One of the many things that makes divorce such a complicated and notoriously confusing business is the array of new terms, acronyms, and phrases tossed around throughout the process. Divorce has its own language, and it is important to be able to talk the talk with family lawyers, judges, collaborative divorce professionals, and clients. Here are ten divorce terms to jumpstart your journey to divorce literacy.
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) is an order from the court that says how an employee’s retirement plan should be divided up between the employee and his or her ex-spouse. The QDRO should include how much to allocate to each spouse, when the non-employee spouse canPublish start receiving benefits, and what happens when either party dies. The details of retirement plans can be incredibly tricky, so it’s important to have an attorney or experienced professional draft the QDRO.
2. Financial Affidavit
Key document used to collect financial data, including all income, expenses, assets, and liabilities.
The financial affidavit is the backbone of any divorce settlement. Full disclosure and accuracy are imperative, but it is also important to note that the affidavit changes frequently as new information comes to light. This document may sound straightforward, but it can be surprising how many people are not involved in family finances and are ill-prepared to compile the necessary information.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) law passed in 1986. It allows an ex-spouse to continue to receive health insurance coverage from his or her former spouse’s employer for up to three years after the divorce.
This federal law is a nice safety net for divorcing individuals who are on their ex-spouse’s insurance plan. However, premiums for COBRA coverage are often higher than when they were covered under the employer’s plan. Particularly with subsidies available under the Affordable Care Act, you should be sure to shop around to make sure you’re getting the best option.
4. Community Property State
A state in which any property not deemed “separate” (i.e., owned before marriage or obtained by gift or inheritance) is “community” property and will likely be subject to a 50/50 division.
The way that assets are divided in divorce depends on the property division statutes of the state. There are currently eight states that have community property statutes: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.
5. Equitable Distribution State
A state where settlements divide property based on a number of considerations to achieve an equitable and fair distribution – not necessarily an equal one.
The remaining 42 states (those that are not community property states) have equitable distribution statutes. In these states, property is divided based on many factors, including the length of the marriage and differences in age, wealth, earning potential, and health of the partners involved. This forgoes the idea that settlements should always be 50/50 and attempts to create a fair post-divorce situation.
6. Legal Separation
Court ruling on division of property, spousal support, and responsibility to children when a couple wishes to separate but not divorce.
Couples may want pursue a legal separation rather than a divorce for several reasons, including religious principals, medical or insurance issues, or simply not wishing to be divorced. The state of Texas is the only state not to recognize legal separations.
7. Recapture Rule
A rule that comes into effect if spousal support payments decrease more than $15,000 during the first three post-divorce years. If an individual paying spousal support is found to be in violation of recapture rules, the “excess spousal support” must be included in the payor’s taxable income in the third post-divorce year.
One of the more confusing and easy-to-forget rules related to divorce, recapture can be a huge tax problem for individuals paying spousal support. The Tax Reform Act of 1984 created this rule to prevent a property settlement payment (which is fully taxable for the payor) from being disguised as spousal support (which is tax-deductible for the payor).
8. Rehabilitative Maintenance
Temporary financial support given to an ex-spouse until they are able to earn sufficient income to support themselves.
Rehabilitative maintenance became popular as a way to give ex-spouses a transition period. It is unrealistic to expect a lower wage-earning or stay-at-home spouse to immediately be able to earn enough income to support an entire household. Rehabilitative maintenance gives these individuals a chance to return to school or the workforce and transition into breadwinner status.
9. Property Settlement Note
A note from the payor to the payee for an agreed-upon length of time with a reasonable interest rate.
These notes are a tool in dividing property between spouses. If one spouse wishes to keep an asset that tips the scales in his or her favor (such as the marital home), a property settlement note can be drawn up to achieve an equitable settlement.
Please note: This is general knowledge and is not tax/ legal/ or financial advice. Work with your professional team to find out what is best for you.
10. IRC Section 72
The section of the IRS code that allows an alternate payee to receive a one-time distribution from a retirement plan without having to pay a 10% tax penalty.
This little-known piece of the tax code can provide a great source of relief for individuals who received some part of their ex-spouse’s retirement plan in the divorce settlement. This one-time, penalty-free early distribution can help in establishing a post-divorce life, whether that’s buying a new car, renting a new apartment, or paying to go back to school. It should be noted that ordinary income tax does apply to this distribution.