“Will my spouse be entitled to some of my pension after our divorce? If so, can I prevent this?”
The short answer to this question is: yes. A pension plan is like a bank account or any other marital asset and can be divided by the court in a divorce case. However, the only portion of the pension plan that the court can divide is that part which you earned or acquired during the marriage. Any part of the pension plan which you earned before the marriage, and which you will earn after the divorce, belongs to you. The remainder can be divided.
The pension plan is divided on a tax-free basis. That is to say, neither party pays any taxes because of the division. Many pension plans are divided by a court order. There are two types of orders, one for state plans and one for other plans. The court order for the state plans is known as a Qualified Illinois Domestic Relations Order (QUILDRO) and the court order for the other plans is known as a Qualified Domestic Relations Order (QDRO). These court orders are prepared by your divorce lawyer at the end of the case and submitted to the judge along with the Judgment for Dissolution of Marriage.
The result of dividing your pension plan is that the pension plan administrator will transfer a portion of your plan to your spouse. The new pension plan created for your spouse by the division is subject to the same pension documents. Your spouse will have the same rights to his or her portion as you have to yours.
You may be able to avoid giving your spouse a portion of your pension plan by giving another asset instead. Sometimes this alternative arrangement may be good for you, and sometimes you may be better off by giving up a portion of your pension. There are tax consequences to consider. Your divorce attorney will advise you which assets are best to keep because of favorable tax consequences down the line. It may be advantageous for you to give away part of your pension rather than keeping it all in trade for another asset. When pension funds are withdrawn, they are taxable. If the money is taken from the pension plan too early, there is also a penalty. On the other hand, if you give away part of the pension and share in another asset, say a bank account with cash, you will have immediate access to the money in the bank account without any tax consequences at all. Your divorce lawyer will help you decide which assets are best for you. This will depend on your age, your income, your needs, and other similar financial considerations.
Jay A. Frank is a divorce and matrimonial practitioner in Chicago with over 35 years of experience. He has been selected as one of the top family-law attorneys in Illinois. He can be reached at (312) 828-9600. View his Divorce Magazine profile.