examine three of these important terms to know:

QDRO (Qualified Domestic Relations Order)

A court ruling earmarking a portion of a person’s retirement or pension fund payments to be paid to his or her ex-spouse as part of a division of marital assets.

A Qualified Domestic Relations Order (QDRO) must first be issued by a State-level domestic relations court and then reviewed by the plan administrators to make certain that what is written in the QDRO is in compliance with the terms of the plan and with applicable laws. The QDRO should include how much to allocate to each spouse, when the non-employee spouse can start receiving benefits, and what happens when either party dies. Because details of retirement plans can be tricky, it's important to have an attorney or experienced professional to draft the QDRO. 

IRC (Internal Revenue Code) Section 72

The section of the IRS code that allows an alternate payee (the person who doesn't own the retirement plan) to receive a one-time distribution from a retirement plan without having to pay a 10% tax penalty.

You know the rule that if you take money out of your retirement account before 59 1/2, you are hit with the tax on the income plus a 10% penalty for taking the funds out early. Well, this little-known piece of the tax code can provide a great source of relief for individuals who receive some part of their ex-spouse’s retirement plan in the divorce settlement. The one-time, penalty-free early distribution can help in establishing a post-divorce life, whether that’s buying a new home, purchasing a car, or paying to go back to school to refresh your skills.  It should be noted that although the 10% penalty is waived, ordinary income tax does apply to this distribution.

Property Settlement Note

A note from the payor to the payee for an agreed-upon length of time with a reasonable interest rate.

When dividing up property during a divorce, sometimes the scale doesn't quite balance equally for both parties.  You see this sometimes when one spouse wants to keep the marital home and doesn't have enough assets to offset the value of the home to give to the other spouse. Property settlement notes are a tool used in dividing property between spouses.  The property settlement note can be drawn up to achieve an equitable settlement. Make sure you have an attorney who knows what they are doing when creating the note and add provisions to cover the payee in the event the payor spouse dies before the note is paid off.

About Terrell Dinkins, MBA, ChFC®, CDFA®

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Terrell Dinkins, MBA, ChFC®, CDFA® is an investment adviser representative of and offers investment advisory services through OBN Wealth Advisors, LLC, a registered investment adviser offering advisory services in the State of Georgia and other jurisdictions where registered or exempted. Main Office: 950 Eagles Landing Pkwy, Suite 216, Stockbridge, GA 30281. Tel: 404-723-9780. Website: OBN Wealth Advisors