Although some married couples keep separate financial accounts, most have at least one joint investment or bank account.
And while some studies suggest that having joint accounts is the right choice for marital happiness, the practice can also lead to a significant amount of stress and frustration if the marriage ends in divorce.
During a divorce, the couple may have to go to court to figure out how to split the money, figure taxes and possibly remove names from the accounts.
File for an Automatic Temporary Restraining Order (ATRO)
If you've been served with divorce papers or you have served your spouse with them, you should consider immediately filing an automatic temporary restraining order (ATRO). This legal document prevents either party from removing money from or tampering with any joint investment accounts, among other things.
Although an ATRO will prevent you from removing your ex-spouse from any accounts, it will also prevent that individual from doing so. This move will help protect your accounts until you are able to determine who has ownership over your mutual and separate accounts.
Hire a Divorce Attorney
Contact a divorce attorney before removing a spouse from joint accounts. While it might seem obvious which accounts are marital property and which are separate property, the concept of commingling could make separating your accounts much more complicated.
Removing a former spouse from an account is not as simple as calling your stock broker and requesting an account change. For example, if you live in a community property state (Washington, Idaho, Nevada, California, Arizona, New Mexico, Texas, Louisiana and Wisconsin) divorce judges may consider all of the financial accounts communal property of the marriage. That even applies to separate accounts you created after the marriage.
Depleting funds from any of these accounts can come with severe consequences. For example, a judge may later determine you were only justified to half of that amount. The judge may then require you to pay half the money back, plus penalties and fees.
A skilled divorce attorney can help you navigate the legal requirements when determining the money or assets you're entitled to following a divorce.
Determine Which Accounts May Be Joint or Separate
Your divorce attorney can help you determine which accounts are joint or separate. However, you'll need to spend some time researching and identifying accounts you own that could be considered property within the marriage. The longer you were married, the more accounts you may have. It's also possible to overlook some accounts, so take time to go through your paperwork and account information.
Couples typically share the following as joint accounts:
- Pension plan
- IRA (all types)
- Health savings account (HSA)
- 529 plan (college savings)
- Any other form of taxable investment account
Your divorce attorney can provide you with an extensive list of account types you may want to check for potential joint ownership.
How to Remove Money or Change Account Ownership
If you can prove the money in an account is your separate property, then you may be able to remove your spouse from the account or take out the money. The process will vary depending on the type of account.
Bank Accounts (Checking and Saving)
Every bank has a different process for removing a name from an account, so check with your financial institution. If you're listed as the primary account holder, you may be able to remove any secondary account holders. If you're listed as the secondary account holder, then you'll need the primary account holder's permission to take over the account as the primary.
Employer-Sponsored Retirement Accounts
You will need to file a qualified domestic relations order (QDRO) with a court to remove a spouse or ex-spouse from an employer-sponsored retirement plan. An attorney can help with this process.
The order will determine how much of the retirement plan you're entitled to receive. If done properly, you can roll over any money received tax-free into a new account. Or, if your ex-spouse is removing money from the account based on the order, then you may remove their name from the account after it's done.
IRAs and HSAs
To remove money or a name from an IRA or HSA, you'll need to submit a document indicating a transfer incident to divorce to the investment company. The company may also require forms such as a signed order from a judge and a copy of the divorce decree.
The IRS will consider such a transfer to be tax-free as long as it occurs within one year of the divorce. You won't need to issue any documentation to the IRS in this scenario. However, if the transfer happens after one year has passed, it may be subject to IRS Section 1041 reporting requirements, as well as additional taxes.
In the case of a 529 plan, the custodial parent should be the account holder. You will need a court order if you want to transfer the account to your name or remove your ex-spouse's name from the account.
Don't Rush Your Account Changes following a Divorce
The most important thing to remember following a divorce is to not rush any account changes. As long as you file an ATRO, you should be able to protect your accounts from any misdeeds by your ex-spouse. That said, make sure you keep a record of how much money is in your accounts.
It's always possible your spouse will begin emptying accounts before you can file for divorce. In such cases, accurate recordkeeping can help you secure a proper judgment in your favor during divorce proceedings.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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