“Will my spouse be entitled to some of my pension after our divorce? If so, can I prevent this?”
To begin answering these questions, one must first define terms. Retirement plans can be broken into two different categories: Defined Contribution Plans and Defined Benefit Plans. Defined Contribution Plans, such as a 401(K), are defined by the amount of money contributed to the plan. Defined Benefit Plans, such as a pension plan, are defined by the monies (the benefit) that you will ultimately receive monthly at retirement age.
In most states, at least a portion of the retirement plan that is accumulated during the course of the marriage is marital property. Many states have offsets for non-marital retirement funds, or at least those funds that were held at the time of the marriage. It is often prudent to get statements showing the balances in your retirement account at the time of your marriage.
When it is time to analyze the division of your assets, there are some options as to how you could divide your retirement plans. First of all, you may retain the entire value of your retirement plan if it can be offset by another asset. For example, if there is $100,000 in the equity in your home that is set aside to your spouse, you may desire to keep your $100,000 retirement plan to offset your spouse’s $100,000 value so that each of you will have $100,000 in assets. When analyzing this, you also need to take into consideration the potential tax consequences of assets being set aside to you. In other words, the house likely will not have any tax consequences due to the exclusion available to houses relating to capital gains. Retirement plans, on the other hand, will definitely have tax consequences.
The second manner in which these assets can be divided are through what is called a Qualified Domestic Relations Order. This is a special order which, when approved by the Plan Administrator of the retirement plan, divides these plans. Typically, Defined Contribution Plans are rolled into IRAs in your own name. Pensions are typically divided on a percentage basis where you will receive your portion of the plan (typically a monthly payment) when you are entitled to receive it pursuant to the plan.
Some things to consider, regarding attempting to retain your pension or your non-dividing it, are:
Whether this information is prudent or not depends on each person’s financial situation.
Finally, it should be noted that pension plans can be valued by calculating the net present value of future payments. While this sometimes proves to be a viable method, these calculations often yield values for these pensions that are greater than the parties can offset with any other asset. In the event of a short marriage or second marriage when there is a significant non-marital interest, a spouse may keep their entire pension by buying out/offsetting the value with some other asset.
When divorce is inevitable, and it is time to divide your assets, one of the first things you need to do is obtain all of your retirement-plan documents. You will also need to collect all of the account statements regarding the status of those plans as of the date of marriage as well as of the date of separation. You will need to update that information so that it is current through the Dissolution of Marriage action. This information then needs to be provided to your divorce attorney, so that all of these issues can be discussed and your financial best interests can be properly evaluated.
James H. Young is a divorce attorney in Lee’s Summit, MO.