Aug / Sept 2016 : Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Consider the following example:

  1. Parties – A and B – were married on 7/1/96 and divorced 20 years later on 6/30/16
  2. B has been a participant in her employer’s 401(k) plan since before marriage. At marriage, the account balance was $30,000.
  3. B had no plan loan balance at time of marriage, but she drew a $50,000 loan from the plan during marriage to provide funds for a family vacation home in northern Michigan.
  4. At divorce, the 401(k) account consisted of $100,000 in investments and a remaining loan balance of $20,000.
  5. Since the loan funds were used for marital purposes, the unpaid plan loan is a marital debt.
  6. Based on these facts, A and B will divide the $70,000 net increase in the account during marriage. A’s $35,000 will be paid from non-loan plan assets.
  7. B will also receive $35,000 of non-loan assets as well as the $20,000 plan loan receivable for which she is responsible to repay (essentially, to herself).
  8. The following presents the division of the account value, including the plan loan receivable.

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Continued in PDF file below… “Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?”
View / Download August/Sept 2016 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section

June / July 2016 : Changing Beneficiary Designations

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Two recent Court of Appeals decisions on disposition of (1) 401(k) account and (2) life insurance proceeds in disputes between decedents’ estates and former spouses who were the named beneficiaries. Patrick Estate v. Freedman, Mich App No. 324438 (2/11/16); Lett Estate v. Henson, Mich App No. 326657 (3/17/16).

Facts – Patrick Estate v Freedman (Unpublished)

  • During their marriage, H designated W beneficiary of his 401(k) plan account.
  • In their 2007 consent judgment of divorce (JOD), it was provided that W be designated beneficiary for the amount assigned to her if H died before her share was segregated into an account for her.
  • e JOD also provided – “Except as otherwise provided herein, any rights of either party as beneficiary in any pol- icy or contract of life, endowment or annuity insurance of the other, as beneficiary, are hereby extinguished.”
  • And further – “Except as otherwise stated herein, each party shall retain exclusively any retirement benefits to which they are or shall become entitled to due to their employment, and any claim thereto by the other as beneficiary or otherwise is extinguished.”
  • H died in 2014 without having changed the beneficiary designation.
  • At W’s request, the plan administrator distributed the proceeds of H’s 401(k) account to her.
  • H’s estate led a complaint claiming that she was not en- titled to the 401(k) account.
  • e trial court ruled that while it was proper for the plan to distribute the 401(k) account proceeds to W, the beneficiary on record, but, under the terms of the JOD, she did not have the right to retain them.
  • W appealed.

Court of Appeals Decision…

Continued in PDF file below… “Changing Beneficiary Designations”
View / Download June/July 2016 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section

May 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 2

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following is a continuation of the materials presented in the March 2015 Tax Trends column.

III. Defined Contribution (DC) Plans

  1. A DC plan–such as a 401(k) plan – provides for separate account for each participant.
    1. E.g.–W’s account balance under the XYZ 401(k) plan was $50,000 on December 31, 2014.
    2. Other types of DC plans include pro t-sharing plans, money purchase pension plans, and 403(b) annuities.
  2. Division of DC plan accounts is also accomplished either by the o set method or by deferred division using a QDRO/EDRO.
  3. Offset method – Valuation
    1. The present value of the DC plan interest is generally considered its account balance as of the valuation date. See above for an example.
    2. As with the present value of pensions under DB plans, it is typically appropriate to tax affect the value of the account balance.
    3. It is important to specify a valuation date, generally close to when other assets will be divided.
    4. If there is a plan loan, the account is (1) valued net of the loan and (2) responsibility to repay the loan is assigned to the participant.
      Example:

      • The total pre-tax value of W’s 401(k) account is $50,000 – $40,000 of plan investments and (2) a $10,000 loan she drew from the plan.
      • Equal division under the offset method:
        (Table shown in PDF)
  4. Deferred division method – QDROs/EDROs

Continued in PDF file below… “Overview of the Division of Retirement Benefits in Divorce – Part 2”
View / Download May 2015 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section

Aug / Sept 2014 : Court of Appeals Rules on Division of 401(k) Funded Largely Before Marriage – CHENEY V CHENEY, Mich App No. 311555 (4/29/14)

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Facts

  • At the time of the divorce trial in September 2011, H’s Ford 401(k) account balance was $315,862.
  • When the parties married in September 1999, the balance was $208,942.
  • Contributions were made to the account during the marriage.
  • The trial court determined that the entire Ford 401(k) was marital and awarded W $157,931.
  • The Court’s rationale was that the pre-marital funds in the account were commingled with contributions made during marriage and, hence, were marital.
  • H appealed, claiming the entire 401(k) account was separate property because (1) most of the account was funded before marriage and (2) he was the sole contributor during marriage.
  • Alternatively, he claimed that the $208,942 premarital balance was his separate property.

Court of Appeals Opinion

  • The COA rejected H’s claim that the entire account was separate property because, pursuant to MCL 552.18(1), retirement benefits accrued during marriage “shall be considered part of the marital estate subject to award by the court.”
  • However, the Court agreed with H’s alternative claim that the pre-marital balance of $208,942 was his separate property.
  • The Court cited McNamara v Horner, 249 Mich App 117 (2002) and Reeves v Reeves, 226 Mich App 490 (1997) in support of its decision.

Comments on the Case
……

Continued in PDF file below… “Court of Appeals Rules on Division of 401(k) Funded Largely Before Marriage – CHENEY V CHENEY, Mich App No. 311555 (4/29/14)”
View / Download August/September 2014 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section