Do’s and Don’ts for Splitting U.S. Accounts
U.S. expats face multiple complexities when owning assets in two or more jurisdictions. These complexities are only amplified during divorce proceedings when assets are divided between spouses.
In this article, we share answers to some common questions that arise when divorcing outside the U.S. However, we always recommend working closely with your financial advisor and divorce lawyer to avoid costly mistakes.
Question #1: We already completed our divorce procedures in our local country. How do we divide our U.S. accounts?
Divorce law differs between jurisdictions. In the U.S., divorce is a legal procedure that must be settled through a local court, and state rules vary. As such, dividing U.S. liquid assets isn’t as simple as asking a financial advisor or U.S. custodian to split the accounts. To divide marital property in U.S. accounts, a court order from a U.S. court is usually required.
Once the divorce is finalized and there’s an agreement regarding assets, the court will then issue a divorce decree — and in some cases a qualified domestic relations order (QDRO). The divorce decree and any related QDRO will specify exactly how the accounts are to be divided.
Question #2: Do I have to go through divorce proceedings in both the U.S. and my country of residence?
If you’ve already gone through a divorce procedure in your country of residence, you’d still need a separate U.S. decree if you wish to divide U.S.-based assets — especially retirement account assets — without triggering adverse tax implications.
To simplify this process, you could try to enforce the foreign court judgement in a U.S. local court. We recommend working with a local U.S. divorce attorney for help with this.
Question #3: What will happen to my retirement accounts?
If the owner of the retirement account chooses to take a distribution to divide it, not only would they have to pay income taxes on distributions taken from tax-deferred accounts but they would also owe a 10% penalty on any distributions taken before age 59 ½.
To avoid paying income taxes or penalties when dividing retirement accounts, the splitting couple must do so via a divorce decree. In some cases, transfers from one IRA to another incident of divorce could be achieved via a written separation agreement as described in U.S. Code section 121(d)(3)(C). However, to streamline the process and avoid delays, we recommend having a decree.
Qualified domestic relations order (QDRO)
When dividing traditional IRA and Roth IRA accounts, a QDRO is unnecessary. Normally, a Divorce Transfer Request Form must be submitted to the custodian along with the divorce decree. Each custodian has different requirements, so it’s important to check with your custodian to see if additional paperwork is required.
In the case of employer-sponsored plans, such as a 401k, these fall under ERISA rules. As such, when dividing employer-sponsored accounts, a QDRO is required. Specifically, this order is required to make one spouse entitled to a portion of the other spouse’s 401k. To avoid the QDRO requirement, the spouse with the employer-sponsored plan could roll over the account into an IRA, so long as they’re no longer employed by the company that set up the plan.1
What if my spouse is a non-resident alien?
Very careful planning must be put in place if one spouse is a non-resident alien of the U.S., especially if the non-resident lives in a non-treaty country. If this is the case, the divorcing couple must apply caution when it comes to what situs assets are left to the non-resident alien spouse.
Question #4: Why am I having challenges opening an IRA account as an American living abroad?
Many custodians will refuse to open accounts for Americans abroad. Therefore, expats face additional challenges when opening new individual brokerage accounts and IRAs while residing overseas. It’s imperative to work with a firm with extensive expertise serving U.S. expats and opening accounts while keeping them in good standing. Although financial advisors can’t issue decrees or legal divorce settlements that are required to split marital property, an experienced advisor will guide you through the process and advise you on the right questions to ask.
Question #5: How can I simplify the divorce process living overseas?
We can’t emphasize enough that all assets must be clearly laid out in a U.S. divorce decree. However, we understand some clients may want to simplify the process and would prefer to avoid U.S. courts. If your spouse already went through divorce proceedings in their local country and doesn’t want a separate process in the U.S., another option is to divide the taxable accounts and have one spouse keep the retirement accounts. However, we still recommend you follow local rules and lay this out in a written separation agreement.
At Creative Planning International, we understand the unique challenges faced by U.S. expats. We work with expats and cross-border families to help them maximize their wealth and avoid costly mistakes. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and take into account currency, diversification and other portfolio considerations as we help implement custom estate and tax planning strategies to meet your specific needs.
To learn more, request a meeting with a member of our team.
