July 26, 2012

Distributing Retirement Benefits in Divorce

Article By: William Dorsey
Contact Us With Your Divorce and Benefits Law Questions.

Property division is often the most contentious issue in any divorce.  Part of the complexity involves dealing with less tangible assets—it’s not just about who gets the house and who gets the car. What about things like retirement benefits?

What is Marital?

Florida law provides an equitable distribution of marital assets and liabilities between husband and wife upon divorce. This equitable distribution also applies to retirement benefits. Often retirement accounts will be your most significant marital asset other than your marital home.

Just like any other assets acquired during the marriage, retirement benefits, which have been accrued by either spouse during the marriage, will be perceived as marital property that will need to be divided in divorce.

However, if a spouse has accrued retirement benefits prior to the marriage, which have not yet been received, those will not be regarded as marital assets.

Similarly, those retirement benefits accrued by either spouse prior or after dissolution of the marriage will not be considered as marital assets to be divided upon divorce.

Courts are sometimes strict on this point.  For example, in a 2011 appellate case, (Brathwaite v. Brathwaite) the ruling held that courts in dissolution of marriage actions could not, as part of its equitable distribution of marital assets, award wife half of husband’s military retirement benefits a portion of such benefits accrued before the parties’ marriage.  Only the portion that accrued during the marriage was a marital asset subject to equitable distribution. This means that any retirement benefits accrued prior to the marriage are considered as non-marital or separate property.

It is also essential that you know if your retirement account can be divided upon divorce. Retirement accounts that are generally divided between spouses in a divorce include IRA’s, Keoghs, ESOPSs, 401(k) plans and traditional pensions (including military and law enforcement pensions). Those retirement benefits that will not be divided as marital assets include social security benefits, disability compensation, and railroad retirement benefits.

How will it be Divided?

Once you have determined whether your retirement benefits or those of your spouse are considered marital assets, the next step is to figure out how those assets will be divided. There are two ways in which retirement benefits can be divided in a divorce:

1. A present-day valuation buy-out or asset reallocation
The present-day value is easy to determine when you are dealing with a 401(k) or IRA: all you need to do is look at your statement. However, things are harder in traditional pension.

The way it works in a pension is that the beneficiary is guaranteed a particular payment at a specific time. Usually, most pensions are awarded every month at age 65. However if you are only 30, you still need to wait 35 more years of growth for you to receive it. Therefore, during the divorce procedure, if you would like to obtain your part of the pension before reaching age 65, you will need an actuary or accountant to calculate the present-day value of the pension. Once that is done, you can trade that amount for other assets of the same value.

2.   Dividing retirement benefits into two accounts
This kind of division can be done in IRAs, 401(k)s or pension plans. For instance, if you are dealing with an IRA, in order to divide the benefit, you need a copy a qualified domestic relations order (QDRO).  If the court approves the division and part the funds are transferred into a new IRA account by the receiving spouse, the transfer if effectuated without tax or penalty.

Retirement benefits are substantially different from other marital assets, mainly because of their purpose (retirement funding) and because of their legal consequences (early withdrawal penalties and taxes). That is why divorcing couples should be careful when considering the division of retirement benefits. For help with these and other divorce issues in our area, be sure to get in touch with an experienced Jacksonville divorce lawyer for guidance.  

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