Divorce/Retirement Benefits/Gilmore Election

[peggysioux5]

I have a client who works for the government that divorced back in 1995.  Client is 71 and still working.  Ex-spouse hired an attorney several years ago regarding her eligibility to receive client’s retirement benefits and was told at that time that until client retired, she could not receive the benefits.  Ex-spouse hired another attorney in 2024 regarding her eligibility to receive client’s retirement benefits and being client is still working and not receiving retirement benefits, ex-spouse is eligible to receive retirement benefits based on the Gilmore Election.  My client will now have to directly pay ex-spouse her community property interest for the amount she should be receiving if client had retired.  My question is the taxation of the funds that the client is paying the ex-spouse.  The notice clearly states the payments are not considered alimony.  Is there a way to deduct the payments made to ex-spouse? 

 

[BrewOne]

From Pub 504:

"Benefits paid to a spouse or former spouse.

Benefits paid under a QDRO to the plan participant's spouse or former spouse must generally be included in the spouse's or former spouse's income."

Code Section 402(e)(1)(A) refers to payments from a plan assigned to an "alternative payee"--not sure this would cover someone paying the ex out of pocket.

Would it have been possible for the plan to pay the ex and not your client?

[peggysioux5]

If the taxpayer had retired, then the benefit payments to the ex-spouse would be paid from plan; however, being taxpayer has chosen to continue to work, he has to pay the ex-spouse the monthly Civil Service Retirement System benefits that is due her out of pocket.  Seems unfair that taxpayer pays ex-spouse retirement benefits but not able to deduct the amount that he is required to pay by the courts.  Hoping a tax professional is familiar with the Gilmore Election and how to handle the taxation of the result of electing the Gilmore Election.

Thank you.

 

[jklcpa]

If you are going to research this, the name is "Gillmore" and you may get more hits with the proper spelling.

I have no personal experience with this, but found these interesting, for whatever they are worth:

https://law.justia.com/cases/california/supreme-court/3d/29/418.html

https://www.willicklawgroup.com/wp-content/uploads/2012/04/Gillmore-Gillmore-and-Trustee-Pay-over-Orders.pdf

The second one is an older blog by an attorney that references the Dunkin case and that lays out different clauses that could have been employed but that Dunkin did not use that possibly could minimize tax impact, differences in tax brackets between the parties, and specific "tax intent" language.  From reading all of this, it seems to me that you should look at the actual document that your client agreed to.

I could be very wrong on this thought also, but it seems to me that this type of arrangement may fall under IRC sec 1041 that deals with transfers of property incident to divorce, and because the heart of the Gillmore decision is that one spouse can't take actions to deprive the other party to division of assets to which that other party is entitled to (by refusing to retire).

That's a long-winded way of saying I don't know. Sorry & good luck! Maybe someone else has experience that will clarify, and hope you will post what you find out.

[peggysioux5]

Thank you for the information.  I used the spelling of the election that the attorney letter provided.  Go figure that the attorney had the spelling incorrect!!  

[DANRVAN]

21 hours ago, peggysioux5 said:

Is there a way to deduct the payments made to ex-spouse? 

 

Your client's situation matches the Dunkin case so close that I would say no.

In reversing the tax court decision, the 9th Circuit determined that Dunkin was basically using money from his wages to pay off a debt owed to his ex.

13 hours ago, jklcpa said:

The second one is an older blog by an attorney that references the Dunkin case

And it appears her analysis drives the nail in the coffin for the OP's client.  

 

15 hours ago, peggysioux5 said:

how to handle the taxation of the result of electing the Gilmore Election.

Looks to me like it depends on facts and circumstances; and in your clients case it looks like he is on the hook for taxes. 

Did he consult an experienced attorney before he made the agreement?

[peggysioux5]

The taxpayer consulted an attorney, but I do not know how experienced the attorney is....I have asked that the taxpayer forward the actual Domestic Relations Order so I can read the details of the Order.  I currently have two summary letters from the attorney.

Thank you all for your input and information.

[BulldogTom]

I have nothing of substance to add to this post.  I just want to say thanks for posting.   I learned something.

Tom
Longview, TX

[Patrick Michael]

I had a client who didn't want to pay an attorney to represent them in a divorce since it was "cut and dry", so he just signed the paperwork from the spouse's attorney.  The client had a nice pension from the state and they had to give half to the ex. The ex filed the paperwork with the state and started to receive half the pension.  Tax time came and the 1099R was for the entire amount, including the wife's share.  No QDRO was filed with the divorce decree, so he was stuck paying the tax on the ex's share.  Ex refused to reimburse for the tax owed on their amount and it cost the client twice as much in attorney fees to straighten it out than they would have paid to do it right the first time.

[Lee B]

Yeah, I have clients who avoid spending any money with Attorneys, no matter what 

[Sara EA]

We have had clients who brought some situation to us and we advised them to see their attorney.  They admitted they didn't want to pay an attorney, which is why they called us!