The Financial Issues of Divorce

Question 1

After being married for 12 years, Marty and Madeleine are getting a divorce. Marty has a universal life insurance policy with a death benefit of $100,000 and a cash value of $10,000. Marty also has a ten-year term policy with a death benefit of $100,000. Both of these policies were purchased during the marriage and Madeleine is the beneficiary on both policies. What is the asset value of all of the insurance?

Answer 1

The cash value of life insurance is the asset value.

Question 2

Which of the following is something a spouse should NOT consider when going through a divorce?

Answer 2

Hiding assets is unethical and may be illegal. Spouses should never be counseled to hide assets.

Question 3

Marital property is best defined as which of the following?

Answer 3

Marital property is everything earned during the marriage even if it is kept in one spouse’s name.

Question 4

During Tammy’s marriage, she received gifts that included two rings, some books, an antique dresser, and $2,000 from her mother. She put the $2,000 into a joint account with her mother. Which assets are considered Tammy’s separate property?

Answer 4

Everything Tammy received as a gift, including the joint account with her mother, is separate property.

Question 5

Many states would consider property to be marital property if it had which of the following attributes?

Answer 5

In some states, marital property also includes any increase in value of separate property.

Question 6

Which of the following is NOT a way a person could try to hide assets from his or her spouse?

Answer 6

Setting up an account in the spouse’s name to hide assets will not work very well.

Question 7

To discover hidden assets, a CDFA® professional should review tax returns going back how many years?

Answer 7

It is recommended that one look at tax returns for the past five years because there may be assets that an individual is not aware of.

Question 8

When one spouse wants to continue living in the marital home, which factor is the least important to consider?

Answer 8

The primary consideration is whether the spouse can afford to keep the house; the emotional tie one has to the house is irrelevant.

Question 9

Which of the following is a risk that a retired participant may face with his or her pension (defined benefit plan) in a divorce?

Answer 9

Sometimes a pension is divided as part of a property settlement. In some states, the income the employee receives from the pension is used to help calculate spousal support or child support. This means that the recipient spouse gets paid twice from the same asset: he or she receives a share of the pension, then “double dips” by receiving support based on the participant’s share of the pension income.

Question 10

Which of the following is not required to be included in a Qualified Domestic Relations Order (QDRO)?

Answer 10

The name of the alternate payee’s attorney does not have to be included in the QDRO.

Question 11

Nicole, age 48, has been married to Andy for 12 years and has worked for her current company for 19 years. She has received a statement from her company stating that based upon her current years of service and income, she is eligible to receive $1,900 per month at age 65 from her defined benefit plan. Assuming an interest rate of 5%, what is the present value of the marital portion of her plan?

Answer 11

The PV of the marital portion is $70,575

Question 12

Which of the following schedules on a tax return will NOT help the CDFA® professional find hidden assets?

Answer 12

Schedule H is used for household employment taxes.

Question 13

Which of the following should a CDFA® professional review in addition to the spouses’ tax returns?

Answer 13

A CDFA® professional needs to review the 1099s and W-2s related to the tax return.

Question 14

Which of the following strategies can a CDFA® professional suggest to a client to help preserve assets during a divorce?

Answer 14

A CDFA® professional should advise clients to reduce unnecessary expenses.

Question 15

Which of the following resources is NOT useful to discover the existence of unknown or forgotten assets and liabilities?

Answer 15

The monthly mortgage statement only reveals the underlying property and the mortgage amount. It does not disclose any additional assets.

Question 16

Greg and Marsha are getting a divorce. Greg began contributing to his 401(k) plan before he married Marsha. He has been contributing $1,000 per month to his 401(k) and he has $400,000 in it. What kind of property is the 401(k)?

Answer 16

The contributions Greg made before his marriage are separate property; the contributions made during the marriage—and possibly the increase in value of the separate portion—are marital property.

Question 17

Which of the following is NOT a career asset?

Answer 17

The family car is not a career asset.

Question 18

Which state is essentially a community property state, but has exceptions to the typical community property rules?

Answer 18

Wisconsin is essentially a community property state, but there are exceptions to the typical community property rules.

Question 19

Which state is a community property state?

Answer 19

Idaho is a community property state.

Question 20

Which statement best sums up the belief that an ex-spouse deserves enough spousal
support to maintain his or her lifestyle and nothing more?

Answer 20

The Wendt case broke through the long-held belief that “enough is enough,” that a spouse deserved enough to maintain her lifestyle, but nothing more.

Question 21

Which of the following statements best describes how assets are split in a divorce?

Answer 21

Community property states require an equal split of assets.

Question 22

Which of the following is true about community property status?

Answer 22

Any property acquired in a community property state retains its community property status no matter where the couple moves.

Question 23

Which of the following is a true statement regarding property settlement notes?

Answer 23

A property settlement note can be collateralized with a retirement plan using a QDRO.

Question 24

Steve and Heidi agreed to divide their assets equally. Heidi is taking the home, car, and furniture, and Steve is taking his 401(k) and a rental property. What would the financial impact be after five years?

Answer 24

Steve has chosen assets that generally increase in value or produce income. A few years after the divorce, Steve’s net worth will likely exceed Heidi’s and the gap will likely continue to widen.

Question 25

Which of the following individuals should appraise a business that is part of the marital property?

Answer 25

It is imperative to have the business appraised by a qualified appraiser.

Question 26

Which of the following is NOT a common option for the disposition of a business that is part of the marital property?

Answer 26

Unless there is extreme wealth, giving away assets is not usually a financially viable option.

Question 27

Which of the following best describes an equitable property settlement?

Answer 27

Equitable is not the same as an equal division of property.

Question 28

When assets are rolled over from a qualified retirement plan to an IRA, what percentage of taxes is the plan administrator required to withhold?

Answer 28

Assets that are rolled over directly from a qualified plan to an IRA avoid the withholding tax.

Question 29

Which of the following is a characteristic of defined benefit plans?

Answer 29

A defined benefit retirement plan promises to pay the employee a certain amount per month at retirement time; it has no cash value today.

Question 30

Which of the following uses vesting schedules?

Answer 30

Defined contribution plans use vesting schedules.

Question 31

If Bob contributes $1,000 to his retirement debts plan and then quits or is fired, what happens to his retirement plan?

Answer 31

Bob can take the amount he contributed ($1,000).

Question 32

Dave contributes $1,000 to his retirement plan and his employer contributes $1,000 to the plan. If Dave quits and he is 60% vested, what amount is his?

Answer 32

Dave can take the amount he contributed ($1,000) plus 60% of the $1,000 his employer contributed ($600).

Question 33

If Kurt takes a distribution out of his retirement plan before he is 591⁄2, which of the following will occur?

Answer 33

Generally, a distribution made before a participant is age 59 1⁄2 is an early distribution and subject to a 10% penalty. There are some exceptions to this rule.

Question 34

When a distribution is paid from a qualified retirement plan, what is the percentage of taxes that the plan administrator must withhold?

Answer 34

The Unemployment Compensation Amendment Act (UCA), which took effect in January 1993, states that any monies taken out of a qualified plan or tax-sheltered annuity are subject to 20% withholding.

Question 35

When a distribution is paid from an IRA, the trustee must withhold what percentage of taxes?

Answer 35

An IRA is not considered a qualified plan and a distribution may take place without withholding 20% for taxes.

Question 36

If a qualified retirement plan is being transferred to a non-participant spouse pursuant to a QDRO, payment of a tax penalty can be avoided if a distribution is taken by the:

Answer 36

The non-participant spouse is exempt from the penalty, pursuant to IRC §72(t)(2)(C), if he or she takes a one-time distribution prior to transferring the retirement assets to a separate account.

Question 37

What is the tax penalty for taking an early distribution from a retirement plan?

Answer 37

Generally, a distribution made before a participant is age 59 1⁄2 is an early distribution and subject to a 10% penalty.

Question 38

Joe and Barb, both age 52, are divorcing and have agreed to split Joe’s 401(k) equally. The value of the 401(k) is $200,000. Barb had the plan administrator transfer $80,000 to her IRA and distribute $20,000 directly to Barb. Which of the following will occur as a result of this distribution?

Answer 38

Barb will pay income tax on the distribution, but no tax penalty because she qualified under IRC §72(t)(2)(C).

Question 39

Which of the following is NOT a true statement regarding survivor benefits from a pension plan?

Answer 39

The plan administrator will assume that the participant is taking the single life option unless instructed otherwise.

Question 40

If the plan administrator transfers the retirement assets directly to the IRA trustee, which of the following will occur upon the transfer?

Answer 40

There is no withholding tax when assets are transferred from a qualified plan to an IRA.

Question 41

Which of the following accounts will NOT issue statements with the current account value?

Answer 41

The value of a defined benefit plan comes from the company’s guarantee to pay based on a predetermined plan formula. There is no account balance.

Question 42

Which of the following methods of dividing pension benefits allows the court to decide how to divide the pension at some point in the future?

Answer 42

Reserved jurisdiction means that the court retains the authority to divide the pension plan at some point in the future.

Question 43

Which of the following assets promises to pay the owner a certain amount per month at retirement time?

Answer 43

A defined benefit retirement plan promises to pay the employee a certain amount per month at retirement time.

Question 44

Which of the following methods of dividing pension benefits should be a last resort?

Answer 44

Reserved jurisdiction should be considered a last resort, as it leaves both spouses in limbo with regard to planning for their future. The court retains authority to order distributions at some point in the future.

Question 45

A QDRO is used as a means to divide which of the following?

Answer 45

A QDRO is used to divide qualified retirement assets between the spouses. This amount can be from zero to 100%, depending on how they have divided the other assets.

Question 46

Which of the following is the biggest detriment if one owns a 401(k) plan versus a company pension?

Answer 46

There is no cost of living adjustment to a 401(k) plan.

Question 47

The numerator of the coverture fraction is the total number of years:

Answer 47

The numerator of the coverture fraction is the total number of years married while working.

Question 48

When will some companies allow the ex-spouse to start receiving pension benefits?

Answer 48

Some pension plans will permit the alternate payee to begin receiving benefits before the participant retires.

Question 49

Tim, age 38, has worked for his company for 16 years. He has decided to divorce Erin after an 18-year marriage. His company says he is eligible for full retirement at age 62 and will receive $2,800 per month based on his current years of service and income. Assuming an interest rate of 4.8%, what is the present value of the marital portion of his plan?

Answer 49

The PV is $113,535

Question 50

Jim, age 52, has worked for his company for 20 years and is planning to retire at age 65 on a pension that will pay him $2,150 per month based on his current years of service and income. The benefit will not increase for inflation. He has been married to his current wife for 17 years. Assuming an interest rate of 5.4%, what is the present value of the marital portion of his plan?

Answer 50

We find that the present value of the marital portion is $103,728.

Question 51

Mike, age 54, has been married for 28 years. He has also worked for his current company for 28 years. He received a statement from his company stating that based on his current years of service and income, he is eligible to receive $2,600 per month at age 62 from his defined benefit plan. His plan is protected from inflation. Assuming an interest rate of 6% and an inflation rate of 3%, what is the present value of the marital portion of his plan?

Answer 51

We find that the PV (present value) of Mike’s inflation-protected pension is $256,831

Question 52

Which of the following employee benefits must be transferred to an alternate payee with a QDRO?

Answer 52

A 401(k) plan is a qualified plan and a QDRO must be used to transfer it to an alternate payee.

Question 53

What does a QDRO do?

Answer 53

A QDRO tells the administrator both how the assets in the plan are to be divided and what happens to the assets when either party dies.

Question 54

When did the QDRO come into existence?

Answer 54

The REA of 1984 provides that all qualified plans subject to ERISA may segregate assets for the benefit of an alternate payee through a court order known as a Qualified Domestic Relations Order (QDRO).

Question 55

The denominator of the coverture fraction is the total number of years that the person:

Answer 55

The denominator of the coverture fraction is the total number of years worked until retirement.

Question 56

Which of the following is NOT an option that should be recommended to a couple regarding their marital home?

Answer 56

Letting the home go into foreclosure is generally not a recommendation that should be made.

Question 57

Wilma is transferring her interest in the marital residence to her former husband, Fred, by quitclaim deed. Which of the following will happen to the mortgage?

Answer 57

Even though Wilma’s name is off the deed, it remains on the mortgage. Wilma is still liable if Fred decides to stop making the payments.

Question 58

Sally and Marty are divorcing. Sally is going to buy out Marty’s interest in their marital home. Which of the following is typically the best way to accomplish this?

Answer 58

The best way to accomplish this would be to require Sally to refinance the mortgage and Marty to take another asset equal in value to the equity in the home.

Question 59

If both spouses are going to continue to own the home jointly after the divorce, although only one of them will continue to live in the house, then the resident spouse should pay 100% of which of the following expenses?

Answer 59

Minor repairs should be paid by the resident spouse, since his or her use may have created the need for these repairs.

Question 60

Adam and Kim are divorced. Adam was awarded use of their jointly-owned home for three years. It has been three years and Adam and Kim have sold the home for $920,000. The basis was $360,000, the mortgage was $420,000, and the selling expenses were $35,000. What is Kim’s taxable capital gain?

Answer 60

$12,500

Question 61

Which of the following is NOT considered to calculate the cost basis of the family home?

Answer 61

Repairs made to the house are not considered in calculating the cost basis.

Question 62

What amount of gain can single taxpayers generally exclude upon the sale of their principal residence?

Answer 62

Single taxpayers can exclude $250,000 from capital gain.

Question 63

Steve and Lori have a home worth $560,000. They bought it when they got married 25 years ago for $185,000. They refinanced their mortgage several years ago and the current mortgage is $420,000. Lori decided to keep the home. She later decides to sell it with 5% sales costs. Using today’s value, what is the amount of taxable gain Lori will report on her tax return?

Answer 63

$97,000

Question 64

How often can the exclusion from capital gains tax upon the sale of the principal residence generally be used?

Answer 64

The exclusion is allowed for one sale every two years.

Question 65

If the non-working spouse is more than 60 years old and has limited assets but wants to keep the house, what is the best way to handle the house post-divorce?

Answer 65

The non-working spouse should keep the house only if it would cost more to rent or buy another suitable home. He or she also must factor into the equation the value of the home versus selling it and generating income from the proceeds.

Question 66

John owned his home for two years prior to marrying Linda. John and Linda just divorced after only one year of marriage. John transferred his interest in the residence to Linda pursuant to the terms of the divorce. Three months later, Linda received an offer to purchase the home for $800,000. Linda lived in the home for one year and three months; John lived in the home for three years. John paid $350,000 for the home, which was worth $750,000 when they divorced. How will any capital gains on the sale of the
marital residence be reported and in what amount?

Answer 66

Linda’s gain is $450,000, which is the difference between the original purchase price and the sale price ($800,000–$350,000).

Question 67

Brett bought his house for $160,000 before he married Kelly. They put improvements into the house totaling $40,000. They also made some repairs around the house totaling $10,000. Kelly is getting the house, which is now worth $350,000. What is Kelly’s cost basis of the house?

Answer 67

To calculate the cost basis of a home, add the cost of improvements to the purchase price of the home.

Question 68

Which of the following factors is generally NOT considered when a judge awards spousal support?

Answer 68

The income and resources of each spouse’s parents are irrelevant to calculating spousal support.

Question 69

Which of the following does a judge generally consider when awarding child support?

Answer 69

All states have child support guidelines, which help the courts decide the amount of child support to be paid. The courts in each state have the power to deviate from the child support guidelines and award a different amount; the state statutes set out the acceptable deviations.

Question 70

Sara has never worked and has $5,200 in monthly expenses. Her husband earns $265,000 per year. Sara is a candidate for spousal support in which of the following circumstances?

Answer 70

Sara is a candidate for spousal support based on her need and her husband’s ability to pay.

Question 71

Which of the following would be appropriate criteria for a judge to use to determine the need for spousal support?

Answer 71

To determine the need for spousal support, the judge considers the recipient’s expenses less the recipient’s income.

Question 72

Which of the following would be appropriate criteria for a judge to use to determine the ability to pay spousal support?

Answer 72

To determine the ability to pay spousal support, the judge considers whether the payor can afford to pay what is needed and still have enough to live on.

Question 73

Which of the following circumstances would trigger the recapture rules if spousal
support ceases?

Answer 73

Spousal support stopping upon the cohabitation of the recipient is not an exception to the recapture rules.

Question 74

Tony, age 45, has been married to Dawn for 24 years and has worked for his current company for 21 years. Based on his current years of service and income, he is eligible to receive $2,850 per month at age 65 from his defined benefit plan that is protected from inflation. Assuming an interest rate of 5% and an inflation rate of 3%, what is the present value of the marital portion of his plan?

Answer 74

We find that the present value of Tony’s inflation-protected pension is $138,746.

Question 75

Rehabilitative maintenance provides which of the following types of financial help?

Answer 75

The purpose of rehabilitative maintenance is to provide temporary financial help until the recipient is able to earn enough to be self- sufficient.

Question 76

Which of the following would qualify as spousal support?

Answer 76

Support payments to the ex-spouse pursuant to a court order qualify as spousal support.

Question 77

Sara asks Mike to paint her house in lieu of one month’s spousal support payment of $800. Which of the following statements is true?

Answer 77

Mike cannot substitute a service for a payment to his ex-spouse pursuant to a court order, so he cannot deduct $800 as spousal support.

Question 78

Jane asks her ex-husband George to pay her additional spousal support in the amount of $500 until she finds a new job. Which of the following is the tax treatment of the payment?

Answer 78

George cannot deduct the extra $500 as spousal support because it was not a payment to his ex-spouse pursuant to a court order.

Question 79

If Mary’s divorce was final on December 18, 2014, what is her filing status for 2014?

Answer 79

Mary can file as either single or head of household. If Mary has a dependent child who lives in her household, and if she provides more than half of the child’s support, then she would qualify as head of household.

Question 80

Keith was ordered to pay Cindy spousal support for five years. They have two children. Which of the following scenarios will trigger the recapture rules?

Answer 80

Pursuant to IRC §71(f)(1)(B), if payments drop by more than $15,000 in the first three years, recapture rules are triggered.

Question 81

Recapture applies in which of the following situations?

Answer 81

A decline in spousal support of $20,000 in year three would trigger recapture.

Question 82

Which of the following describes the relationship between child support and maintenance and how child support changes?

Answer 82

Only when the amount of child support is dependent on spousal support does this apply.

Question 83

Which of the following is always modifiable?

Answer 83

Since circumstances can change after the divorce is final, child support is always modifiable.

Question 84

How often can the custodial parent transfer the tax exemption to the non-custodial parent?

Answer 84

The tax exemption can be transferred to the non-custodial parent for one or more years using a written waiver or IRS Form 8332. Once the custodial parent has executed the waiver, the non-custodial parent must attach the form to his or her income tax return. If the waiver is for more than one year, a copy of the form must be attached to the non- custodial parent’s return each year.

Question 85

Which of the following is a true statement regarding the re-characterization of support?

Answer 85

Spousal support payments are re-characterized as child support when spousal support is reduced not more than six months before or after the date on which the child reaches age 18, 21, or the age of majority in their state.

Question 86

The multiple-reduction rule applies when children are between 18 and 24 inclusively in which of the following situations?

Answer 86

Spousal support payments are re-characterized as child support when the spousal support payments are to be reduced on two or more occasions that occur not more than one year before or after each child reaches a certain age; if that happens, it is presumed that the amount of the reduction is child support. The age at which the reduction occurs must be between 18 and 24, inclusive, and must be the same for each of the children.

Question 87

Margaret, who just turned age 65, was married first to Louis for 15 years and then to Harold for 12 years. She has not remarried since divorcing Harold. Louis, age 66, is receiving $1,250 per month from Social Security. Harold, age 67, is receiving $1,080 per month. Margaret has earned a benefit from Social Security of $820 per month. What is the highest Social Security benefit that Margaret is currently eligible to receive?

Answer 87

Margaret can only take benefits from one account, so she must choose which account she will take benefits from: $820 from her own account, $625 from Louis’s account, or $540 from Harold’s account. Obviously, she should take benefits from her own account, which would pay her $820 per month.

Question 88

How many ex-spouses may collect on one worker’s Social Security retirement benefits, assuming all other requirements are met?

Answer 88

There is no limit on the number of wives who can collect Social Security benefits. As long as he is married to each one for ten years or longer, they each get half of his Social Security benefit.

Question 89

Bob (age 65) and Sally (age 57) divorced after ten years of marriage. Bob received Social Security of $1,000 per month. Sally’s Social Security benefit will be $750 per month at retirement. Bob died shortly after the divorce. How much will Sally be able to collect from Social Security at the time of Bob’s death?

Answer 89

Sally does not qualify for widow’s benefits because has not reached the age of 60

Question 90

Gary works for an employer who has 20 or more employees. Following his divorce from Martha, how many months will Martha be eligible for COBRA insurance coverage?

Answer 90

Since there are 20 or more employees, she is eligible for COBRA for 36 months.

Question 91

When was The COBRA law passed?

Answer 91

The Consolidated Omnibus Budget Reconciliation Act (COBRA) law was passed in 1986.

Question 92

Dave is ordered to pay lifetime spousal support and child support payments to his ex- wife, Sheila. Life insurance would be required in which of the following situations?

Answer 92

Life insurance is only required if the judge orders it. It can be used to protect both child support and spousal support payments.

Question 93

Life insurance is often a requirement in a divorce decree and should be obtained at which of the following times?

Answer 93

Insurance should be obtained as soon as the parties have an idea it is required. If the spouse cannot get insurance (for health reasons, etc.), the settlement can be changed to make up for the lack of insurance.

Question 94

Which of the following types of bankruptcy allows for the liquidation of all assets to pay off debt and then the remainder of the unpaid debt is forgiven?

Answer 94

Chapter 7 bankruptcy allows an individual to liquidate all of the assets and use the proceeds to pay off debts, erasing the debts that cannot be paid in full.

Question 95

Alex and Kim have a joint bank account with $25,000 in it, an ABC credit card with a balance of $2,500, and an XYZ credit card with a balance of $2,500. These are their only assets and debts. Which of the following divisions of assets and debts makes the most financial sense?

Answer 95

The best option is for them to pay off the credit cards. That way, each will not be able to affect the other’s credit post-divorce.

Question 96

Matt and Claire have joint credit card debt of $8,000. Claire charged $6,000, and Matt charged $2,000 on the card. The divorce decree states that Matt will pay off the credit card debt. Who is liable for the debts?

Answer 96

This is a joint debt, and they will both be liable to the credit card company. However, Matt will be the one that must make the payments according to the judgment.

Question 97

Which of the following can be discharged in bankruptcy?

Answer 97

Property settlement notes, especially unsecured notes, are almost always discharged in bankruptcy.

Question 98

Gerald was ordered to carry life insurance to protect the lifetime spousal support he was paying to Madge. Which of the following options would offer Madge the LEAST protection?

Answer 98

The policy at work can be terminated or the beneficiary can be changed. This offers the least protection.

Question 99

In helping clients reach an equitable property settlement, which of the following should a CDFA® professional consider?

Answer 99

Both appreciating assets and depreciating assets should be considered.

Question 100

What does the Pension Benefit Guaranty Corporation (PBGC) do?

Answer 100

The Pension Benefit Guaranty Corporation (PBGC), which is a federal corporation, announces the monthly interest rates for the following month. The rate used to calculate the present value of pension plans is based on average annuity rates.