Getting Divorced? Consider your Pension
Finances: Experts Say Pension May be the Biggest Overlooked Asset in Divorce
When people consider divorce, many fail to realize that the future pension of a spouse is subject to a divorce settlement, even if the couple is divorcing young.
Lee S. Rosen is president of Rosen Law Firm with offices in Raleigh, Charlotte, Durham and Chapel Hill, N.C. Pension issues are complicated and have many pitfalls for the unwary. Pension plans are the trickiest issues in divorce,” he said.
A pension is one of the most important assets,” said attorney Henry S. Gornbein of Gornbein, Smith, Peskin-Shepard PLLC, of Bloomfield Hills, Mich. Normally in a pension division through a Qualified Domestic Relations Order, the spouse is entitled to half of the pension accrued during the marriage.”
Under these provisions, a spouse married for six years to a person who retires with a pension after working for a company for 30 years would be entitled to 10 percent of the pension amount after the pensioner retires from that company. Once the divorce is finalized, the pension administrator is notified and the administrator handles the disbursement to the former spouse upon the retirement of the pensioner.
However, there are states where pension benefits to the former spouse can accrue after the divorce, and Rosen stresses that the former spouse be aware of this in case the pensioner remarries and divorces in the future. The first spouse to get their Qualified Domestic Relations Order qualified wins. The second order that is qualified can only divide the benefits that remain after the first order is addressed,” he said.
Gornbein explained that different types of pensions offer different benefits to the divorced couple. A defined benefits pension is where you know exactly what the future benefits will be. A defined contribution pension is one that is contributed to, often a 401K where amounts are deposited monthly into an account. Pensions in many large companies also have a savings, stock purchase plan. Executives have additional pensions.”
Attorney Michael J. Grilli is an associate of Bacon/Wilson of Springfield, Mass. With the 401(k) type plan, the non-employee spouse is receiving a lump sum of money that will either remain in the current plan or may be ‘rolled over’ into their own plan.”
How pensions are affected by divorce for government employees can differ from those in the private sector, according to Grilli. The most unique aspect of a government pension is that it usually exists for the employee in lieu of social security and as such when the benefit is being divided it must be weighed against any social security benefit that the non-employee spouse may have. In many governmental pensions, there is a provision that only one spouse may receive a benefit. In certain circumstances, an ex-spouse may lose what has been given to them by the court by virtue of their ex-spouse getting remarried.”
The federal government has enacted legislation, The Uniformed Services Former Spouses Protection Act (USFSPA), to regulate the entitlement of military pension benefits that are awarded to a former spouse. Military and government pensions are governed by their own set of laws and are entirely distinct from private sector pensions,” says Rosen. It is imperative to work with someone with experience. A mistake may not be clear for many years and by that time, it will be way too late to fix the situation.”
In order to be eligible for a portion of the military pension of a former spouse under the USFSPA, the couple must have been married for at least10 years during a time that the former military spouse had 10 years of creditable military service. The pension must also be based on the military member accruing 15 creditable years of service.There are other significant provisions and caveats to the provisions of USFSPA that should be explained by a knowledgeable attorney.
TIPS FROM THE ATTORNEYS
1. Understand the tax issues.
“It’s important, however, to remember that retirement assets have not necessarily been taxed yet. These potential taxes need to be factored into any distribution, “ Rosen said.
2. Stop contributions during divorce.
Grilli recommended that with defined contribution pensions like a 401K, the pensioner should stop to the extent possible any contributions while the divorce is going on. At the end of the day, if you are going to be losing a portion of the account, it is best to stop contributing to that account.”
3. Know the death benefits.
Gornbein points out that the possibility of the death of the former spouse should be taken into account. There are survivorship benefits. If the decree is properly drafted it would include these.
4. Be careful about the paperwork.
“Rosen suggests caution when the company of the pensioner supplies forms. It is tempting to use the forms provided by the company to divide pensions. Watch out. Lawyers for the pension plan draft those forms. They are drafted to protect the plan, not the employee and not the spouse.
5. Know the value of a defined pension plan.
With a defined benefit plan, Grilli suggested having it valued. It is possible for an expert to tell you, based on life expectancy and the terms of the pension, what that eventual benefit may be worth. This is important if you wish to negotiate the value of this pension against other assets. For example, while a pension may only pay $1,500 a month upon retirement, given your life expectancy, this may result in that pension having an actual value of hundreds of thousands of dollars.” Gornbein said, normally, shared pensions are pooled. An actuarial study can also be done and look at the present value of the benefits and then trade them off on a case-by-case basis.”