Relationships Talk

• Applications for divorce usually spike at the start of the year.
• But South Africa’s best-known divorce lawyer believes you shouldn’t rush into a divorce after a fraught holiday season.
• If you do decide to push ahead, Billy Gundelfinger has some advice on what mistakes to avoid.

Across the world, January is known as Divorce Month – and South Africa is no exception.

“When I come back from vacation in December, it’s usually total chaos at the office,” says Billy Gundelfinger, South Africa’s best-known divorce lawyer.

Over his four-decade career, Gundelfinger has represented the likes of President Cyril Ramaphosa (in the divorce following his first marriage), Mandla Mandela, Malusi Gigaba, Tokyo Sexwale, Bill Venter, ‘Baby Jake’ Matlala, Rhema Bible Church leader Ray McCauley, former SAA CEO Khaya Ngqula, Sir Donald Gordon (chairman of Liberty International), and a daughter of former president Jacob Zuma in their divorces. 

According to a Sunday Times report, “being Gundelfingered” has become a verb in certain Johannesburg circles.

See also: The world’s richest man is divorcing – and he’s reportedly dating a former TV anchor who’s still married

Gundelfinger, who is a part-time law professor at Unisa, these days only takes on “big money” divorce and criminal law cases.

The traditional spike in divorce applications in January follows from conflict over December, he believes: during the holiday, couples are forced to live in close quarters with each other – without the distractions of work and other activities.

“They start looking critically each other and then usually one party decides: ‘This is not how I want to live the rest of my life’ and files for divorce in January.”

But Gundelfinger recommends waiting at least until the end of February before you take action.

“Often people rush into a divorce in January, when the problems could be sorted out through counselling. Divorce isn’t always the answer – particularly not when there are children involved.”

When you do decide to pursue a divorce, here are some of the biggest mistakes to avoid:

Not arriving at a settlement before you go to court

“A bad settlement is better than an acrimonious and costly fight in court,” says Gundelfinger.

Sit down with your spouse and attempt to come to an amicable agreement about what you want to do with your assets and sort out child-related issues before you have to slug it out in court.

 Your lawyers can help you draw up a settlement agreement, stating:

• How your assets will be divided up.
• Who will get custody of the children and arrangements regarding contact
• All issues regarding maintenance.

The more you can agree to before you go to an attorney, the more money you will save.

When the divorce is finalised and the parties have signed a settlement agreement, the agreement becomes an order of court, and if one of the parties doesn’t adhere to it, they will be in contempt of court.

Choosing the wrong lawyer

Get an attorney who specialises in divorce and family law – it will save you money, believes Gundelfinger.

“If the lawyer is specialised, the case will be wrapped up in a much shorter time.”

Remember that there are many factors to consider, especially if property ownership is transferred – including problems surrounding capital gains and donations tax. Getting an expert in divorce issues could help prevent long-term problems.

Unnecessarily going the expensive route

If you don’t have children, and you have agreed on how assets should be divided, go directly to the high court or the family court, where you can represent yourself and don’t need a lawyer.

Guldenfinger believes, in some cases, you can even opt for a DIY online divorce.

Read more: You can get a R1,000 divorce in three weeks – but the two of you need to agree on these five things 

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Also from Business Insider South Africa:

The surprise split of Amazon CEO Jeff Bezos and his wife MacKenzie puts advisors on alert: Are you prepared with appropriate retirement and tax advice if your clients divorce?

It’s unlikely that Bezos will have to crack open his Amazon 401(k) or IRA to get through this event. But for your average client, that’s exactly where most of their wealth may be.

Though you can’t predict which of your clients might divorce, you should know the rules of how large retirement balances are split if the event occurs. Do you know which of your clients live in states where the community property rules may apply, or where ERISA might trump those state laws when company plan funds are involved? It’s worth looking up.

Advisors also need to know how an IRA or 401(k) might be divided. This is one area where the biggest tax mistakes are made. Such errors mean that everyone ends up with less — including you, the financial advisor.

This type of advice is a high-value personal service and can make or break your relationships and future referrals. And, as seen in the harrowing case studies below, failure to cover these bases could seriously impact your clients.

Here are key points to know when splitting up a retirement account in a divorce.

IRAs and 401(k)s

Divorce will impact many retirement plans because they may be among a client’s largest assets. But IRAs and other retirement accounts are unlike most other assets because of the tax rules surrounding distributions from these accounts. Normally, any distribution would trigger a tax bill that would have to be figured into a divorce agreement.

Divorce is one of the few times that retirement assets can be transferred from one individual, during his or her lifetime, to another with no tax consequences. However, tax rules for IRAs and employer plans, including 401(k)s, are very different, when it comes to splitting them up in a divorce.

An employer plan is split using a qualified domestic relations order. This QDRO is a court order that is submitted to the plan administrator for qualification. Once it is qualified, it allows employer plan assets to be retitled and made available to the ex-spouse if the plan allows. Most plans do allow a spouse full access to their separate account under the plan.

Distributions from the QDRO plan to an ex-spouse will not be subject to the 10% early distribution penalty.

Note: a similar exception is not available for IRAs split in a divorce. When QDRO plan funds are rolled over to an IRA, this exception is lost.

QDROs do not apply to IRAs. IRAs are split according to the divorce or separation agreement, and the transfer must be a direct transfer from one spouse to the other spouse. This will be a tax-free transfer incident to the divorce. However, it’s a big mistake to take a distribution from the IRA and give those funds to the ex-spouse. That would be a taxable distribution to the IRA-owning spouse. This is exactly what happened in the 2018 Kirkpatrick case where the IRA transfer due to the divorce was supposed to be tax-free, but ended up as a taxable distribution costing the couple thousands in unnecessary taxes.

Community property — surprising outcomes

The Bezos divorce brings up another interesting twist: Jeff and MacKenzie Bezos they live in Washington state, one of the nine community property states. The others are: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, and Wisconsin. Alaska has adopted an optional community property system.

Community property laws can really throw a monkey wrench into who ends up with a retirement account. Take this recent case involving Gwendolyn and Michael Berry (United States v. Gwendolyn Berry; No. 4:17-cr-00385, Released December 17, 2018), where the government took part of Gwendolyn’s community property interest in Michael’s retirement accounts, even though he owed nothing to IRS.

Here, there was no divorce but the couple was separated physically when Gwendolyn went to jail for tax and mail fraud. Here, the government pursued restitution of more than $2.1 million from Gwendolyn due to her criminal financial activity. In order to meet this lofty sum, the government will garnish all of her eligible assets. But since she and her husband live in a community property state, the government also got half of Michael’s eligible assets, including retirement dollars in two IRA accounts, even though he did nothing wrong.

Gwendolyn was a former bookkeeper convicted of embezzling money from a client’s account. She is currently serving fifty-one months in prison for wire fraud, mail fraud, and filing false tax returns. At her sentencing, the judge ordered her to make full restitution to the person from whom she stole. To satisfy this order, the government located five separate IRAs owned by the Berrys and filed garnishment writs on each.

Three of the accounts were owned by Gwendolyn, so the government sought to garnish 100% from those accounts. The other two were owned by Michael. Even though he was not a party to her criminal activity, the government requested a garnishment order on one-half of each of his accounts.

Michael challenged the garnishment writs, but lost. The problem was that Mr. and Mrs. Berry lived in Texas, which is a community property state. Community property consists of property or assets acquired by either spouse during the marriage. The Fifth Circuit Court of Appeals previously held that restitution liens apply to community property – even property managed by a spouse who is not liable for the debt. The lien is limited to the spouse’s interest, which is one-half. As a result, the government was successful in asserting that since Gwendolyn has a 50% community property interest in her husband’s IRAs, the garnishment writs towards his two IRAs were proper.

While Michael obviously couldn’t have predicted that his wife would become a criminal, there is a lesson here even for your law-abiding clients who live in community property states. Community property is everything a husband and wife own together. In general, this includes all money earned and property acquired during the marriage. For community property rules to apply, a client must have two things; a valid marriage and a domicile in a community property state. Community property rules can determine who gets a retirement plan at death, after a divorce or even when one spouse owes money, as was the case with the Berrys. These are state laws, and often conflict with federal law.

For example in the landmark Boggs case (Boggs v. Boggs, 520 U.S. 833, 1997)

In it, the U.S. Supreme Court ruled that when there are conflicting claims, ERISA trumps community property law. Here, Boggs remarried after his first wife died. When he died, he left his plan benefits to his second wife.

The children from Boggs’ first marriage claimed that part of Boggs’ company retirement plan belonged to them since they inherited a community property interest in those funds from their mother (Boggs’ first wife). They lost and the funds went to the second wife. The court said that ERISA (federal law) trumped community property (state law) and awarded the funds to the second wife who was the named beneficiary of the company plan.

Another oft-cited case is the Bunney case (Bunney v. Commissioner; 114 T.C. No. 17; No. 20713-97, (April 10, 2000). Here, similar to the Kirkpatrick case cited above, Michael Bunney and his wife divorced and he withdrew funds from his IRA and gave them to his ex-wife as part of the divorce settlement. As in the Kirkpatrick case, this distribution was taxable because he didn’t transfer the funds directly to his ex-wife according to the divorce agreement.

But here, Mr. Bunney claimed that since they lived in a community property state, half of his IRA already belonged to her, so the IRA distribution should not be taxable. He, too, lost when the court ruled that even though spouses are equal owners of an IRA under community property law, the IRA owner pays the tax on a distribution to an ex-spouse. Mr. Bunney had to pay the tax on the IRA distribution that he gave to his ex-wife. If this was done as a direct transfer, there would have been no tax bill.

New rules in 2019

Advisors can check beneficiary forms, which in some cases can override community property interests. Even so, if clients wish to name someone other than their spouse as their IRA beneficiary, they should get a spouse’s written consent, when community property rules apply.

Advisors should also plan ahead now to avoid uncertainty later. Bezos and his wife reportedly did not have prenuptial or postnuptial agreements. Clients can be encouraged to consider these options even if they do not have billions of dollars. Smart advance planning can save money and avoid costly litigation if a divorce occurs.

Finally, remember that now, in 2019, the tax rules for alimony have changed. Alimony on post-2018 divorce agreements is no longer deductible for the payer and no longer taxable the spouse-recipient. This is yet another item to add to the tax complications of divorce.

While you don’t have any clients with the wealth of Jeff Bezos, you do have clients with their own thorny issues and they will need to salvage every dollar. Hopefully you can help them avoid the tax traps of splitting retirement accounts in a divorce.

Ed Slott

Ed Slott, a CPA in Rockville Centre, New York, is an IRA distribution expert, professional speaker and author of several books on IRAs. He is also the founder of Ed Slott & Co.

More from this Author

Statistically speaking, your marriage is in trouble. The numbers aren’t on your side, with 53 percent of marriages ending in divorce. Add another ten percent to that to account for the marriages that have failed but the couples remain together for the kids or for religious reasons, and you’re inching close to a stat that says that three-quarters of marriages don’t work.

“Marriage is like the lottery,” says James Sexton, “you’re probably not going to win, but if you win, what you win is so good that it’s worth buying a ticket.”

Sexton is a New York-area divorce lawyer and the author of the book If You’re In My Office, Its Already Too Late. In his two decades on the job, Sexton’s led more than 1,000 couples through divorce. His bluntness stems from his keen understanding that wedded-bliss can easily go bust.

RELATED: A Year-By-Year Guide to Your Risk of Divorce

So, if you’ve bought or considering buying the ticket Sexton speaks of, what can you do to buck the odds? He says that you have to keep an eye on the little things. The tiny slips and mishaps that, while innocuous, can add up to disaster over time.

“Marriages tend to fall apart in two ways: very slowly and then all at once,” he says. “Just like how people go bankrupt. There’s no single raindrop that’s responsible for the flood, but the flood comes.” Sexton says a lot of people finally step foot into his office because of a big thing such as affairs, impropriety, or financial infidelity. “But those big developments are usually a function of slippage that’s happened over a period of time.”

And while he says you might not actually be act like Dr. Strange and view every possible outcome of your marriage and find the best plan, Sexton does have a variety of suggestions that will lessen the likelihood of stepping into a divorce lawyer’s office. “It’s just like, there’s no way to illness-proof your body,” he says. “But you’d never say, ‘Because I can’t prevent all illness, I might as well smoke cigarettes.’”

ALSO: 7 Reasons Marriages Fail in the First 5 Years

As such, Sexton laid out some trouble spots that can lead all couples to divorce, and how to course correct as quickly as possible.

Avoid Communication Breakdowns

It’s shocking, Sexton says, how often communication is the first thing to go in marriage. Between the stresses of day-to-day life, dealing with work issues, shuttling kids from one practice to the next, in-law visits, and holidays, couples often push addressing issues aside. Eventually, Sexton says, those issues will catch up to you.

“You’re not being candid and blunt with each other about what’s going on in your head and in your heart,” he says. “I think the solution is active communication. Really blunt, candid communication. Because eventually, the truth of your marriage and the truth of how it’s working and not working comes out. I’d rather it come out in a conversation between two people before they’re too far gone than have it come out in a courtroom.”

Don’t Keeping Feelings Bottled Up

One of the many stale platitudes a married man hears on or around his wedding, and continues to hear throughout their marriage, is, “Happy wife, happy life.” That one is often followed by, “There are two words you’ve got to learn, ‘Yes dear!’” While Sexton recognizes that part of those adages speak to the idea of picking your battles, he also says that they can sow seeds of trouble in a marriage.

“They’re a great recipe for people building resentment between each other,” he says. “Because really what they’re saying is, ‘Swallow your feelings, even if you’re unhappy with something or even if something doesn’t sit right with you, just agree with your wife.’”

To avoid that pitfall, he says, there has to be give and take where each person feels like his or her voice is being heard. “It’s like Chris Rock said in his Netflix special, sometimes you’ve got to play the tambourine,” he says. “You don’t always have to be the lead singer in the marriage. Sometimes you’ve just got to be the one playing the tambourine.”

Don’t Let Sex Issues Linger

“I wrote an article recently that basically said that with great intentions, people ruin their sex lives and marriages,” offers Sexton. The way it breaks down is, in a monogamous marriage, both partners know what the other person enjoys sexually and, over the years, build up a sort of “greatest hits” package that they run through during a sexual encounter. As the routines of married life begin to settle and the window of time becomes more and more narrow, these “greatest hits” encounters get squeezed into the schedule whenever space opens up.

“Now think about what you’ve just done,” Sexton says. “With good intentions, you now have a situation where, on roughly the same days or nights, you and your spouse do roughly the same things to each other.” As a result, sex becomes routine, predictable and, if the patterns don’t change over time, possibly nonexistent. The key is noticing this and trying to make a change through, you guessed it, better communication.

Stop Trying to Keep Up With the Insta-Joneses

Social media offers a suite of issues, but what Sexton says is the most pervasive is the untruthful portrayal of life and parenthood it constantly shows you. There was a time when people’s marital role models were their parents and their grandparents, or maybe a happy couple down the street. Now, many people are forming their ideas and opinions based on what they see on Facebook and other social channels.

“What is Facebook?” Sexton asks. “It’s an advertisement for yourself. It’s a curated version of your life. So everyone’s posting the best pictures of the best moment of their marriage. So how would you not look at that and say, “Oh my marriage sucks compared to that’?” It’s important, Sexton says, to remember that what you’re looking at represents people letting you see only the moments and images from their lives and marriages that they want you to see.

Don’t Be An Idiot on Social Media

The other troubling aspect of social media is that it gives you a window through which you can reach out to old girlfriends or boyfriends. There’s a chapter in Sexton’s book called, ‘If You Wanted to Invent an Infidelity-Generating Machine It Would be Called Facebook.’ He’s not wrong.

“Because I have so many clients that I represent whose affairs started on Facebook. In my opinion, Facebook is the most toxic website for relationships that’s out there.”

Sexton says that the problem with social media as it relates to opening the door to inappropriate relationships is that, not only do most platforms encourage you to connect with people, but also that connecting with them over social media gives you plausible deniability. “If you just went up to one of your neighbor’s wives and started talking to her, people would look at you like, ‘Hey, why are you talking to that woman?’” he said. “But, if on Facebook you went, ‘Oh wow, I saw that you guys went to Aruba. Where did you stay? We’re planning a trip there. Now you have plausible deniability as to why you spoke to this person.”

Don’t Ever Forget Why You Got Married

As crazy as it sounds, there are people out there who simply got married because they thought it was what they were supposed to do and only now, years into it, are realizing that they didn’t think things through.

“People very often don’t answer the question, ‘Why am I getting married? What is the problem to which marriage is a solution for me?’,” says Sexton. “People don’t think about that. Its sort of just assumed you’ll get married. Why? ‘Well, because we’ve been together for a while.’ And I think there’s something to be said for thinking about why someone’s getting married.” Sometimes staying married can be as simple as remembering why you said ‘I do’ in the first place.

“Fabulous Fashion” eschews social history, economic history, technological history, and even fashion history. Its focus is solely on the dresses, gowns, and a handful of suits worn by faceless manikins clustered on risers. The groupings are based on formal or material properties, such as shape, color, pattern, and metallic looks.