When you're not Jeff Bezos: Tips for most financially painless divorce

Announcing his coming divorce this week, Amazon CEO and founder Jeff Bezos just missed the cut-off for the favorable federal tax classification of alimony.

And if the couple files for divorce in Washington state, where they own a residence and Amazon is headquartered, everything acquired during the marriage is considered community property and subject to a 50/50 division. (There are nine other community property states: Alaska (with opt-in), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Wisconsin.)

While what could be the most expensive divorce of all time is interesting, what can the average person do to protect themselves financially from divorce disaster? Here are things to keep in mind and some practical tips.

Retirement accounts: Who gets what

When spouses divorce, the court will usually separate retirement accounts, including the 401(k), 403(b), TSP, Simple, and SEP, among others, through a Qualified Domestic Relations Order, QDRO for short. If you are in a community property state, this means an even 50/50 division. If you are in an equitable distribution state, either the judge will decide the split (if your case is contested) or you can negotiate the amount (if you are agreeing to a distribution through a marital settlement agreement).

If you have the flexibility of agreeing on the division, remember to incorporate the tax considerations into your calculations. In other words, don’t agree to take all the retirement account (which is 100% taxable as ordinary income as you take withdrawals) and give your soon-to-be ex the primary residence (where all gains – up to $250,000 for a single taxpayer and $500,000 if you sell the house while still married – are excluded from capital gains taxes).


Use a premarital agreement

It is reported that the Bezos, who married young and without major financial means, do not have one. Even though they can be a romance killer, a premarital agreement trumps the division of property your home state follows because it is a private contractual agreement that both parties agree to ahead of any problems. While some lawyers may still try to circumvent its terms, especially where major assets exist, a properly drafted agreement is difficult to overcome. 

Keep separate property separate  

Even if you do not have a premarital agreement, if you come to the marriage with sufficiently more assets or if you inherit assets or receive gifts during the marriage, keep these assets separate and apart from any joint marital accounts. This way they can retain their character as your separate property, not subject to marital division.

Keep a record of debts paid or down payments made

If you plan to use your individual assets to pay off your future spouse’s student loans or put the down payment down on your joint home, keep a record of those funds and agree that those funds remain your separate property.

About Rebecca Walser Rebecca Walser is a tax attorney, a certified financial planner, and the author of Wealth Unbroken, who specializes in the strategic planning of maximizing lifetime wealth while minimizing tax through her practice, Walser Wealth Management (www.walserwealth.com). She earned her juris doctor degree from the University of Florida and her Master of Law degree in taxation from New York University.  She is a frequent national media contributor.