Can this be done? Is this even Legal?

Question

Hi BP,

I recently got an idea, but I'm starting to doubt that it is feasible,  and it may not even be legal for all I know. I know BP has people of all backgrounds so I expect someone might be able to answer my question.  The situation is kind of complicated, but I'll do my best to explain it.

About three weeks ago I got a divorce. For the settlement, I transferred money from my retirement investments to her.  Our plan was that since she would be going to nursing school for the next two years, I would give her enough to help her do that and find a very cheap place to live. It was a pretty lopsided agreement, but I want her to have the resources to have a future.

I recently had an idea that would be a win-win for us both.  Instead of her using the money allocated towards finding a very cheap housing situation, she could give me enough to make a sizable down payment on a loan to get a property that is nice enough for me to rent out when she leaves.  I would be able to get into real estate, and she could live in a decent place for a while.

But is that even legal? Can she give me some money she received by cashing the retirement money I transferred to her? If that is legal, is there some way that I could use that money to secure a loan that I probably couldn't get without a 40% down payment on a 100K house for rent?  Would she have to be on the mortgage?  Her credit is really bad. Thats why we think that to get a loan, it would have to be through me.

Thanks,

Tim

Edward B. · Answer

I don't know about the legality of it but I would seriously, SERIOUSLY, question how smart it is. I know lots of people who think that they are going to have or that they had an amicable divorce, but there are always hard feelings there. I would not want to be financially tied to someone that I divorced any more than absolutely necessary. I think you are setting yourself up for some serious pain down the road. I can see so many ways that this ends badly, very badly.

Victor N. · Answer

Take your losses and move on.  My father taught me that you can tell if a deal is fair by asking if I were on the other side, would I want to enter into the proposed transaction?  In this case, she would be crazy to do this if she is thinking clearly.  Dividing the retirement plan funds through a QDRO is a nontaxable event.  If she takes out the money to give you, she pays her highest marginal income tax rates and likely a 10% early distribution penalty plus filing a gift tax return.  She should keep the money invested in her own retirement account.  I have had to start over twice through divorce so I understand the emotional and financial pain.  However, this kind of deal will just prolong the suffering and cause more pain.

Dave Hurt · Answer

I agree with everyone else here for many reasons.  Why would she give you 48k as a down payment on a home she wouldn't have any equitable interest in?  I know you said she will have a place to live 'rent free' but coughing up 48k doesn't exactly seem free to me.  As already mentioned, she could take those funds and rent for several years and not be beholden to her ex-husband as her 'landlord'.  Furthermore, when the time does come for her leave - she could make a big stink about it and claim that she does in fact have an equitable interest in the property.  Since she would basically be 'gifting' the 48k to you, she may also be on the hook for gift tax (disclaimer - not an accountant so I have no clue, just putting it out there) which then creates a paper trail and gives her a stronger case that she has an interest in the property.  I would be afraid that this could result in nasty litigation down the road...however it sounds like you've already made up your mind so whatever you choose good luck!

Charlie Fitzgerald · Answer

DISCLAIMER, I am not licensed to practice law in your State.

The transfer of the retirement assets to your ex, as part of your marital settlement order from a court, converts those assets to her, lawfully and legally.  Any tax ramifications you will face (early distribution penalty if you are under 59 1/2, taxes on the distribution etc.) are on you.  Now that those assets are lawfully your ex wife's assets.  She is free to do whatever she wants with them, including loaning/giving them to you so you can do whatever you want with them.  Having said that, I agree with @Edward B. wholeheartedly.  This is not a road you will likely enjoy going down in terms of buying a joint asset with your ex-wife, having her live in it now, and then surrender the asset to you later (even if you compensate her for it.)

The song "Bad Moon Rising" comes to mind...

Good luck.

Gary Headrick · Answer

Listen to the guys above. Having lived (barely) through 4 divorces I can attest to one divorce is worth 2 stock market crashes and the road to hell is paved with good intentions. Get back in the shower and come up with another plan.

Bryan O. · Answer

@Timothy Wright just say thank you and walk away. Your plan is bad. She could just take that $48k and pay rent on a great place for 2 years, so why would it benefit her to just give it back to you? There is no win-win here. Consider your loss as the price of an educational course and move on. These aren't the droids you are looking for.

Jeff B. · Answer

If she contributes funds (source is irrelevant) she could later make claims against the new property.

Although a divorce may be finalized, your lives will be tangled for a long time thereafter.

Timothy Wright · Answer

I'm now inclined to agree. In any case, I think this conversation has gone about as far as it needs to go. Thanks for your advice, everyone

Lorenzo Smith · Answer

please listen to these guys that's what the forum is for.

Can this be done? Is this even Legal?

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