Common Issues with Pensions During Divorce and How to Handle Them
A pension can be one of the most significant assets in a divorce. Even if only one spouse earned the pension, the funds are generally considered joint marital property that must be divided upon divorce. This can generate high amounts of anxiety for both the pension owner and the spouse, as both may have been counting on the funds for retirement. And there are common issues with pensions during divorce.
Pensions can cause enormous problems in a divorce settlement for multiple reasons. Katherine spoke with Nancy Hetrick, a Certified Divorce Financial Analyst (CDFA), about some of the most critical issues relating to pensions. Here’s what you need to know.
Issue # 1–Determining How to Divide the Assets
You will need to determine whether a non-participating spouse has a right to share in a participating spouse’s pension benefits and if so, the amount to which they’re entitled. In general, a non-participating spouse has a right to share in their spouse’s pension benefits–but only those earned during the marriage. Thus, if a spouse accrued $100,000 in pension benefits but had earned $20,000 before the marriage, only the remaining $80,000 would be considered marital property. (Naturally, if the parties had agreed to keep pensions as separate property in a prenup, then the pensions will not be considered joint property.)
Once you’ve determined how much of the pension is marital property, you can negotiate the division of the assets like any other property. In other words, a couple doesn’t necessarily have to split the assets 50/50, but one spouse’s share can be offset by a different asset of equivalent value, such as real estate or the non-participating spouse’s own pension.
You will also need to decide how the assets will be distributed. Parties typically choose between a lump sum or a monthly annuity, or distributing the present value of the pension at the time of the divorce.
Issue # 2–Understanding Rules Concerning Survivor’s Benefits
The parties must also pay close attention to the pension’s rules regarding a survivor’s benefit. Many plans permit a former spouse to receive or continue receiving benefits after the death of the participant spouse as long as certain conditions are met. For example, a plan may permit a non-participant former spouse to receive benefits if:
- The couple had been married for at least nine months,
- The non-participant spouse has not remarried.
- The divorce decree explicitly names the non-participant spouse as a beneficiary.
Your divorce decree should expressly state that you and your soon-to-be-ex-spouse have agreed that the non-participating spouse will be entitled to the pension’s survivor benefits. Hetrick has seen tragic results when the decree failed to include this specificity. For example, in one case, a former spouse lost her right to benefits when the pension-owning spouse committed suicide shortly after the divorce decree was signed. Because the decree did not explicitly state that the former spouse was entitled to survivor’s benefits, the money was forfeited to the state.
Make sure that the language is as specific as possible and adheres to the pension’s rules and state law.
Issue #3– Understanding the legal formalities governing the pension split.
You should clearly understand the rules governing your or your spouse’s pension, particularly regarding dividing the assets upon divorce. If you do not follow these rules precisely, some or all the pension could be forfeit, leaving you or any other intended recipient or beneficiary in a nightmare situation.
Many pensions require the divorce decree to contain very specific language regarding the division of assets. For example, the federal government’s Thrift Saving Plan pension requires the parties to specify the exact percentage of the pension owner’s assets in the decree. If it is not specifically included, the non-participant spouse will receive nothing, despite the intentions of the divorcing couple.
Hetrick says most plans require the non-participating spouse to file a “Qualified Domestic Relations Order” (QDRO) before finalizing the divorce decree. A QDRO is a legal document that establishes that the non-participating spouse is entitled to receive a specific, defined portion of the pension. The QDRO requires very precise language that can vary depending on the pension plan and the particular situation between the parties. Once drafted, the judge must sign the document, and it must be submitted to the plan.
It is the non-participating spouse’s responsibility to ensure that the QDRO is drafted and filed in a timely manner.
The Bottom Line
Familiarize yourself with pension plan rules and the state laws governing pensions. You should also ensure that your financial expert and divorce lawyer are experienced in dealing with the division pensions and will review your unique situation with care.
Next in this series: All about QDROs!
You may also want to read: 10 Mistakes People Make When Going Through Divorce
If you’re considering divorce but would like to try an approach that might mean a brighter future, call our team at Miller Law Group to schedule a confidential consultation.