Question: Having been involved in the “divorce process” for nearly two years, I have come to realize that divorce lawyers are "problem makers" rather than "problem solvers". Over a two-year period, my wife’s and my lawyers have wasted huge amounts of time and money. Rather than being creative and helping us solve our problems, they have created meaningless disputes that have padded their pockets. I am writing you as a last resort to see if you can guide us to a resource that will put us on the right track. Our problem:

While I earn a good living as a manager for a large company, the money is simply not there to support the lifestyle we once enjoyed as a family. Although we have increased our net worth, the recent stock market tumble has decreased our equity and the income from the stocks we have purchased over the years is minimal. Our second largest asset is my company pension plan that has a current balance of more than $500,000. But the lawyers say we can’t use this without incurring taxes and penalties. My wife is 53 and unemployed outside the home. The oldest of our three children is in her second year at college. At 57, I still have a number of productive years ahead of me, so it seems that there should be ways in which to take advantage of what we have accumulated without getting pounded by the system and the government.

Answer: In almost every divorce and separation situation, the income that was sufficient to support one family under one roof is insufficient to fund two separate households. For husband, wife, and children to enjoy even a semblance of their former standards of living, the creative production of cash flow is often essential. For this reason, it is often advisable and necessary for lawyers to include financial and tax experts as part of the planning team. First of all, contrary to what your lawyers have advised you, monies from your qualified retirement plan (Pension, Profit Sharing Plan, 401(k), IRA's, etc.) can be used at the time of a divorce to increase cash flow. Depending on amounts and needs, this cash flow can enhance, reduce, or, in some instances, replace spousal support.

Although distributions from a qualified plan prior to age 59 and a half will normally trigger a 10% penalty in addition to income tax, you can transfer all or part of the funds in your plan to your wife's IRA without tax or penalty through a qualified domestic relations order (QDRO). However, once properly transferred from one qualified plan to another without tax or penalty, even though your wife has not yet reached 59 and one-half, she can withdraw a series substantially equal installments for five years or until she reaches age 59 and one-half, whichever is later, and not pay the 10% penalty. Once the amount is determined and payments begin, your wife will not be able to change the amount because, if modified, penalties will be retroactive to the first payment. Your wife will be required to pay income taxes on the amounts withdrawn.

At the same time, with proper investment advice, all or a portion of your stock portfolio which has been geared toward growth may be moved into an income-producing mode. In these ways, your wife could withdraw established amounts from the portion of your pension which is set aside to her and could withdraw income from the portion of the portfolio which is moved over to her side of the ledger. In this way, your out-of-pocket expenses each month would be reduced.

Bottom Line: Qualified money and investing for income can play an important role in the settlement of domestic relations disputes by creating or supplementing an income stream. Although the substantial equal withdrawal option will work with any amount, be sure to contact professionals who can help you fashion the rollover and structure the substantially equal payments before you make a move. And make sure you know the cost of the capital gains taxes, if any, before you sell any stock.

SoloFact: After divorce, spouses should make sure to change the beneficiary of their pensions to avoid unintended results. Some courts have ruled that even though a former spouse has signed a general waiver of rights to the pension, if the beneficiary is not changed, the former spouse may still be entitled to the proceeds. Therefore, it is a good idea to 1) specifically identify the pension in the waiver and 2) make sure to change your beneficiary immediately after divorce so it will not be forgotten. Based on a recent decision of the United States Supreme Court, the beneficiary of life insurance and an ERISA pension takes precedence over the terms of a divorce agreement or decree.