with Matthew Lundy, Esq., Certified Divorce Financial Analyst
Divorce Planning For Financial Assets
Matthew L. Lundy, Esq. and his law firm specialize in handling domestic relations and family law litigation, along with divorce planning and estate planning. He has developed a reputation as a young lawyer with a special skill for handling complicated legal issues. Matthew has been honored as a “Rising Star” by Super Lawyers Magazine and as an “Outstanding Young Lawyer” by the American Registry.
Matt has seen a lot of complicated cases and has helped many deserving individuals get their fair share in retirement. He also addresses the impact of market fluctuations on retirement portfolio values and how a couple should navigate the complicated finances behind divorce. He sheds light on the complexities behind retirement accounts and offers divorce planning tips on how to divide assets, especially equity assets, so you don’t lose out by having to sell when the market is down.
Qualified Domestic Relations Order
Matt explains his specialty, the QDRO, Qualified Domestic Relations Order, a term that often comes up in divorce cases and is a court order that essentially divides up retirement plans for couples going through divorce. Plans include any retirement and pension plans set up by employers in the private sector under the Employee Retirement Income Security Act of 1974 (ERISA).
He says QDROs are complicated because the subject matter of retirement plans is complicated and goes beyond what most people need to know on a routine basis, which is how much they have in the plan, what their holdings are, and a few trading basics. In divorce planning, you have to get very specific about what the plan is and how it’s being divided. It’s not as easy as a simple “divide by two” because it depends on the securities you hold in the plan. He cites the example of a checking account, where the cash value does not fluctuate if you make no transactions, so that is easy to divide. But when a retirement account has a collection of fairly complicated investments—with stocks, options, mutual funds, ETFs, bonds, etc.—values can sharply change within a few hours/days/weeks, so categorizing what is in the portfolio and determining how and when it should be divided is no straightforward task.
Matt’s Most Interesting Case—The Uncompromising Pilot
On Steve’s prompting, Matt says he has seen a lot of interesting cases in divorce planning, in the context of family law.
One case that stands out for him, very early in his career, is where a woman with two children was getting a divorce. Her husband, who was a pilot and made about $200,000 a year, refused to pay any child support or alimony. He wouldn’t even pay for the house and, basically, abandoned everybody and left.
The woman was in dire need of money when she came to Matt’s law firm. They went straight to court. On hearing her case, the judge was absolutely irate with her husband for his behavior and wanted to throw him in jail.
Rather than have him thrown in jail, however, Matt and his team asked the judge to enter a QDRO for the entire balance of the husband’s 401(k), which was about $400,000. The judge agreed and took the entire account and assigned it to her. Essentially, what they did was use the QDRO as an enforcement mechanism for a non-compliant person.
Everyone Loses With A Shrinking Portfolio
Next, Steve wonders what happens when a plan’s assets shrink over the course of a year, say from $500,000 to $250,000. Matt says those are classified as passive gains and losses based on market fluctuations, and each party eats half the loss.
Within the purview of divorce planning, he also talks about the more complicated division of Defined Benefit Plans that factor in issues such as the income stream, periodic cost-of-living adjustments, survivor benefits, early retirement supplements, and more.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: My next guest is Matthew Lundy, Esquire. He was born in South Florida, and he’s developed a reputation as having a special skill for handling complicated legal issues. Matthew has published scholarly articles and conducted seminars for judges, attorneys, and other professionals. He’s been honored as a rising star by Super Lawyers Magazine and an Outstanding Young Lawyer by the American Registry.
But he specializes in an area of law which pertains to certain complexities within divorce, and this why I’ve asked him to join me today. I wish him to talk about one area, in particular, and it’s an area of something called the “Qualified Domestic Relations Order.” Welcome to the show, Matt.
Finally got you in here after two other attempts. Thanks for joining me.
Matthew Lundy: [LAUGH] Thank you very much for having me; I appreciate it.
Steve Pomeranz: So, this is an area of law that if you do get divorced and you have a retirement plan, this word comes up a lot.
The nickname is the QDRO, and, as I said before, the “Qualified Domestic Relations Order.” What is a QDRO?
Matthew Lundy: A QDRO is, basically, a court order that’s entered in a family law case that divides a retirement plan. That’s the short answer to that question.
Steve Pomeranz: Okay, well, are we talking about IRAs or are we talking about more sophisticated retirement plans?
Matthew Lundy: We’re talking about retirement plans that are set up under the Employee Retirement Income Security Act of 1974. Which in normal human speak, that basically means any retirement plan that’s set up by an employer in the private sector.
Steve Pomeranz: And it also is known as ERISA, right?
Matthew Lundy: Correct, that’s right.
Steve Pomeranz: Yeah, so sometimes you’re looking at your brokerage statements or your investment adviser agreements, and it says something about ERISA. So, this is a particular area of the law that has to do with pension plans that are run by private companies.
Matthew Lundy: Exactly.
Steve Pomeranz: Okay, so why are QUADROs so complicated?
Matthew Lundy: QDROs are complicated not because court orders are complicated; they’re complicated because the subject matter of retirement plans is complicated. Most people probably know about as much about their retirement plans to the extent that they can identify what they have. They can say, “I have a 401(k),” or “I have a defined benefit pension plan,” but that’s about all they really know about what they have.
So, what makes the orders complicated is that you have to get very specific about what the plan is and how it’s being divided.
Steve Pomeranz: And what about the division? I mean, if I have a plan that has a certain amount of assets, why can’t I just divide it in half?
Matthew Lundy: The plans are creditor protected. So, whereas something like a checking account…let’s say you look at your checking account on one day, and it has $100,000 in it. Unless you go and take a withdrawal, odds are there’s still going to be $100,000 in it tomorrow, with something like a 401(k).
Steve Pomeranz: Okay.
Matthew Lundy: Even though it has a cash balance, it’s not actually a cash account. It’s a collection of fairly complicated investments, right?
Steve Pomeranz: Right.
Matthew Lundy: And it’s going to be worth something different two hours from now than it’s worth right now. So, categorizing what it is and how it’s being divided and when it’s going to be divided can get pretty tricky because, quite frankly, there isn’t that much understanding of what the asset is.
Steve Pomeranz: Give me an example of a particularly interesting case that you’ve come across in your career.
Matthew Lundy: Well, I’ll tell you, there’s a lot of them, not surprisingly in the family law context. I’ve seen a lot of interesting ones.
But one of the ones that I came into very early into my career…there was a case where a woman was getting a divorce and she had two kids and her husband was a pilot. And he made about $200,000 a year and he refused to pay any child support, he refused to pay any alimony. He wouldn’t pay for the house; he, basically, abandoned everybody and left. So, when the woman came to us, she obviously, was in dire need of money. And when we went to court, the judge was absolutely irate with this gentleman for not making payments as he was supposed to be, and the judge wanted to throw him in jail. And rather than have him thrown in jail, we actually asked the judge to enter a QDRO for the entire balance of his 401(k), which was about $400,000. And the judge was willing to sign that order and the plan actually took the entire account and assigned it to her.
So essentially, what we did, in that case, is we used the QDRO as an enforcement mechanism for a non-compliant person.
Steve Pomeranz: A qualified domestic-relations order. And that’s where that term really comes from, right?
Matthew Lundy: Exactly.
Steve Pomeranz: So, that is a very good example. In one case—and this is an extreme case so it does, I think, go to define the question very well and the answer—but in most cases, I am interested in this factor that if a certain point during the divorce, the assets, the plan assets…let’s say it’s 2007 and the plan assets are worth half a million dollars.
Matthew Lundy: Right.
Steve Pomeranz: And by mid-2008 they’re worth $250,000. What kind of thinking goes on there?
Matthew Lundy: Typically, it’s depending on what state you’re in. Those are called passive gains and losses. That’s the technical speak in family law. The passive gains and losses on that money means the market fluctuations. People typically share a pro rata basis, those market gains and losses. So, if it was worth $200,000, and it dipped to 150 and each party was entitled to half, that means each party would eat $25,000 of loss in that case.
Steve Pomeranz: Okay, sure, well, that makes sense. I think the difference here—and maybe some of the problems that someone can run into—is if they decide to cash out when the market is way down. Now, you’re splitting cash, now you’ve kind of got a little bit of problem.
Matthew Lundy: Well, and so, that really gives you a clear understanding on why there needs to be some kind of financial professional being consulted,
Steve Pomeranz: Yeah.
Matthew Lundy: During the process of the divorce because you want to time that transfer as best as possible so that you don’t receive the minimal amount of money during your divorce if somebody is going through that.
Steve Pomeranz: My guess is Matthew Lundy. He’s an attorney who specializes in this particular area of divorce, called the qualified domestic relations order. And if you, unfortunately, have been in a divorce or are contemplating one, and you ask your attorney to start asking questions about your pension plan, he’s going to stop you, and he’s going to say, “go seek another professional.” They don’t really want to get involved in that.
Matthew Lundy: That’s true.
Steve Pomeranz: I do remember that myself. So, once again, if you have some financial advice perhaps that person would tell you don’t cash out. If you own shares of XYZ you still own those shares, so split the shares, not necessarily the value.
Matthew Lundy: That’s right.
Steve Pomeranz: Would that be an acceptable way to think about it?
Matthew Lundy: I think that’s probably in a lot of cases a very acceptable way to think about it.
Steve Pomeranz: So, again, there’s this timing issue. Are there certain benchmarks or rules as to when this date should be set to actually split the assets?
Matthew Lundy: Well, it really depends. Family law is sort of a very flexible creature in some ways.
It can be whatever the parties agree to the extent that they’re going to agree. If they don’t agree, and they end up having a trial then it would typically be the date that their case is filed in most states.
Steve Pomeranz: Matt, we talked about a 401 case. Those are defined as define contribution plans, what about defined benefit plans? Those are a lot more complicated. How do you split those up because it’s not really a bucket of money you’re talking about, it’s a future benefit?
Matthew Lundy: Correct. Defined benefit plans are probably considered one of the five most complicated assets that people run into in family law cases.
It’s right up there with businesses that people own that have to be valued. It’s not a simple answer. When somebody has a defined benefit plan, I find that they virtually don’t understand what they have at all. So, if you say to most people, “what is a defined benefit plan?”, they won’t really be able to answer that question very clearly. And just so your listeners understand a defined benefit plan, it ultimately turns into some kind of annuity when you reach a minimum age of retirement. So, social security is a defined benefit plan. You can start drawing on it when you turn 62, which would be an early draw under social security.
But the regular age to draw on it is 66, so you can receive a reduced amount at 62 but the regular amount is at 66. What does it include? It includes a stream of income, so that’s something that would be divided. It includes a cost of living adjustment, which is an increase, a periodic increase, that’s intended to reflect the consumer price index.
It’ll include a survivor benefit. And in the case of a private sector pension, they offer certain early retirement supplements, which can be sort of complicated. So, when you run into one of those, the deal is, you need to be as specific as possible. It’s another reason that an attorney like me exists, so that I can come in and say, “okay, legally, this is how this particular asset is divided. And these are the ten things we need to address when we approach a defined benefit pension plan.”
Steve Pomeranz: My guest, Matthew Lundy, is an attorney specializing in “qualified domestic relations orders” or QDROs, and he’s involved in divorce.
More information about Matt can be found at mlundy, L-U-N-D-Y, mlundylaw.com and he’s located in Boca Raton. Thanks so much for joining us, Matt.
Matthew Lundy: Thank you very much, it was great being here, I appreciate it.