So You Want to Fool the Financial Aid Folks--Why Not Just Rob the Needy?
Q: A friend of mine is going to be custodian for an 18-year-old’s college account, worth about $140,000. My friend is looking for ways to make sure the money doesn’t count against the student when it comes to financial aid. Any suggestions?
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A: Yes. Tell your friend to pay the bills and stop looking for ways to cheat other people.
Financial aid is designed to help students in need. Somebody with a $140,000 kitty does not qualify, even at an Ivy League school. The average cost for tuition, fees, room and board at a public college is less than $11,000 a year; the typical private college runs about twice that much, and the Ivies cost about $30,000 to $35,000. If this student decides he needs extra money--say he simply must have a new cravat for the big Harvard-Yale game--he can darned well get a job, or apply for a Stafford student loan. Ditto for graduate school.
Thousands of genuinely needy students graduate each year with crushing student loan debts because of a lack of available financial aid; any paper-shuffling your friend might do to hide the ward’s lack of neediness would essentially be stealing money from them. That’s legally and morally wrong--and a lousy example to set for the student.
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Q: You recently mentioned in one of your columns that retirement savings accumulated during a marriage are considered community property. If a 401(k) or 403(b) retirement plan existed before the marriage, and contributions continued the same as before, how does one keep track of what part is individual and what is community property? What legal safeguards do the spouses have to make sure they get their share of the retirement savings?
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A: Why do I sense that these are more than rhetorical questions?
These are the kind of details that are worked out during the divorce negotiations and spelled out in the qualified domestic relations order or “quadro.” A good quadro is quite specific about who gets which benefits and how much. A bad or nonexistent quadro means that you could get nothing, or far less than you deserve.
This is why you need a good accountant as well as a good divorce lawyer if you decide to split. People who don’t get good financial help during a chaotic and trying time, such as a divorce, often wind up paying for it in lost benefits and assets.
According to Violet Woodhouse and Victoria Collins, authors of “Divorce and Money,” the process of dividing a defined contribution plan such as a 401(k) or a 403(b) is fairly simple if you know the value of the account when you married. You subtract that figure from the account’s total value on the day you separated, and divide the result in half to determine each partner’s marital share. (Note that in California you use the date you separated. Some other states use other dates, such as the date of the filing for divorce.)
If you had $10,000 in your account when you married and it grew to $50,000 by the day you separated, your spouse gets $20,000 ($50,000 minus $10,000, divided by 2) and you get $30,000 ($50,000 minus $10,000, divided by 2, plus your original $10,000).
If you don’t know the account’s value at the time of marriage, and you can’t get the company’s plan administrator or human resources department to help you figure it out, you have another option: Divide the total time you contributed to the account by the total time you were married, and then multiply the account value by the result. If you contributed to the plan for 10 years but were married for six, you would multiply the account value on the day you separated by 60% or 0.6. Divide the result in half to determine the marital share. In this case, the $50,000 would be multiplied by 0.6 to equal $30,000; half of that, or $15,000, would be your spouse’s share.
As for legal safeguards, the situation is getting easier as more companies get experience in dividing up retirement plans after divorce.
Once upon a time employers routinely refused to pay out plan money to ex-spouses at the time of the divorce. Today, fortunately, most 401(k) and 403(b) plans will allow you to divide up the assets as soon as you have a “quadro” to show them. If you run into any trouble, just shake your lawyer at ‘em.
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Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
Timely Tip
You can check your insurers’ financial strength by telephone or on the Web. Two to try: A.M. Best, https://www.ambest.com and Standard and Poor’s, (212) 208-1527, or https://www.ratings.com.
