In latest the Weekly Wright Report:
Educate Yourself on How College Accounts are Considered When Dividing Marital Property
When parties are getting divorced, the division of marital property is often an issue to be resolved whether by settlement or a court. By statute, the term, marital property, is defined as property, however titled, acquired by one or both parties during the marriage. A court engages in a three step process when determining whether to grant a monetary award: (1) determine whether a particular asset is marital or non-marital property; (2) value all marital property; and (3) decide if the division of marital property according to title would be unfair and, if so, make a monetary award. In the State of Maryland, marital property is subject to an “equitable” distribution between the parties, which does not necessarily mean equal as some may think, but rather, a fair division based on a host of factors identified by statute. By way of example and in incredibly simple terms, if Husband has $100 of marital funds in a bank account titled in his name, individually, and Wife has no assets, a Court may order Husband to pay Wife $50 (or $55) as a monetary award.
In many of our cases, dividing marital property is far more difficult than the hypothetical identified above. For example, there may be a dispute regarding step one, i.e., determining whether certain property should be characterized as marital or non-marital property. By statute, non-marital property is defined as property: (1) acquired before the marriage; (2) acquired by inheritance or gift from a third property; (3) excluded by valid agreement; or (4) directly traceable to any of those sources. It could be a family business a spouse inherited but has worked to increase its value during the marriage. Or, it could be a piece of real estate that one spouse purchased prior to the marriage but continued to pay a mortgage on the property during the marriage with marital funds. In other words, a particular asset may be a mix of marital and non-marital property.
Step two, i.e., the value of all marital property, may also be in dispute during the divorce process. While parties may easily rely on bank statements for the value(s) of checking and savings accounts, investment and/or retirement accounts, other assets can be more difficult to value. Going back to that family business, parties may each hire a business valuation professional to render expert opinions about the value of the business and those opinions may differ. Similarly, real estate appraisers may have differing opinions regarding the fair market value of a particular parcel of real estate.
While it is fairly common for parties to have a difference of opinion regarding whether a particular asset is marital or non-marital property or the value of marital property, it is less common for parties to dispute how a particular asset is titled. With that said, however, family lawyers have long struggled with how to handle a particular asset during the divorce process: the 529 account. Fortunately, the Court of Special Appeals of Maryland in Abdullahi v. Zanini, 241 Md. App. 372 (2019) recently provided guidance on how 529 accounts should fit in during the three-step process for determining whether to grant a monetary award.
For many couples, a 529 account, otherwise considered an investment account for a child’s education, can be a significant investment during the course of a marriage. Generally, a 529 account is for the benefit of a particular child and a parent is the custodian, or trustee, of the account. So, should the 529 account be accounted for when considering an equitable distribution of marital property? In a case of first impression, the Court of Special Appeals in Abdullahi, 241 Md. App. at 412, answered that question in the negative, so long as the evidence does not suggest that the custodian of a 529 account will use the funds for another purpose. Stated another way, as long as funds held in 529 accounts are intended to be used for a child’s education, those funds should not be considered in the three-step process for determining a monetary award.
This holding is unique in that it carves out an exception in that a 529 account, even if characterized as marital property, may be excluded from the analysis of dividing marital property. However, from a common sense approach, this result makes sense as parents generally consider this investment as money belonging to the child for his/her education, whether private secondary school, college, or even graduate school. Additionally, in many cases where settlements are reached, agreements can specific how these funds can be used to provide assurances that the funds will be used for the benefit of the child. Should you have any questions regarding how a college education account may play out in your divorce, please reach out to me at firstname.lastname@example.org or 410.659.1325.
Getting Divorced? Don’t Forget Health Insurance
When going through a divorce there are many things to consider, but a crucial one is continued health insurance coverage. Action must be taken well in advance of the divorce to avoid a lapse of coverage. Overlooking this step could lead to catastrophic financial consequences if a severe health issue arises during an uninsured period.
Additionally, the cost of health insurance may be a factor in calculating alimony and child support. Thus, it is important to know that cost before finalizing support issues.
When reviewing your health insurance options, there are three basic means to get coverage: (1) through employment; (2) with the Federal or state governments; and (3) on the open marketplace. In deciding which option is best for your situation, you will need to take into account the type of coverage needed, the cost of coverage (monthly premiums, deductible amounts and out-of-pocket limits), and the availability of prescription coverage.
If you are on your spouse’s employer-based insurance policy at the time of the divorce, you should look into maintaining that coverage. This may be permitted under COBRA or your state’s continuation coverage law.
The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) allows you to maintain health insurance coverage with your former spouse’s employer for 36 months or until new coverage is obtained, whichever is sooner. COBRA is a convenient option because you keep your same policy. However, it can be one of the more expensive options because you (or your former spouse if that is part of a negotiated settlement) are responsible for the entire cost of the coverage without any subsidy from the former spouse’s employer. The employer’s human resources department can help determine the monthly premium of COBRA coverage.
Continuation coverage varies by state. In Maryland, the rules for continuation coverage are similar to those under COBRA, where you have the option to maintain coverage with an employer sponsored plan upon divorce.
If you are employed at the time of the divorce and your employer offers health insurance, you can elect to enroll in the employer’s health insurance plan. Most group health insurance plans allow changes in coverage, including the election of coverage, only during a period of open enrollment. However, upon divorce, you may sign up for coverage outside the open enrollment period because a divorce, which is considered a “qualifying life event,” is an exception.
It is important to know the deadlines for taking action to continue coverage or elect new coverage under an employer’s insurance plan after the divorce. Generally, you will have 60 days from the date of the divorce to elect continuation coverage. Contact the employer’s human resource office to get the information you need about the options available and the timing for making an election.
Depending on your post-divorce income, you may qualify for health insurance under Medicaid. The Federal government also provides health insurance for minor children through the Children’s Health Insurance Program (CHIP). If your income will decrease as a result of a divorce, you may find you or your children qualify for health insurance through Medicaid or CHIP. It is best to consult with an insurance broker to understand your options for government sponsored insurance.
If you do not qualify for health insurance offered through an employer or the government, you will have to go onto the open marketplace for private health insurance. This is something you would typically do online. However, in Maryland, the state provides counselors to those shopping for coverage. One needs to carefully consider the various coverage options available through the marketplace, as they vary greatly by cost and the degree of coverage. If you are young and relatively healthy, a high deductible policy—which will essentially provide coverage for catastrophic health events—may be a good bet. If you have pre-existing health conditions, a more comprehensive policy may be needed. This is another area where it may be useful to consult with an insurance broker for help in navigating the options in the open market. Typically, a broker receives a fee through the marketplace at no additional cost to you. A broker can also help you determine if you qualify for any government subsidies that would reduce the premium.
Health Savings Accounts (HSAs)
A Health Savings Account (HSA) isn’t a health insurance plan, but it can be a valuable component to your health insurance planning. An HSA is an account in which you may set aside money specifically to pay for qualified medical expenses, which include deductibles, copayments and coinsurance. Generally, funds in an HSA may not be used to pay premiums. To qualify for an HSA, you must have what is considered a high deductible health plan, which is defined (in 2020) as one that has a minimum deductible of $1,400 for an individual and $2,800 for a family.
Funds deposited into an HSA account are not subject to income tax. Thus, to the extent you are using funds in an HSA to pay health care costs, you are paying with pre-tax dollars, which effectively reduces the cost of health care. In 2020, an individual may contribute a maximum of $3,500 into an HSA; the maximum HSA contribution for a family is $7,100.
If you or your spouse has an HSA at the time of the divorce, the funds in the account are likely considered marital property, which are subject to distribution like any other marital asset. However, if HSA funds are going to be transferred from one spouse to another, they must be deposited into a HSA to avoid tax consequences. An accountant may be helpful in providing guidance when settling an HSA.
When leaving a marriage, you may be overwhelmed with all the things that have to get worked out. However, you should not overlook the importance of assuring continued health insurance for you and your children after the divorce. You will also need to decide how you will pay the cost of health insurance once the divorce is final, such as by including the cost in alimony or child support calculations. If you have questions about providing health insurance for you and your family following a divorce, or want help in navigating your divorce, you may contact the Family Law team at Wright, Constable & Skeen.
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