CDS Financial Considerations in Divorce 2 — Questions and Answers
Question 1: A QDRO (Qualified Domestic Relations Order) is required to divide which type of retirement account without incurring early withdrawal penalties?
- Individual Retirement Account (IRA)
- 401(k) or defined benefit pension plan (Correct answer)
- Roth IRA rollover
- Deferred compensation account
Correct answer: 401(k) or defined benefit pension plan
QDROs are required to divide ERISA-governed plans like 401(k)s and pensions, allowing tax-penalty-free transfers to an alternate payee.
Question 2: Under the Tax Cuts and Jobs Act of 2017, alimony payments from divorce agreements finalized after December 31, 2018 are:
- Deductible by the payer and taxable to the recipient
- Non-deductible by the payer and non-taxable to the recipient (Correct answer)
- Deductible by the recipient and taxable to the payer
- Taxable to both parties equally
Correct answer: Non-deductible by the payer and non-taxable to the recipient
Post-2018 divorce agreements eliminated the alimony deduction for payers and the income inclusion for recipients under the TCJA.
Question 3: When a marital home is sold as part of a divorce settlement, the capital gains exclusion for a single filer is:
- $125,000
- $250,000 (Correct answer)
- $500,000
- $1,000,000
Correct answer: $250,000
A single filer can exclude up to $250,000 of capital gains on the sale of a primary residence under IRC Section 121.
Question 4: Which method assigns each spouse the retirement benefits they individually earned during the marriage, leaving both parties' accounts intact until retirement?
- Present value offset method
- Deferred distribution method
- In-kind transfer method
- Separate interest approach (Correct answer)
Correct answer: Separate interest approach
The separate interest approach divides pension benefits so each spouse receives their own share directly from the plan at retirement.
Question 5: A spouse who was a stay-at-home parent discovers the other spouse has a significant stock option plan. When are unvested stock options typically treated as marital property?
- Never — unvested options are always separate property
- Only if granted before the marriage
- When they were granted during the marriage, regardless of vesting date (Correct answer)
- Only after they fully vest post-divorce
Correct answer: When they were granted during the marriage, regardless of vesting date
Options granted during the marriage are generally marital property even if unvested, with allocation often calculated using a time-rule formula.
Question 6: When dividing a business in divorce, the 'enterprise goodwill' is generally treated as marital property, while 'personal goodwill' is:
- Also always marital property
- Separate property in most states because it is tied to the individual spouse (Correct answer)
- Divided equally regardless of classification
- Ignored entirely in business valuation
Correct answer: Separate property in most states because it is tied to the individual spouse
Personal goodwill, which depends on the owner-spouse's individual skills and reputation, is treated as separate property in most jurisdictions.
Question 7: Which federal law allows a divorcing spouse to continue health insurance coverage under the other spouse's employer plan for up to 36 months?
- ERISA
- HIPAA
- COBRA (Correct answer)
- FMLA
Correct answer: COBRA
COBRA (Consolidated Omnibus Budget Reconciliation Act) provides continuation coverage for up to 36 months for a spouse who loses coverage due to divorce.
CDS Financial Considerations in Divorce 2
A QDRO (Qualified Domestic Relations Order) is required to divide which type of retirement account without incurring early withdrawal penalties?