G.63 Planning for Divorce and Unmarried Couples

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1 A. Professional Conduct and Regulation

A.1 Code of Ethics and Standards of Conduct A.1.1 The Six Ethical Principles A.2 Procedural Rules and Discipline A.2.1 Fitness Standards for Candidates A.3 Financial Institutions Overview A.3.1 Broker-Dealers vs. RIAs A.4 SEC and Securities Regulation A.4.1 FINRA and Broker-Dealer Regulation A.4.2 State Securities Regulation A.5 Consumer Protection Laws A.5.1 Privacy and Confidentiality Requirements A.6 Fiduciary Duty and Application

2 B. General Principles of Financial Planning

B.7 The Financial Planning Process B.7.1 Establishing the Client Relationship B.7.2 Gathering Client Data and Goals B.8 Personal Financial Statements B.8.1 Key Financial Ratios B.9 Cash Flow Management B.9.1 Emergency Fund Planning B.10 Debt Management Strategies B.10.1 Mortgage and Home Financing B.11 Economic Concepts B.11.1 Planning for Inflation B.12 Time Value of Money Concepts B.12.1 TVM Calculations and Applications B.12.2 Loan Amortization B.13 Education Needs Analysis B.14 Education Savings Vehicles B.14.1 529 Plans In-Depth B.15 Education Funding Strategies B.16 Gift/Income Tax Strategies

3 C. Risk Management and Insurance Planning

C.17 Principles of Risk and Insurance C.17.1 Risk Management Process C.18 Analysis of Risk Exposures C.19 Health Insurance Fundamentals C.19.1 Types of Health Insurance Plans C.20 Disability Income Insurance C.20.1 Disability Policy Features C.21 Long-Term Care Insurance C.22 Annuities Overview C.22.1 Fixed vs. Variable Annuities C.23 Life Insurance Fundamentals C.23.1 Types of Life Insurance C.24 Business Owner Insurance Solutions C.25 Insurance Needs Analysis C.26 Insurance Policy and Company Selection

4 D. Investment Planning

D.27 Equity Securities D.27.1 Fixed Income Securities D.27.2 Mutual Funds and ETFs D.27.3 Taxation of Investment Vehicles D.28 Systematic Risk D.28.1 Unsystematic Risk D.29 Economic and Market Cycles D.30 Measures of Risk and Return D.30.1 Investment Performance Measures D.31 Asset Allocation Strategies D.31.1 Portfolio Diversification D.32 Bond and Stock Valuation D.32.1 Stock Valuation Models D.33 Investment Policy Statement D.33.1 Modern Portfolio Theory D.34 Active vs. Passive Investing D.34.1 Common Investment Strategies D.35 Alternative Investments D.35.1 Options and Derivatives

5 E. Tax Planning

E.36 Income Tax Fundamentals E.36.1 Filing Status and Tax Brackets E.37 Types of Income E.37.1 Deductions and Credits E.37.2 Capital Gains and Losses E.38 Business Entity Taxation E.38.1 Self-Employment Tax E.39 Taxation of Trusts and Estates E.40 Tax Reduction Strategies E.40.1 Retirement Account Tax Strategies E.41 Property Transactions E.41.1 Basis Rules for Acquired Property E.42 AMT and NIIT E.42.1 Special Tax Situations E.43 Charitable Giving Strategies

6 F. Retirement Savings and Income Planning

F.44 Retirement Needs Analysis F.44.1 Sources of Retirement Income F.45 Social Security Benefits F.45.1 Social Security Claiming Strategies F.45.2 Medicare Planning F.46 Eldercare and Special Needs Planning F.47 Qualified Plan Overview F.47.1 Defined Benefit Pension Plans F.47.2 Defined Contribution Plans F.48 Eligibility and Vesting F.48.1 Coverage and Discrimination Testing F.48.2 Contribution and Benefit Limits F.48.3 401(k) Plan Features F.49 Non-Qualified Deferred Compensation F.49.1 Executive Compensation Plans F.50 Retirement Plan Selection for Businesses F.50.1 Individual Retirement Accounts F.51 Distribution Rules F.51.1 Required Minimum Distributions F.52 Retirement Income Strategies F.52.1 Tax-Efficient Withdrawal Strategies F.53 Business Succession Planning

7 G. Estate Planning

G.54 Property Titling and Beneficiary Designations G.54.1 Beneficiary Designations G.55 Strategies to Transfer Property G.55.1 Lifetime Gifting Strategies G.56 Wills and Estate Documents G.56.1 Powers of Attorney G.56.2 Advance Directives and Healthcare Documents G.57 Federal Gift Tax G.57.1 Federal Estate Tax G.57.2 Generation-Skipping Transfer Tax G.58 Sources for Estate Liquidity G.58.1 Life Insurance for Estate Liquidity G.59 Trust Fundamentals G.59.1 Revocable Living Trusts G.59.2 Irrevocable Trusts G.59.3 Trust Income Taxation G.60 Marital Deduction Planning G.60.1 QTIP Trusts G.60.2 Portability of Estate Tax Exemption G.61 Intra-family and Business Transfer Techniques G.61.1 Family Limited Partnerships G.61.2 GRATs and IDGTs G.62 Postmortem Estate Planning Techniques G.62.1 Disclaimer Planning G.62.2 Estate Tax Elections G.63 Planning for Divorce and Unmarried Couples G.63.1 Estate Planning for Unmarried Couples G.63.2 Planning for Blended Families G.64 Planning for Special Needs and Circumstances G.64.1 Special Needs Trusts G.64.2 ABLE Accounts

8 H. Psychology of Financial Planning

H.65 Client and Planner Attitudes, Values, Biases H.65.1 Money Scripts and Money Attitudes H.65.2 Planner Self-Awareness H.66 Behavioral Finance H.66.1 Cognitive Biases H.66.2 Emotional Biases H.66.3 Heuristics and Mental Accounting H.67 Sources of Money Conflict H.67.1 Couples and Money Conflict H.67.2 Family and Intergenerational Money Conflict H.68 Principles of Counseling H.68.1 Therapeutic Techniques in Financial Planning H.68.2 Professional Boundaries and Referrals H.69 General Principles of Effective Communication H.69.1 Listening and Questioning Skills H.69.2 Managing Difficult Conversations H.69.3 Non-Verbal Communication H.70 Crisis Events with Severe Consequences H.70.1 Death and Divorce H.70.2 Job Loss and Health Crisis H.70.3 Sudden Wealth and Sudden Loss H.70.4 Natural Disasters and Traumatic Events

G.63 Planning for Divorce and Unmarried Couples

Key Takeaways Explain This Topic AI

QDRO required for division of qualified retirement plans

Alimony treatment changed under TCJA (no deduction/income after 2018)

Unmarried couples cannot use marital deduction

Domestic partners need comprehensive estate planning documents
Last updated: October 2026

Planning for Divorce and Unmarried Couples

Divorce and non-marital relationships present unique estate and financial planning challenges. CFP professionals must understand the tax implications of property transfers in divorce, the significant changes to alimony taxation under the Tax Cuts and Jobs Act (TCJA), and the critical estate planning gaps faced by unmarried couples.

Part 1: Divorce Planning
Property Transfers Incident to Divorce (IRC Section 1041)

One of the most important tax provisions in divorce planning is IRC Section 1041 , which provides that property transfers between spouses (or former spouses) incident to divorce are treated as non-taxable events .

Key Rule Application
Gain/Loss recognition NO gain or loss is recognized on transfer
Gift tax NO gift tax applies
Treatment Transfer is treated as a gift for tax purposes
Basis Receiving spouse takes the transferor's carryover basis

"Incident to Divorce" Definition :

Property transfers qualify as "incident to divorce" if they occur:

Within one year after the date on which the marriage ceases, OR
Related to the cessation of the marriage and occurring within six years of the divorce

Even transfers after six years may qualify if the former spouses can demonstrate that factors (such as legal impediments or disputes) prevented the transfer from occurring sooner.

Important Basis Consideration : Because the receiving spouse inherits the transferor's original tax basis, any built-in gain in appreciated assets will be taxed when the receiving spouse eventually sells the property.

Example : Sarah transfers stock to her ex-husband David as part of their divorce settlement. Sarah's basis in the stock is $50,000, and its fair market value is $200,000. David receives the stock with a $50,000 basis. When David sells the stock for $220,000, he recognizes $170,000 in capital gain ($220,000 - $50,000).

QDRO: Qualified Domestic Relations Order

A Qualified Domestic Relations Order (QDRO) is the only legal mechanism to divide qualified retirement plans (401(k)s, pensions, 403(b)s) in a divorce without triggering taxes or penalties.

Requirement Detail
Form Court order pursuant to state domestic relations law
Purpose Divides retirement plan assets for child support, alimony, or property settlement
Plan administrator Must be approved by the retirement plan administrator
Tax consequence Division under QDRO is NOT a taxable event

Early withdrawal penalty Distributions to alternate payee under QDRO are exempt from 10% early withdrawal penalty under IRC 72(t)(2)(C)

Rollover option Alternate payee can roll over QDRO distribution to their own IRA or qualified plan

What Does NOT Require a QDRO :

IRAs (traditional and Roth) - can be divided by direct transfer per the divorce decree
Rollover IRAs - no QDRO needed
Nonqualified deferred compensation plans - not subject to ERISA; divided per divorce agreement

Common QDRO Mistakes :

Assuming the divorce decree alone is sufficient (it is not; a separate QDRO is required)
Failing to obtain plan administrator approval before finalizing the divorce
Waiting too long after divorce to process the QDRO (the participant spouse may take distributions)
Alimony Taxation: The TCJA Game-Changer

The Tax Cuts and Jobs Act of 2017 fundamentally changed the tax treatment of alimony for divorce agreements executed after December 31, 2018.

Divorce Agreement Date Payor Treatment Recipient Treatment
Before January 1, 2019 Alimony is deductible (above-the-line) Alimony is taxable income
After December 31, 2018 Alimony is NOT deductible Alimony is NOT taxable

Key Points on TCJA Alimony Rules :

The new rules apply to divorce or separation agreements executed after December 31, 2018

Pre-2019 agreements that are modified after December 31, 2018, can elect to apply the new rules (if expressly stated in the modification)

Pre-2019 agreements that are not modified continue under the old rules

The TCJA alimony provisions are permanent : they had no sunset, and the OBBBA has since made most other TCJA individual provisions permanent too

Planning Implication : Under the old rules, alimony was often paid by the higher-income spouse (who could deduct it at higher tax rates) to the lower-income spouse (who was taxed at lower rates), creating overall tax savings. The TCJA eliminated this planning opportunity for post-2018 agreements, potentially affecting settlement negotiations.

Child Support

Child support maintains the same tax treatment regardless of the TCJA:

Characteristic Treatment
Payor NOT deductible
Recipient NOT taxable income
Dependency exemption Generally claimed by custodial parent (or as stipulated in agreement)

2026 Note : The OBBBA permanently set the personal dependency exemption at $0, so it will not return in 2026; divorce negotiations now center on who claims the child tax credit and head of household status.

Updating Estate Plans After Divorce

A divorce creates an immediate need to update all estate planning documents:

Document Required Action
Will Update or create new will to remove ex-spouse as beneficiary or executor
Revocable trust Amend to remove ex-spouse as trustee or beneficiary
Retirement accounts Update beneficiary designations (ERISA plans may require spousal consent to change)
Life insurance Change beneficiary if ex-spouse was named
POA (financial) Revoke POA naming ex-spouse; execute new POA
Healthcare proxy Revoke and execute new document naming trusted person
HIPAA authorization Revoke ex-spouse's access to medical information

State Law Considerations : Some states automatically revoke bequests to a former spouse upon divorce, but this varies by jurisdiction and does not apply to beneficiary designations on retirement accounts or life insurance. Never rely on automatic revocation.

Part 2: Estate Planning for Unmarried Couples

Unmarried couples, including domestic partners and long-term partners who choose not to marry, face significant estate planning disadvantages compared to married couples.

Key Differences: Married vs. Unmarried Couples

Planning Feature Married Couples Unmarried Couples

Unlimited marital deduction YES - unlimited tax-free transfers between spouses NO - transfers are subject to gift/estate tax

Portability (DSUE) YES - unused exemption passes to surviving spouse NO - exemption is personal only
Automatic inheritance rights YES - state law provides elective share NO - no automatic inheritance
Social Security survivor benefits YES - available to surviving spouse NO - not available
ERISA retirement plan rights YES - spouse is default beneficiary NO - must be specifically designated
Medical decision-making Spouse has default authority Requires healthcare proxy/POA
Hospital visitation Automatic rights May require documentation
Critical Documents for Unmarried Couples

Because unmarried partners have no automatic legal rights, comprehensive documentation is essential:

Will or Revocable Trust : Names partner as beneficiary and potentially as executor/trustee

Beneficiary Designations : Update all retirement accounts, life insurance, and POD/TOD accounts to name partner

Durable Power of Attorney : Grants partner authority over financial matters if incapacitated
Healthcare Proxy/Medical POA : Authorizes partner to make medical decisions
HIPAA Authorization : Permits partner to access medical information
Cohabitation Agreement : Addresses property rights during the relationship
Financial Planning Strategies for Unmarried Couples

Life Insurance : Because unmarried partners cannot rely on the marital deduction or survivor benefits, life insurance is often critical to provide for a surviving partner:

Name the partner as beneficiary
Consider an ILIT if estate tax is a concern
Life insurance proceeds are generally income tax-free to the beneficiary

Joint Ownership Considerations :

Joint tenancy with right of survivorship provides automatic transfer at death
Creating joint ownership may trigger gift tax if one partner contributes more than half
Unmarried couples cannot use the gift tax marital deduction for transfers between partners

Annual Gifting : Unmarried partners can use the annual gift tax exclusion ($19,000 in 2026) to transfer assets without gift tax, but this is less efficient than the unlimited transfers available to married couples.

Gift and Estate Tax Exposure

For unmarried couples with significant assets:

Scenario Tax Consequence

Transfer $500,000 to partner during life Gift tax on amount exceeding $19,000 annual exclusion (uses lifetime exemption)

Leave $5 million to partner at death Estate tax if total estate exceeds exemption ($15 million in 2026)
Create joint account with partner's funds No gift tax issue
Add partner to title of $1 million home you own Gift of $500,000 (half value) to partner
Planning Opportunities
Use annual exclusions strategically : $19,000 per year (2026) can transfer significant wealth over time
Consider trust planning : Irrevocable trusts can remove assets from taxable estate
Life insurance : Provides tax-efficient wealth transfer to partner

Charitable planning : If no unlimited marital deduction is available, charitable strategies may reduce estate taxes

Business structures : LLCs or family partnerships can facilitate gradual wealth transfer
Quiz: Divorce and Unmarried Couples Planning

Question 1 : Jennifer and Mark divorced in 2024. As part of the settlement, Jennifer pays Mark $3,000 per month in alimony. Which statement correctly describes the tax treatment of these payments?

A) Jennifer can deduct the payments; Mark must report them as income
B) Jennifer cannot deduct the payments; Mark does not report them as income
C) The payments are split equally for tax purposes between Jennifer and Mark
D) The tax treatment depends on which spouse has higher income
Answer: B

Explanation : For divorce agreements executed after December 31, 2018, alimony is NOT deductible by the payor and NOT taxable to the recipient under the TCJA. This rule applies to Jennifer and Mark's 2024 divorce. The pre-TCJA rules (deductible/taxable) only apply to divorce agreements executed before January 1, 2019.

Question 2 : David wants to divide his 401(k) account as part of his divorce settlement. His attorney tells him the divorce decree language is sufficient to split the account. This advice is:

A) Correct; the divorce decree is the only document needed
B) Incorrect; a QDRO must be drafted, submitted to the plan administrator, and approved
C) Correct only if the 401(k) balance is under $100,000
D) Incorrect; IRAs require a QDRO, but 401(k)s do not
Answer: B

Explanation : A Qualified Domestic Relations Order (QDRO) is required to divide a qualified retirement plan such as a 401(k). The QDRO must be approved by the plan administrator. A divorce decree alone is NOT sufficient. Note that IRAs (answer D) do NOT require a QDRO; they can be divided by direct transfer per the divorce decree.

Question 3 : Michael and his partner James have lived together for 15 years and own a home jointly. Michael dies with an estate worth $3 million, leaving everything to James. Which statement is TRUE?

A) James can claim the unlimited marital deduction to avoid estate tax
B) James can elect portability to preserve Michael's unused exemption
C) James has no access to the marital deduction or portability because they are unmarried
D) James can claim half the marital deduction since they have lived together over 10 years
Answer: C

Explanation : The unlimited marital deduction and portability are available ONLY to legally married couples. Unmarried partners, regardless of the length of their relationship, cannot use these provisions. James will inherit Michael's $3 million estate using Michael's individual exemption amount (well within the $15 million threshold for 2026), so no estate tax is due in this case, but there is no marital deduction or portability available.

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G.63.1 Estate Planning for Unmarried Couples
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