Question: My wife and I in the process of divorce. We have three grown children. In addition to our home and various accounts, each of us has a pension and IRA’s. Can I change the beneficiary of my IRA and 401k to our children before the divorce?
Answer: Unless there is a court order in effect that prevents you from doing so, each of you can change the beneficiaries -- without the consent or knowledge of the other – of your IRA’s, insurance policies, wills, and annuities, either before or after divorce. However, when it comes to pensions and 401k’s -- which are governed by the federal law called ERISA, you cannot remove your spouse as beneficiary without her written consent before divorce – which undoubtedly she will not give.
Today, most states have laws that automatically revoke a devise or bequest to a spouse contained in a will after a divorce is granted. However, without a specific provision in your settlement agreement or court order, your divorce will not in and of itself revoke the designation of your spouse as beneficiary of your IRA, annuity, or insurance policy. To make sure that your former spouse does not receive the benefit of these assets at your death, you must sign new beneficiary designations.
If you don’t remove your former spouse as a beneficiary of your pension plan after divorce, she may receive the payout at your death. Therefore, as the plan participant, you should sign new beneficiary designations. And since this area is so complicated, we suggest that you confirm your plans with your lawyer and tax advisor before you act.
Question: My husband and I sold our home about 18 months ago and moved into a condominium. Now, we are getting divorced. We own this condo jointly. He has moved out, and I will be living there until it’s sold and we divide the proceeds. Will we be able to exclude capital gain on the sale of this property as our principal residence?
Answer: While individuals are allowed to exclude the capital gains generated from the sale of personal residences an unlimited number of times (up to $250,000 each per sale), there must be at least two years between the sales. If there is less than two years between sales, you will be able to exclude the gain generated by the first, but not the second, sale.
Because many homes are sold as a result of divorce, the law recognizes the special problems associated with divorcing couples since it is not uncommon for one of the spouses to move out months, if not years, before the house is sold. In order to allow the “departed” spouse to either attain or retain the required two year occupancy needed to qualify his or her ownership interest for the full capital gains exclusion, the law allows the departed spouse to count the time the other spouse occupies the residence just as if departed spouse was still living in the home. However, it is important to remember that this “tacking” can only take place if the remaining spouse is authorized to continue occupancy pursuant to court order or marital agreement. And if one spouse purchases the interest of the other incident to a divorce, the purchasing spouse will be allowed to take advantage of the selling spouse’s period of ownership. Here, we suggest that your property not be sold until at least two years have passed from your prior sale.
