QDRO Buyout?

[mommytimes4]

QDRO Buyout in CT

I have a QDRO in place from my divorce where I will receive a fixed monthly distribution from my former spouse's pension upon retirement. My former spouse is employed by the State of CT and plans to retire later this year. My former spouse recently approached me about the possibility of 'buying out' my portion of the QDRO with a lump sum payment from assets outside of the pension. Essentially, my former spouse wants to offer me a lump sum payment in exchange for 'voiding' the QDRO. My questions are... Is this even legal/possible? What are the tax implications? What are potential pitfalls or advantages for me under this scenario? Any advice would be greatly appreciated. Thank you

 

[tranquility]

QDRO Buyout in CT

I have a QDRO in place from my divorce where I will receive a fixed monthly distribution from my former spouse's pension upon retirement. My former spouse is employed by the State of CT and plans to retire later this year. My former spouse recently approached me about the possibility of 'buying out' my portion of the QDRO with a lump sum payment from assets outside of the pension. Essentially, my former spouse wants to offer me a lump sum payment in exchange for 'voiding' the QDRO. My questions are... Is this even legal/possible? What are the tax implications? What are potential pitfalls or advantages for me under this scenario? Any advice would be greatly appreciated. Thank you

It is certainly legal. As to the tax ramifications, that is much harder and would depend on the actual facts. I would say you are selling your rights for money. There would be a determination about the value of your rights in comparison to what you exchange them for. I think a difference would be ordinary income. Take all your facts to a tax professional. Without research (Which I would do if you came to me.) I suspect all it will do will accelerate your income. But, that is a suspicion. Think of it so much as a "voiding" as a purchase of your rights.

 

[LdiJ]

QDRO Buyout in CT

I have a QDRO in place from my divorce where I will receive a fixed monthly distribution from my former spouse's pension upon retirement. My former spouse is employed by the State of CT and plans to retire later this year. My former spouse recently approached me about the possibility of 'buying out' my portion of the QDRO with a lump sum payment from assets outside of the pension. Essentially, my former spouse wants to offer me a lump sum payment in exchange for 'voiding' the QDRO. My questions are... Is this even legal/possible? What are the tax implications? What are potential pitfalls or advantages for me under this scenario? Any advice would be greatly appreciated. Thank you

Was a QDRO already submitted to the pension plan administrators? If so, it might be a bit complicated or even very complicated to undo. You should also compare the lump sum he is offering to what you might collect over your life expectancy...and whether you will be disciplined enough to save that lump sum money to be used over that same life expectancy.

Right now you have some guaranteed income for retirement in addition to any Social Security benefits that you might receive. If you end up spending the lump sum in a fairly short amount of time you may find yourself with insufficient retirement income.

 

[tranquility]

Was a QDRO already submitted to the pension plan administrators? If so, it might be a bit complicated or even very complicated to undo. You should also compare the lump sum he is offering to what you might collect over your life expectancy...and whether you will be disciplined enough to save that lump sum money to be used over that same life expectancy.

Right now you have some guaranteed income for retirement in addition to any Social Security benefits that you might receive. If you end up spending the lump sum in a fairly short amount of time you may find yourself with insufficient retirement income.

Yet, I suspect the "It's my money and I want it NOW!" crowd could buy the rights. As to if it comes from the trustee or is just a contractual issue, I don't know. I know I would spend some hundreds or, probably, thousands, for actual advice.

 

[davew128]

Yet, I suspect the "It's my money and I want it NOW!" crowd could buy the rights. As to if it comes from the trustee or is just a contractual issue, I don't know. I know I would spend some hundreds or, probably, thousands, for actual advice.

I'm going to take a contrary opinion and say its tax free under 1041. This is no different than a property settlement for a former spouse's interest in the family home.

 

[LdiJ]

I'm going to take a contrary opinion and say its tax free under 1041. This is no different than a property settlement for a former spouse's interest in the family home.

If other non retirement property is being exchanged for the pension I think I agree.

 

[tranquility]

I'm going to take a contrary opinion and say its tax free under 1041. This is no different than a property settlement for a former spouse's interest in the family home.

The settlement is done. The OP now has rights to a distribution. She will have income when she gets the distribution.

Pretend the OP won the lottery and was going to get $1,000,000 over 20 years. She wanted her money now and sells the rights for $500,000 today. That's not an exchange. I think the exchange portion of 1041 on a divorce has to be within 1 year of the divorce and be included in the settlement. If the parties went back to court and got the settlement changed and they had not been divorced for a year, I would agree with you. I don't think they are within a year of divorce or will there be a reopening of the settlement.

 

[davew128]

The settlement is done. The OP now has rights to a distribution. She will have income when she gets the distribution.

Pretend the OP won the lottery and was going to get $1,000,000 over 20 years. She wanted her money now and sells the rights for $500,000 today. That's not an exchange. I think the exchange portion of 1041 on a divorce has to be within 1 year of the divorce and be included in the settlement. If the parties went back to court and got the settlement changed and they had not been divorced for a year, I would agree with you. I don't think they are within a year of divorce or will there be a reopening of the settlement.

from IRC 1041:

(c) Incident to divorceFor purposes of subsection (a)(2), a transfer of property is incident to the divorce if such transfer—
(1) occurs within 1 year after the date on which the marriage ceases, or
(2) is related to the cessation of the marriage.

As you can see, the one year rule is not absolute. Moreover, there is no correlation between a lottery annuity and a retirement plan, even less so when its part of a divorce.

 

[tranquility]

from IRC 1041:

(c) Incident to divorceFor purposes of subsection (a)(2), a transfer of property is incident to the divorce if such transfer—
(1) occurs within 1 year after the date on which the marriage ceases, or
(2) is related to the cessation of the marriage.

As you can see, the one year rule is not absolute. Moreover, there is no correlation between a lottery annuity and a retirement plan, even less so when its part of a divorce.

http://www.aicpa.org/interestareas/personalfinancialplanning/cpeandevents/downloadabledocuments/20131121-divorcetaxationoutline.pdf

The transfer is related to the cessation of the marriage. Code Section
1041(c)(2). A property transfer is treated as related to the cessation of
the marriage if both of the following conditions apply, namely:
a. The transfer is made pursuant to a divorce or separation instrument
described in Code Section 71(b)(2), (including a modification or
amendment of such decree or instrument) [Note: a transfer occurring
within one year of the date of cessation of the marriage need not be
made pursuant to a divorce or separation instrument. Code Section
1041(c)(1)] and
b. The transfer occurs not more than six years after the date of cessation
of the marriage. Reg. 1.1041-1T(b), Q&A 7. PLR 9306015. The
Regulations include in the term “cessation of the marriage” events
such as annulments and voided marriages. Reg. 1.1041-1T(b), Q&A
8.

They would have to go back and modify the agreement and it be within 6 (Not the "one" I claimed.) years.

Going further edit:
I see it only gets to a presumption and not the facts. On the facts, the presumption can be rebutted:

3. If these conditions are not met, i.e. the transfer is not made pursuant to a
divorce or separation instrument - unless made within one year after the
date of cessation of the marriage - or the transfer is made more than six
years after the date of cessation of the marriage, the transfer is presumed
to be not related to the cessation of the marriage. See, e.g. PLR 9306015.
a. This presumption may be rebutted only by showing that the transfer
was made to accomplish the division of property owned by the
former spouses at the time of the cessation of the marriage.
b. For example, the presumption may be rebutted by demonstrating that
the transfer was not made within the prescribed six year period
because of factors interfering with the earlier transfer of the property,
such as business or legal disputes hindering transfer, or disputes as to
the value of the property at the time of cessation of the marriage, and
by further demonstrating that the transfer was accomplished promptly
after these factors were resolved. Reg. 1.1041-1T(b), Q&A 7; PLRs
9235026, 9644053 (protracted litigation over value and purchase
price) and 200221021(compelling business reasons).

I don't think that would apply to our facts, but, there it is.

 

[mommytimes4]

Thank you... and more information

First, thank you to each of you for taking the time to read and respond to my questions with valuable feedback. It's a bit daunting and overwhelming to deal with what seems like a very complicated matter. I agree that hiring a tax and/or legal professional to handle the matter would be the wise thing to do. However, as a single parent who is about to send two children to college (without assistance from their other parent) I just don't have the resources to hire a professional at this point.

I also want to answer a few of the questions that were asked in the responses in the interest of clarity:

1) The divorce was finalized in 2012.
2) Yes, the QDRO was filed with and approved by the pension plan administrators.
3) The proposed buyout would be funded from non-retirement funds, hence the uncertainty re: taxes.
4) A firm amount or % has not been discussed at this point. If my former spouse and I live for another 20 years (current ages: 55 & 50) the approximate payout over that time would be $140k.

Again, thank you.

 

[Bali Hai]

Was a QDRO already submitted to the pension plan administrators? If so, it might be a bit complicated or even very complicated to undo. You should also compare the lump sum he is offering to what you might collect over your life expectancy...and whether you will be disciplined enough to save that lump sum money to be used over that same life expectancy.

Right now you have some guaranteed income for retirement in addition to any Social Security benefits that you might receive. If you end up spending the lump sum in a fairly short amount of time you may find yourself with insufficient retirement income.

She is asking the question because it sounds like she wants the money NOW. My guess is that there won't be offered an even trade dollar for dollar.