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Dividing Marital or Community Property
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Dividing Marital or Community Property

Valuation and Distribution

There are several ways to evaluate and distribute retirement benefits in a divorce. The laws in some states specify the method that must be used.

Here are some common ways it's done:

  • Cash out. Some retirement accounts can be liquidated and divided at the time of the divorce. But this won't work for a lot of assets. Many pensions aren't accessible before retirement age. Fees, penalties, and taxes for early withdrawal could destroy the value of many accounts
  • Immediate offset. In this method, the retirement account is left intact to grow and mature for the employee-spouse. But the other spouse gets money or property to "offset" his or her share of the asset's present value. However, you do need enough assets to make an offset work
  • Continued jurisdiction. In this method, the divorce court retains jurisdiction over the case and doesn't divide the benefits until they're paid out to the employee-spouse. This lets the court consider any changes that occur between the time the couple splits up and the time benefits are paid. The down side: Matters could be unsettled for years
  • Deferred distribution. In this method, the court issues an order at the time of the divorce that allows the non-employee-spouse to receive his or her share of the retirement pension when the employee-spouse begins to receive pension payments. In ERISA plans, a court order called a qualified domestic relations order (QDRO) is used to direct the pension plan administrator to pay out a percentage of the benefits to the employee's ex-spouse

Splitting up retirement benefits in a divorce is complicated. There are many kinds of benefits, it's hard to determine their value and different state and federal laws apply. Contact Troyan for assistance.

To protect your interests, you need help from an experienced divorce attorney. Pension Evaluators® shall work directly with you as your pension experts congruently. It pays to invest in expert help now to help secure your retirement future.

A few states, such as California, take a rather simple approach. Lawmakers in those states believe property should be divided equally because they view marriage as a joint undertaking in which both spouses are presumed to contribute equally to the acquisition and preservation of property. The contributions may be different in nature, but they are treated equally. The wage earner does not receive more property than the homemaker, and vice versa. All marital property will be divided fifty-fifty, unless the husband and wife had a premarital agreement stating otherwise.

The California community property approach saves resources. Husbands and wives do not have to spend time and money arguing about who should get more property since the law of that state already has determined that community property will be divided fifty-fifty. (In California, there still may be issues to dispute, such as: What is and what is not community property? What is the value of a particular piece of community property? For example, if an actress divorces mid-way in production of a film, how does one value her interest in the film?)

Although California may save resources by declaring an automatic fifty-fifty split, it deprives courts of the opportunity to fine-tune property divisions to meet the needs of individual cases. In several other community property states and in all equitable distribution states, courts are allowed to fine-tune property divisions. (That may or may not be an advantage, depending on the cost of fighting over what is "equitable" and one's faith in judges to make fair decisions regarding property.)

"Equitable distribution" means a court divides marital property as it thinks is fair. Like community property states, states applying principles of equitable distribution view marriage as a shared enterprise in which both spouses usually contribute significantly to the acquisition and preservation of property. Unlike the community property approach of California, however, equitable distribution states are not locked into a fifty-fifty split. The division of property could be fifty-fifty, sixty-forty, seventy-thirty, or even all for one spouse and nothing for the other (although that would be very unusual). Under equitable distribution, courts consider a variety of factors and need not weigh the factors equally. That permits more flexibility and more attention to the financial situation of both spouses after the divorce. However, it also makes the resolution of property issues less predictable. Here are some examples of factors that are considered by states applying principles of equitable distribution:

  • Nonmarital Property. If one spouse has significantly more nonmarital property than the other, that could be a basis for giving more marital property to the less wealthy spouse. As noted, courts are not obliged to give equal amounts of property to each spouse, but if the parties have sufficient assets to leave each party in a comfortable situation after the divorce, courts usually will try to do so.
  • Earning Power. If one spouse has more earning power than the other, that could be a basis for giving more marital property to the spouse with less earning power. Courts reason that the party with greater earning power can regain money lost in a divorce more easily than the party with less earning power.
  • Who Earned the Property. That can be a factor in favor of the party who worked hard to acquire or maintain the property. When courts apply this factor to a family business, it is common for a court to award all the interest, or a majority of the interest, in the family business to the spouse who operates the business. In that circumstance, the court not only is considering who earned the property, but also is seeking to disentangle the husband and wife from each other's future financial affairs. If the value of the business is approximately the same as the value of the family home, it is common for the court to give the business to the spouse who primarily operates the business and give the home to the other spouse.
  • Services as a Homemaker. Courts recognize that keeping a home and raising children are work. In addition, those services often enable the spouse who is working outside the home to earn more money. Thus, services as a homemaker are a factor in favor of the homemaker. Some courts also apply a related concept of considering whether one spouse had impaired her or his earning capacity because of working as a homemaker. If a party can show his or her work as a homemaker resulted in missing the opportunity for training or job experience that could have resulted in higher income, that factor can favor giving more property to the homemaker-spouse.
  • Waste and Dissipation. If a spouse wasted money during the marriage, that could count against him or her when it comes time to divide property. This factor is sometimes labeled "economic fault," and may be considered even by courts that do not consider other kinds of fault. Waste or dissipation could include gambling losses, significant sums of money given to family members (particularly over the protest of the other spouse), and money spent on pursuing romantic relationships outside the marriage. Business losses occasionally are considered waste or dissipation, but more often, they are considered an ordinary risk of doing business for which neither spouse should be penalized (particularly if the business deal would have benefited both parties had it gone better). In some states, before waste or dissipation can be a factor, it must be shown that the waste or dissipation occurred when the marriage was breaking down (a relatively short time before or after one spouse filed for divorce). In other states, waste or dissipation at any time during the marriage could be relevant.
  • Fault. Non-economic fault, such as spousal abuse or marital infidelity, is considered in some states, but most states do not consider it relevant to property division. In years past (particularly prior to 1965), divorces were based on fault. One needed to show fault by the other party in order to obtain a divorce, and fault was an important consideration in dividing property and setting support. The more modern view is that courts should focus primarily on the economic factors when dividing property and pay less attention to who-did-what-to-whom. Most courts and legislatures concluded that it was too difficult and not worth the time to try to sort out all the transgressions that may have gone on in a marriage, many of which are of a subjective nature.
  • Duration of Marriage. A long marriage may be a factor in favor of a larger property award to the spouse with less wealth or earning power. The longer the marriage, the more likely a court is to view the husband and wife as equal partners.
  • Age and Health of Parties. If one spouse has ill health or is significantly older than the other, that factor could favor a larger award to the sicker or older spouse. When the factor is mentioned by a court, it most often is in connection with an older wife whose ability to earn money is diminished by her age and health. The factor can apply to men too, particularly if the man is of an age at which it is not reasonable to assume that he can go out and re-earn a substantial amount of assets if his wife were given a majority of the marital assets. In such a case, an equal division of assets would be more likely.
  • Tax Consequences. The tax consequences of property division can be considered when dividing property. If, for example, the sale of a house or the sale of stock in a company as part of a divorce will result in payment of capital gains tax, the court can consider that when dividing the property. Perhaps the person who will have to pay the tax may receive some extra property to compensate for the added tax that person will have to pay. Conversely, if a property settlement results in a tax benefit, the person receiving the benefit may receive less property because of that benefit. In order for a court to consider tax consequences, the consequences usually must be immediate and specific. The court generally does not want to speculate about possible tax consequences that may occur several years in the future.
  • Premarital Agreements. A written premarital agreement, assuming it is valid, can be a trump card in dividing marital property. By entering into a premarital agreement, the wife and husband have agreed to waive their rights to have a court consider the usual cluster of factors in dividing property. Instead, the parties through their agreement have determined in advance how their property should be divided in the event of a divorce.
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