ORANGE COUNTY BAR ASSOCIATION FAMILY LAW SECTION WEBINAR QDROs, Fluctuating Markets, and COVID-19 Thursday, April 23, 2020 COVID‐19 QDRO TOPICS David T. Ruegg and John Madden IRMO Janes 217 Cal.Rptr.3d 916 (Cal. Ct. App. 2017) Stipulated agreement awarded Wife a fixed dollar amount of $113,392 from husband’s 401(k) in March 2010. In 2014 Wife requested a QDRO and that gains/losses on her interest be factored into the QDRO. Husband claimed that no gains/losses should be factored in because this was an JUDGMENT equalization award. Court: Wife should receive gains on her interest from March LANGUAGE: BE 2010 to the date of transfer. Not equitable for Husband to keep CAREFUL the gains because a QDRO had not yet been processed to move Wife’s interest. ABOUT YOUR NOTE: This case came out of 4th Appellate District, Division Three. Another case, In re Marriage of Heggie (2002) 99 FIXED DOLLAR Cal.App.4th 28, 120 Cal.Rptr.2d 707 out of 4th Appellate District, Division Three, comes to a different conclusion. The AWARDS rapid change in value over a short period of time does not require an adjustment of the award. The distinguishing feature between these two cases seems to be the passage of time. Best practice‐specify if market adjustment should apply and if so from what valuation date. Normal Early Withdrawal Rules: 10% Federal penalty ON TOP of ordinary income rates. No penalties if cash out is pursuant to a QDRO. See IRC §72(t)(2)(c). However, the cash out will be treated as ‘ordinary income’ for purposes of income DEFINED taxes. A 20% mandatory IRS withholding for CONTRIBUTION: estimated taxes will apply. Account holder can not ‘cash out’ via QDRO under CASHING OUT ERISA. However, Parties are free to discuss “side agreements.” (Agreement to pay ‘out spouse’ more AND THE QDRO than community entitlement with agreement to EXCEPTION ‘pay back’ employee spouse the net of any overpayment) QDRO ‘cash out’ exception does not apply to IRA accounts. See IRC §72(t)(3)(A). Strategy if possible‐Complete IRA rollover to 401k FIRST, then use the cash out exception. DEFINED CONTRIBUTION: OFFSETTING, EQUALIZING AND BUYOUTS, OH MY! Offsets: Let's just total up the community in both retirement accounts and only divide the larger account with an adjusted percentage. It's simple math‐let's not complicate things with more QDROs! What can go wrong? When you offset‐consider the fact that you are mathematically making two accounts equal in terms of the rate of return‐when in reality‐they are not equal. You could be allocating a large share of ‘better performing’ investments to one party and a large share of ‘crummy investments’ to the other! (See Handout) Equalizations: My client owes $10,000 in child support arrears and $40,000 from a buyout of the family residence. Let's just take an additional $50,000 from the tax deferred 401(k) plan. That’s a fair trade, right? Oh and let’s stipulate that the QDRO attorney will figure out how to take out the money tax free‐I hear QDRO attorneys can do that sort of thing. What can go wrong? In this scenario‐you are combining a post tax child support obligation, a capital tax asset house, and a pre‐tax 401(k) and ‘mashing’ them all together, all while ignoring any tax implications. Buyout of Spousal Support: Consider whether spousal support will or will not be deductible when doing a buyout against a pre‐tax/deferred tax asset. Consider‐In re Marriage of Fonstein (1976) 17 Cal.3d 738 does not allow the Court to consider tax ramifications that are not immediate and specific. ACTUAL VALUE VS ESTIMATED VALUE‐ UNDERSTANDING ACTUARY ‘LUMP SUM VALUES’ Actuaries are used to calculate the lump sum values of streams of payments. If someone offered you a choice between $100,000 today OR $500/month for the rest of your life‐what would you need to know to make the decision? Answer: Your Date of Death. “Tell me when you plan to die and I’ll tell you the value of these benefits.” Actuaries use ‘death tables’ and ‘discount rates’ to determine what is better: $500/month for the rest of your life or $100,000 today. Example: If you are 35 years old‐likely $500/month is the smarter decision. If you are 85 years old, likely $100,000 today is the smarter decision THANK YOU! David T. Ruegg, QDRO Attorney Law Offices of Ruegg & Ruegg 19510 Van Buren Blvd., Ste #488 Riverside, CA 92508 Telephone: (951) 523‐7376 Fax: (855) 880‐0098 [email protected] John Madden, Valuation Expert Moon, Schwartz & Madden 3333 Vincent Ave., Ste 260 Pleasant Hill, CA 94523 Telephone: (925) 258‐7100 [email protected] 1 of 2 Tool Created By Law office of David T. Ruegg (951) 523‐7376 [email protected] For questions on how to use this Tool, email: [email protected] (See tabs below for with/without statements) Enter applicable amounts above the black line. Date of Marriage: 1/1/2000 Date of Separation: 1/1/2010Valuation Date) Note: For use during marriage; assumes contributions are community property and split 50/50 Date Of Statement: Beginning Value$ 10,000.00 1/1/2000 Contributions Ending Balance Date of Statement: Period $ 3,134.00 $ 15,000.00 1/1/2001 Period $ 5,835.00 $ 20,000.00 1/1/2002 Period $ 5,000.00 $ 30,000.00 1/1/2003 Period $ 10,000.00 $ 50,000.00 1/1/2004 Period $ 100.00 $ 51,000.00 1/1/2005 Period $ 5,000.00 $ 60,000.00 1/1/2006 Period $ 100.00 $ 55,000.00 1/1/2007 Period $ 500.00 $ 56,000.00 1/1/2008 Period $ 100.00 $ 56,000.00 1/1/2009 Period $ 400.00 $ 60,000.00 1/1/2010 2 of 2 Trace Party 1 Party 2 Total Party 1 % Party 2 % Period 1 Balance$ 10,000.00 $ ‐ $ 10,000.00 100.00% 0.00% Contributions$ 1,567.00 $ 1,567.00 $ 3,134.00 Gains/Losses$ 1,866.00 $ ‐ $ 1,866.00 Period 2 Balance$ 13,433.00 $ 1,567.00 $ 15,000.00 89.55% 10.45% Contributions$ 2,917.50 $ 2,917.50 $ 5,835.00 Gains/Losses$ (747.77) $ (87.23) $ (835.00) Period 3 Balance$ 15,602.73 $ 4,397.27 $ 20,000.00 78.01% 21.99% Contributions$ 2,500.00 $ 2,500.00 $ 5,000.00 Gains/Losses$ 3,900.68 $ 1,099.32 $ 5,000.00 Period 4 Balance$ 22,003.41 $ 7,996.59 $ 30,000.00 73.34% 26.66% Contributions$ 5,000.00 $ 5,000.00 $ 10,000.00 Gains/Losses$ 7,334.47 $ 2,665.53 $ 10,000.00 Period 5 Balance$ 34,337.88 $ 15,662.12 $ 50,000.00 68.68% 31.32% Contributions$ 50.00 $ 50.00 $ 100.00 Gains/Losses$ 618.08 $ 281.92 $ 900.00 Period 6 Balance$ 35,005.96 $ 15,994.04 $ 51,000.00 68.64% 31.36% Contributions$ 2,500.00 $ 2,500.00 $ 5,000.00 Gains/Losses$ 2,745.57 $ 1,254.43 $ 4,000.00 Period 7 Balance$ 40,251.53 $ 19,748.47 $ 60,000.00 67.09% 32.91% Contributions$ 50.00 $ 50.00 $ 100.00 Gains/Losses$ (3,421.38) $ (1,678.62) $ (5,100.00) Period 8 Balance$ 36,880.15 $ 18,119.85 $ 55,000.00 67.05% 32.95% Contributions$ 250.00 $ 250.00 $ 500.00 Gains/Losses$ 335.27 $ 164.73 $ 500.00 Period 9 Balance$ 37,465.42 $ 18,534.58 $ 56,000.00 66.90% 33.10% Contributions$ 50.00 $ 50.00 $ 100.00 Gains/Losses$ (66.90) $ (33.10) $ (100.00) Period 10Balance$ 37,448.52 $ 18,551.48 $ 56,000.00 66.87% 33.13% Contributions$ 200.00 $ 200.00 $ 400.00 Gains/Losses$ 2,407.40 $ 1,192.60 $ 3,600.00 Ending Balance$ 40,055.93 $ 19,944.07 $ 60,000.00 66.76% 33.24% Note: Allocation of contributions maybe different depending upon the period before, during and after the date of marriage, marriage and date of separation. Please contact David Prenovost, CPA for any questions regarding this worksheet at [email protected] 1 of 2 Tool Created By Law office of David T. Ruegg (951) 523‐7376 [email protected] For questions on how to use this Tool, email: [email protected] (See tabs below for with/without statements) Enter applicable amounts above the black line. Date of Marriage: 12/31/1990 Date of Separation: 12/31/1999 Date of Valuation: 10/1/2000 Note: For use after marriage; assumes contributions are separate property of contributing spouse Date Of Statement: Beginning Value$ 39,888.15 12/31/1999 Contributions Ending Balance Date of Statement: Period 1$ 21,111.85 $ 60,000.00 1/1/2000 Period 2$ 1,000.00 $ 62,000.00 2/1/2000 Period 3$ 1,000.00 $ 65,000.00 3/1/2000 Period 4$ 1,000.00 $ 70,000.00 4/1/2000 Period 5$ (1,000.00) $ 69,000.00 5/1/2000 Period 6$ 5,000.00 $ 73,000.00 6/1/2000 Period 7$ 100.00 $ 85,000.00 7/1/2000 Period 8$ 500.00 $ 90,000.00 8/1/2000 Period 9$ 200.00 $ 92,000.00 9/1/2000 Period 10$ 400.00 $ 100,000.00 10/1/2000 2 of 2 Trace Party 1 Party 2 Total Party 1 % Party 2 % Period 1 Balance$ 19,944.08 $ 19,944.08 $ 39,888.15 50.00% 50.00% Contributions$ 21,111.85 $ ‐ $ 21,111.85 Gains/Losses$ (500.00) $ (500.00) $ (1,000.00) Period 2 Balance$ 40,555.93 $ 19,444.08 $ 60,000.00 67.59% 32.41% Contributions$ 1,000.00 $ ‐ $ 1,000.00 Gains/Losses$ 675.93 $ 324.07 $ 1,000.00 Period 3 Balance$ 42,231.86 $ 19,768.14 $ 62,000.00 68.12% 31.88% Contributions$ 1,000.00 $ ‐ $ 1,000.00 Gains/Losses$ 1,362.32 $ 637.68 $ 2,000.00 Period 4 Balance$ 44,594.18 $ 20,405.82 $ 65,000.00 68.61% 31.39% Contributions$ 1,000.00 $ ‐ $ 1,000.00 Gains/Losses$ 2,744.26 $ 1,255.74 $ 4,000.00 Period 5 Balance$ 48,338.43 $ 21,661.57 $ 70,000.00 69.05% 30.95% Contributions$ (1,000.00) $ ‐ $ (1,000.00) Gains/Losses $ ‐ $ ‐ $ ‐ Period 6 Balance$ 47,338.43 $ 21,661.57 $ 69,000.00 68.61% 31.39% Contributions$ 5,000.00 $ ‐ $ 5,000.00 Gains/Losses$ (686.06) $ (313.94) $ (1,000.00) Period 7 Balance$ 51,652.37 $ 21,347.63 $ 73,000.00 70.76% 29.24% Contributions$ 100.00 $ ‐ $ 100.00 Gains/Losses$ 8,420.04 $ 3,479.96 $ 11,900.00 Period 8 Balance$ 60,172.41 $ 24,827.59 $ 85,000.00 70.79% 29.21% Contributions$ 500.00 $ ‐ $ 500.00 Gains/Losses$ 3,185.60 $ 1,314.40 $ 4,500.00 Period 9 Balance$ 63,858.01 $ 26,141.99 $ 90,000.00 70.95% 29.05% Contributions$ 200.00 $ ‐ $ 200.00 Gains/Losses$ 1,277.16 $ 522.84 $ 1,800.00 Period 10 Balance$ 65,335.17 $ 26,664.83 $ 92,000.00 71.02% 28.98% Contributions$ 400.00 $ ‐ $ 400.00 Gains/Losses$ 5,397.25 $ 2,202.75 $ 7,600.00 Ending Balance$ 71,132.42 $ 28,867.58 $ 100,000.00 71.13% 28.87% Note: Allocation of contributions maybe different depending upon the period before, during and after the date of marriage, marriage and date of separation.