[Ed: Originally published on Facebook.]
This week we’ve been looking at examples of property division. I want to shift a little bit and talk about the mechanics of property division. As a starting point, assume every division of property – that is, every instance of one spouse transferring any property to the other spouse – carries a “transaction cost” that must be paid by one or both parties. Sometimes, that transaction cost is negligible (e.g., transferring money out of a bank account is a simple as writing a check). Often, it can be substantial, however. For instance, to divide a 401(k) or some other “qualified” retirement account, a special instrument known as a “qualified domestic relations order” (or “QDRO”) must be drawn up, typically by an attorney, and then it will have to be signed by the judge and approved by the retirement plan – all of which costs time and money.
My golden rule is to minimize transaction costs by minimizing the number of transactions. As a simple example, let’s say one spouse has changed jobs four times during the marriage, but the other spouse has held the same job throughout the marriage. The one spouse has four different retirement accounts, with balances of $10,000, $15,000, $8,000, and $24,000, and the other spouse has a retirement account with a balance of $174,000. The total of all five accounts is $231,000, half of which is $115,500. These parties COULD do five transfers – one spouse could transfer $5,000, $7,500, $4,000, and $12,000 to the other, and the other spouse could transfer $87,000, and the result would be that both sides would have five accounts each, worth a total of $115,500. But it would be much easier for the spouse with the one large account to do a single transfer of $58,500 to the other spouse – leaving one spouse with five accounts worth a total of $115,500, and the other with one account worth $115,500. Same result, but achieved in one transaction instead of five, which is much easier.
By the way, if you’re the one with multiple retirement accounts out there, you should probably consider trying to consolidate them all. A financial planner can help you with this. If you’re following the “Your Post-Divorce Compass” plan, Days 11, 13, and 23 touch on retirement accounts and financial planning.