In some divorces, a pension or other retirement asset can be a substantial portion of the marital estate to be divided upon divorce. Pensions are structured differently than 401(k) and some other retirement accounts. With a pension, the recipient receives a set amount per month during retirement. On the other hand, with a 401(k), money is put into the account during your working years and the money grows, hopefully, so that a certain large lump sum is available for distribution at retirement.
Division of a pension in divorce can be difficult. Actuarial assistance can be crucial to determine the present value of a pension. Where an early retirement is allowed and the participant has not yet retired, it can be difficult to value and divide the pension in any meaningful way. If the recipient spouse says in the divorce that he will retire at age 65 and the pension is divided as if that asset is only worth what it would be worth if he retired at 65, and then he retires sooner, the spouse with the pension can obtain a windfall that was either not intended by the parties or at least probably not intended by the non-recipient spouse.
To deal with this issue, in the absence of an antenuptial agreement or post-nuptial agreement, the courts have addressed various methods of dividing these accounts:
- First, the court can simply value the asset as if the recipient spouse retires at age 65 and award to the recipient spouse and award other assets to the non-recipient spouse to make up the difference. If this happens, it is important to reserve the right for the non-recipient spouse to obtain additional amounts of any benefits obtained by the participating spouse upon early retirement to avoid the windfall.
- Second, the court can award each spouse for example, 50% of the pension. This is a good way to avoid having to value a pension, since it doesn’t matter what the asset is worth if both parties are receiving an equal portion of it; however, and this happens, if the recipient spouse dies before the pension benefits become available, the non-participant spouse could receive nothing. The issue is complicated further if there are survivor benefits and if those are not dealt with properly in the divorce, particularly if the participant spouse remarries.
- Finally, the court can reserve jurisdiction over the retirement assets and create an equitable division of property at the time the recipient spouse retires. Again, the same concerns apply where the recipient spouse may die before receiving any pension benefits, and the non-participant spouse does not get any benefit as a result.
It is important to have a full and frank discussion with your divorce attorney and financial advisor concerning pension assets, especially pensions that are worth a substantial amount of money, where there has been a long-term marriage, or where the recipient spouse is not yet in retirement.
Andrew M. Tatge is a business and family law attorney with Gislason & Hunter LLP (www.gislason.com) and can be reached at firstname.lastname@example.org or (507) 387-1115. This information is general in nature and should not be construed as tax or legal advice.