1. Believing that your spouse will be “fair” in the division and distribution of community property
Many spouses will attempt to argue with his\her spouse that they have very little to give upon dissolution. The fact is that “deceitful people are deceitful“ and are very adept at hiding or sheltering assets and crying poor mouth. Of course, lawyers advise clients on how to legally conceal the real value of things. You need a skilled attorney to be able to decipher and calculate the real value of things in order to negotiate a “just and equitable” division of community property.
A word of caution: In these difficult economic times, home values are reduced and many are underwater. This means that the equity has been substantially reduced in many cases. Equity is the difference between the value of the property versus the debt on the property. It‘s difficult to wrap one’s mind around this idea as the reduction in equity does not reduce the mortgage payment nor does one get a tax deduction on your income tax return. It‘s truly a “paper profit” or a “paper loss.” For example, lets assume a house was purchased for $750,000.00 in 1995 on a 30-year mortgage. There are three scenarios for calculating this:
1) Assume the house is worth $900,000.00 in 2012 and its debt is $700,000.00. In this case, the equity is $200,000.00 and the split is $100,000.00 per spouse.
2) Assume the house is worth $750,000.00 in 2012 and its debt is $700,000.00. In this case, the equity is only $50,000.00, which can be split into $25,000.00 for each spouse.
3) Assume the house is worth $600,000.00 in 2012 and its debt is $700,000.00. In this case, it has a negative equity of $100,000.00, which can be split into a debt of $50,000.00 for each spouse. This is not a pleasant thing to look at especially after paying 17 years on a mortgage, retirement values in pensions, 401ks and IRAs and life insurance. Except for Life Insurance, values in 401ks and IRAs fluctuate daily the same way land values have. So, there needs to be caution when dividing these things.
2. Payment of community property equity out of the marital homeFailing to properly and completely secure any repayment of debt or community property one spouse pays to the other when one spouse keeps the marital home. It’s not enough to have a distribution in the court order. To be fully protected, one must get an Owelty Deed of Trust securing the payment. Owelty is a fancy name for a marital asset. One key to remember is that community property is not a debt, it possession of actual property, regardless of its value.
3. Divorce Decree Terms of Disclosure
Failing to put an annual tax return disclosure obligation in the divorce decree to insure the proper amount of child support is being paid. In divorce decrees or SAPCR orders (Suit Affecting the Parent Child Relationship), we can insert a requirement that the child supporting paying spouse annually discloses to the child support receiving spouse his\her income tax return for recalculating the proper amount of child support. While in divorce cases, the child support can’t be modified for 3 years, in SAPCR cases, it can be done annually. Of course, after 3 years after the divorce, the case is a SAPCR case and not a divorce.
4. Failing to appreciate the fact the child support payor may pass or become injured in the future (effectively, though not legally, avoiding payment of child support)
This can be resolved through the purchase or transfer of life insurance or disability insurance. While I’ve offered this many times during my career, only once has anyone ever done it. Unfortunately, should that triggering occur, it is too late to purchase the necessary insurance or insure the proper amount of insurance is in place.
5. Failing to get a properly drafted QDRO entered and served
A QDRO is a Qualified Domestic Relations Order which divides the parties’ retirement accounts, whether they are 401ks, 403bs, IRAs or Roth IRAs. This is where it gets really tricky as federal law dictates these things as a result of the 1986 Tax Reform Act, also known as Consolidated Omnibus Budget Reorganization Act (COBRA). This is also the same statute that requires continuance of medical insurance after employment severance. Also, we have the Employment Retirement Income Security Act (ERISA), which dictates how these retirement plans are managed. It’s one of the few places I have seen where a company bureaucrat can effectively overrule a court, meaning just because a court has signed a QDRO order, the administrator of an ERISA plan does not have to comply with it, as the ERISA plan supercedes the court order. So, the solution is to use the particular Administrator’s Guideline Order for the State court. Remember, federal courts do not adjudicate divorces as it appears to be only state court matter. So, we have to be extra special careful and vigilante when drafting QDROs.