“Hands off,” decries one spouse, “I worked for this, not you. Back off, you lazy sot!”
Retirement Assets
While I loathe being the bearer of what could be received as bad news: assets earned during the marriage are marital property and subject to equitable distribution. This includes assets earned directly from the efforts of just one party. This asset class includes retirement savings plans, 401(k)s, 403(b)s, and pensions (both defined contribution plans, and defined benefit plans). Often, these assets are complex and require professional valuations in order to glean their true, marital value.
One party might say: “Sure, I have a pension. It says I’ll get $1,800 every month, when I’m 62! I’m only 45 now, and can’t touch anything. Plus, what if I don’t retire? What if I lose my job or get laid off or worse? I might get nothing. How can I give you part of something I may never receive?”
This is true, however, we must widen our lens to take in the whole picture and the concept of…
Present Value
Participants usually receive pension statements that state projected monthly payments as of a certain age of retirement. In order to equitably distribute marital assets, we must calculate their “present value.” Present value means an asset’s current worth; that is, what it would have to equal today (e.g. $470,000) in order for it to produce a particular projected monthly amount (e.g. $1,800) down the road, say, in 17 years. The $470,000, not the $1,800 per month, is the amount we have to divide in a divorce.
Confusing? Yes. Particularly because we are no longer working with real numbers. We have entered the mysterious, worrisome and sometimes Escherian world of mathematical possibilities. A world of “maybe numbers” assembled from actuarial charts of life expectancy and statistical probability. To make sense of this world, we need the expertise of an actuary.
What are the actual values? What about the portion earned before the marriage or after we filed for divorce? And how do we divide these assets?
“Someday” and “Maybe” Numbers: The Challenge of Dividing Retirement Assets – Part 2
Just because we determine a value for something does not mean we divide it! Often spouses are concerned that the mere mention of an asset puts it on the auction block and forfeits their exclusive rights to it. Not so!
Getting a comprehensive picture and value of ALL assets is an important part of creating a solid settlement agreement. An agreement should even specify assets whose separate nature is undisputed, with the other party waiving any rights, title or interest thereto. Full disclosure helps an agreement stand – stopping either party from claiming he entered into the agreement without full knowledge of the vital facts upon which he relied.
Retirement assets can be complex; difficult to understand and value. Determining the portion of an asset that is actually subject to equitable distribution is one of the intricacies parsed out below.
Marital vs Non-Marital
If the parties were married for the entire time the participant [in the retirement plan] worked and the pension plan was in effect, its whole value is marital, and the “alternate” spouse will be entitled to an equitable share. Depending on multiple factors, including the length of the marriage, this share could be as much as 50%.
Sometimes a portion of the pension was premarital.
If, for example, the plan participant worked for 5 years prior to the marriage, the portion earned during those 5 years is premarital. That means it is separate property and not subject to equitable distribution.
However, how do you determine the premarital value of the 5 years of pension? You cannot simply look at its value on the date of the marriage! Stay with me here. Because early contributions accrue interest, that interest is also separate property and needs to be valued.
So if a plan is worth $10,000 at the date of marriage, you can’t simply subtract $10,000 from the total as the nonmarital portion – you must also see what the gains on the $10,000 were for the length of the marriage until the filing of the complaint. How was the $10,000 invested? How did each of those funds perform over the 5 years? This requires analysis! The $10,000 might actually be worth $30,000. This is not visible to the naked eye.
The eye of the actuary, however, is greater than 20/20!
So, to summarize: the pre-marital portion must be qualified, backed out, and then a present value given for the marital portion. Defined benefit plans, usually pensions, are complex assets that typically require the expertise of an actuary to properly value.
What does the actuary do?
An actuary (or other expert such as a forensic accountant) must read the pension statement, annual benefits description, and Summary Plan Description (SPD) to understand the benefits. She will look at dates of birth of both parties, date of marriage, actuarial tables, life expectancy for the beneficiary and the alternate beneficiary. Then, the expert will provide a present value and, if necessary, the marital and non-marital shares of the asset.
In the final Part of this series, we will talk about some popular options that divorcing couples use to divide assets with a theoretical “present value.”
“Someday” and “Maybe” Numbers: The Challenge of Dividing Retirement Assets – Part 3
In Part 2, we discussed marital vs non-marital retirement assets and how some of those assets require an actuary or other expert to figure out the “present value” before the asset can be divided.
We now arrive here: How do folks equitably divide these assets? Particularly because the present value doesn’t actually exist in a divisible form. It’s a theoretical, projected number!
Below are some popular options:
QDRO (NJ QDRO Overview)
A court order goes to the plan administrator, directing it to divide the asset in the way set forth in the order. This method avoids any tax consequences pursuant to this division at the time it is made. When the plan participant retires, each party receives a monthly sum directly from the plan administrator, as if each had a separate pension. Once this is complete, the parties need not have contact with one another regarding distribution as the administrator manages this directly with each party.
Offset Against Other Assets
Sometimes parties chose not to divide the retirement asset at all, and instead trade its value against another asset. For example, maybe there’s $200,000 of equity in the marital home (the husband and wife each entitled to $100,000) and $200,000 present value in the pension to which each party would be entitled to $100,000. The husband might keep the pension and wife keep the marital home. Admittedly, these are different asset classes; however, part of equitable distribution is not just halving the baby but identifying workable solutions aligned with the family’s particular needs and choices at the time.
Life Insurance Policy
A bit more creative, instead of dividing the pension at the time of divorce, the parties agree that when it is in payout status, the recipient will pay a portion to the alternate payee directly, perhaps as alimony or equitable distribution, depending upon tax consequences and legal restrictions. Parties might choose this option for two reasons:
- The monthly amount is not discounted by the administrator, the way it would be if it was divided into two separate pensions pursuant to a QDRO.
- The parties avoid the costs of a QDRO, which, though not significant, can increase the costs and timetable of the divorce.
To compensate for the risk taken by the alternate payee – one of which is that the participant spouse dies before reaching the date of pension payout, forfeiting the entire pension – the participant will obtain a life insurance policy benefitting the alternate spouse in an amount that will replace the pension payments in the event of the participant’s death. Having the life insurance covering at least some of the risk is an essential part of this approach.
Conclusion
Informed decisions make for better agreements and a better night’s sleep. Knowing the values of assets, even if you ultimately wish to waive any interest you have in them, is good practice. It helps with clarity and can inform other aspects of your agreement. Divorce is laden with pitfalls that can lead to regrets, nausea and insomnia. In my opinion, taking the additional time and making the investment to learn the values of potentially significant assets can help people sidestep all three.