Pensions
When a couple divorces, they probably focus first on dividing the property that's easy to see--the home, furniture, cars, etc. The property they can't see their intangible property is also affected by divorce.
For many families, a pension is the largest asset, after the family home. Even if the pension is earned solely by the efforts of one spouse, the portion of it that was earned during the marriage is still marital property subject to division by the court. (For discussion of how a pension can be considered nonmarital and marital, see the earlier section on "Marital and Community Property,"). Many courts prefer to give full rights to a pension to the party who earned it as long as the other party will have a sufficient amount of income and property from other sources.
If, however, the pension is the primary source of income that a spouse would have and there are no other significant sources of income, the court is likely to divide rights to the pension. The court can divide the pension between the spouses by percentages (i.e., spouse A will receive 60 percent, spouse B 40 percent) or by a fixed cash amount to one spouse with the remainder to the other spouse (i.e., spouse A will get $600 per month, spouse B $400).
Divorced spouses may also be eligible to collect Social Security retirement benefits based on their ex-spouse's work record. As long as the divorced spouse:
- is sixty-two or older
- is unmarried
- was married to the worker for at least ten years and
- is not entitled to benefits on own or other account, that exceed one-half the wage earner's primary benefit amount
he or she is generally eligible to collect benefits. The wage-earning spouse doesn't have to be retired and actually drawing benefits; he or she just has to eligible for retirement benefits.
The impact of divorce on Social Security retirement benefits is very different from its impact on pension benefits. A worker with a pension is eligible for a certain amount of money in benefits. If a court orders these benefits split between the parties, the worker's share will go down.
With Social Security retirement benefits, the eligibility of a divorced spouse has no effect on the amount the worker is entitled to. He or she will collect that amount whether he has no eligible spouse or ex-spouse or whether he has four ex-spouses all eligible to collect based on his work record.
That's one reason establishing eligibility for a divorced spouse is normally not difficult. It doesn't require a court appearance or even notification to the worker. It simply requires presenting the appropriate documentation to the Social Security Administration. Documentation would normally include proof of
- identity
- each party's age
- Marriage and
- divorce (the divorce must be final; the legal action cannot be a separation or an annulment)
Generally, original documents are best, but certified copies will be acceptable.
A divorced spouse may also be eligible for benefits on the account of a deceased wage earner if the wage earner was eligible for benefits. Requirements are similar to those outlined above, except that the surviving divorced spouse must be at least sixty (or at least fifty and disabled or be caring for a child who is also eligible to receive benefits on the deceased wage earner's account) and the surviving divorced spouse can remarry after age sixty (age fifty if disabled). The amount of the benefit is approximately equal to the wage earner's primary benefit amount. As with retirement benefits, more than one person can collect. Applicants will need the documents outlined above, along with proof of the wage-earner's death and, if applicable, of disability.
Retirement Benefits in a Divorce
Accrued or vested retirement benefits are community property. This means they need to be divided in a divorce. Retirement benefits that fall under community property include military pensions, veteran's educational benefits, ERISA funds, IRAs, Keoghs, Employee Stock Option Plans (ESOPS), 401K and 403K plans, etc.
Certain retirement benefits are not classified as community property. They include:
- Social Security payments
- Compensation for military injuries
- Worker's compensation disability awards
Regardless of the length of the marriage, retirement benefits should be discussed and settled. For example, the petition, marital settlement agreement and judgment should all provide either for the spouse's waiver of retirement benefits or the division of any such benefits. A spouse should waive retirement benefits only if that spouse's share is worth very little.
There are two options for dividing retirement benefits: (1) the present-day valuation buy-out, and (2) division into two accounts. In the former, the spouse without the retirement benefits takes the present-day value of his or her interest in the retirement benefit and trades it for something else of equal value, such as cash or other assets. Stock options and pension plans where a person must work for a certain number of years may be worth more than you think. It may be advisable to hire a professional pension actuary or appraiser before making a decision.
When dividing a retirement account, you want to make sure you don't lose any tax advantages. A Qualified Domestic Relations Order (QDRO) will be required to transfer a share of retirement funds from the spouse participating in the retirement plan to the other spouse. Please contact the retirement plan administrator or a qualified attorney for more information regarding QDROs.
Contact Pension Evaluators® & QDROs of Troyan Inc® & Associates Group by calling (800) 221-0706 for further assistance.