Bezos divorce raises question: How can planners protect HNW clients?
BY: Stacy Francis
January 10, 2019
With especially keen interest, financial advisors will be following the long and tangled saga of the divorce of Jeff Bezos from his wife of 25 years.
Amazon king Bezos is the world’s richest person with a fortune that just crossed the $150 billion mark, according to the Bloomberg Billionaires Index. That means even a 1% payout to his wife MacKenzie, would rank as one of the largest divorce settlements in history.
What does this mean for planners? More and more lawyers are pulling in financial advisors to deal with the King Solomon-like task of divvying-up marital assets.
Of all the myriad assets Bezos holds, those that will need the most care are the millions wrapped up in retirement accounts — vehicles to which financial advisors bring a particular expertise. Planners can add a tremendous amount of value when implementing a divorce settlement if they are in the know about the intricate rules of dividing retirement assets.
For instance, few advisors and even fewer lawyers realize that splitting ERISA-qualified retirement accounts is easier said than done. The surgical tool for this job is a qualified domestic relations order or QDRO.
QDROs apply to two main types of retirement plans, namely 1) defined contribution plans and 2) defined benefit plans. 401(k), 403(b) and 457 plans are all types of of such plans.
A QDRO is a legal document that directs the administrator of the pension plan to give a certain amount of an employee’s retirement benefit to his or her ex-spouse after the divorce is final. The plan administrator then sends payments directly to the receiving spouse. It seems straightforward and clear. Not so!
QDROs are the source of many potential divorce problems if attention and care are not used while drafting this legal document. Frequent errors can result in loss of benefits to the receiving spouse. No one wants to think something might go wrong, but many times it does.
As an advisor, you can add a vast amount of value by bringing up questions that will drastically reduce the chance of a post-divorce dispute.
- What happens if the employee spouse dies before the benefits payout starts or while the benefit already started? Is the ex-spouse out of luck?
- What if the receiving spouse dies before the benefits payout starts or while they are already collecting? Does the recipient ex-spouse forfeit the future payments or does the income pass to one of their heirs?
- What happens if the employee elects early retirement? Is the amount reduced, accelerated or delayed?
- Does the QDRO mesh with the pension plan document? What if the QDRO order requires payments that the company plan administrator does not allow?
There have been cases where the divorce is completed, the QDRO is sent to the pension plan, but the receiving spouse gets nothing. Why? Because the QDRO required a method of payment not allowable by the plan. For example, one attorney requested a lump sum distribution when the plan states the benefit may only be paid out monthly.
It is critical to know what type of plan the employee spouse has, how it is funded, and how it pays out. This information can be found in the Employee Retirement Plan Summary Plan Description booklet. While financial advisors cannot give legal advice, we can raise red flags that will protect against these costly mishaps in divorce. Bezos’ separation is expected to cost enough already without any mistakes.