Ensuring maintenance payments despite premature death

Dear Gabby,

My client Sarah is getting a divorce. Sarah and her husband Tom have been married for 23 years and although she had a great career, Tom was making more and more money. Under the proposed agreement, Tom is obligated to pay Sarah alimony for ten years. Sarah relies on her support to achieve her financial goals. What happens if Tom dies before the end of the ten-year term?

Sam L, Texas

Dear Sam,

In most states, alimony is based on the financial needs of the recipient and the ability of the payer to pay. If the payer dies, the alimony payment ceases. One of the most effective ways to protect maintenance against the risk of premature death is life insurance.

Using insurance to secure alimony involves purchasing life insurance on the life of the payor (in this case, Tom's), naming the alimony recipient (Sarah) as the beneficiary. This ensures that Sarah will continue to receive financial support from the life insurance proceeds in the event of Tom's death.

That's how it's done:

1. Determine the amount: Calculate the amount of life insurance coverage needed to replace Sarah's support payments in the event of Tom's death. Consider factors such as the length of alimony payments (10 years), Tom's lifestyle and health, and Sarah's financial needs.

2. Select the policy: Choose a life insurance policy that fits your coverage needs and budget. Options include term life insurance, which provides protection for a specified period of time, or permanent life insurance, which provides lifetime protection as long as premiums are paid.

3. Name the alimony recipient as the beneficiary: As the alimony recipient, Sarah would be named as the life insurance beneficiary. This ensures that Sarah receives the death benefit proceeds when Tom dies.

4. Pay premiums: Make sure life insurance premiums are paid regularly to maintain coverage. Sarah can request that the insurance company notify her if the policy is in danger of lapsing due to non-payment of premiums.

5. Make records: Both parties should maintain life insurance records, including the policy number, coverage amount, and insurance company contact information.

6. Check regularly: Review life insurance annually to ensure coverage remains appropriate and beneficiary designation has not been changed. Sarah and Tom can adjust the coverage over time to reflect the reduction in maintenance due as the termination date approaches. Sarah can include a clause in the divorce agreement that requires Tom to provide proof of insurance at least once a year.

By taking out life insurance to cover maintenance, Tom can protect Sarah financially in the event of his early death, ensuring that she has the resources she needs.

Dear Gabby,

I manage my client's IRA. He is getting a divorce and has agreed to give his wife half. How do I split the account?

Vera H., Wisconsin

Dear Vera,

Dividing an individual retirement account during a divorce requires a special process to ensure it is done correctly and in a tax-efficient manner. Here is a general overview:

Key Concept: Transfer Incident to Divorce

• IRAs are divided by a Transitional incident to divorce (TID)which allows tax-free transfers between spouses.
• This is different from qualified retirement plans such as 401(k)s, which use Qualified Domestic Relations Orders (QDROs).

Steps involved:

1. Division agreement:
   1. The divorce decree or settlement agreement must be specified explicitly the IRA transfer as a TID.
   1. The agreement should list the receiving spouse's specific account information, transfer amount, and IRA information (if already established). If the recipient does not have an IRA account, they must open one.
2. Transfer of funds:
   Once the divorce decree is finalized, the document is presented to the IRA custodian (the bank or financial institution that holds the IRA account).

The custodian then facilitates the transfer directly between the IRAs, following the instructions of the court order.

• Tax implications: Complying with the TID process ensures that the transfer is tax-free. Any other method of dividing the IRA (such as withdrawing funds and distributing them as cash) could result in tax penalties.

Gabrielle Clemens is a divorce financial planning expert and author of Marriage Is about Love, Divorce Is about Money.

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