DEFERRED DISTRIBUTION OF RETIREMENT BENEFITS: RETROACTIVE AWARDS
© 2004 National Legal Research Group, Inc.
All American jurisdictions now agree that retirement benefits are subject to division in some if not most divorce cases. See generally Brett R. Turner, Equitable Distribution of Property 6.09 (2d ed. 1994 & Supp. 2004). The most common method of division is deferred distribution, which awards the nonowning spouse a stated equitable portion of the marital share of each future payment, if, as, and when received. Id. 6.11. Deferred distribution is so convenient and common that federal law requires pension plan administrators to enforce orders implementing it, provided that those orders meet the federal law requirements for a Qualified Domestic Relations Order (QDRO). Id. 6.07.
Except for the sometimes arcane process of understanding the terms of the plan and drafting an appropriate QDRO, deferred distribution is not difficult to implement as regards payments due after the date of the property division order. If the draft QDRO has not been pre-approved by the plan, approval may take time, but federal law requires the plan administrator in most instances to segregate the nonowning spouse's benefits during the approval process. 29 U.S.C.A. 1056(d)(3)(H). If the order is ultimately determined to be qualified, the nonowning spouse receives the segregated benefits. In addition, while a QDRO is the only way to force payment of the nonowning spouse's benefits directly from the plan, the court can order payments from one spouse to the other without the need for a QDRO. Thus, payments due after the date of the final property division are not at all difficult to divide.
But what about payments due before the date of the final property division order? In some cases, the retirement benefits at issue will be matured or in pay status technical terms which mean that the employee has already retired and is already receiving his or her monthly check. That check is partly marital property. If payments due before the final property division order have not been previously divided, can the court order a retroactive deferred distribution of the retirement benefits? The general rule is yes, but there is a significant exception.
Retirement benefit payments due before the final property division order are subject to the same rules of classification as retirement benefit payments due after the final property division order. Retirement benefits are acquired for purposes of property division when they are earned, not when they are received. A defined benefit pension plan is earned during the marriage to the extent that the pension is based upon credible service performed during the marriage. Ordinarily, one single marital or community share fraction is applied to all of the benefits. Since a single fraction is generally used, that fraction applies equally to benefits received both before and after the final property division order. Thus, if the pension is 70% marital property, benefits received before the final property division order are likewise 70% marital property:
While an interest in the retiree's retirement pay is a property interest, payments already received are nothing more than money in the hands of the retiree. In a practical sense the situation is no different than where the court awards one spouse a valuable asset and then orders that spouse to pay the other a certain sum as and for his or her community property interest therein. We conclude these labels cannot be called upon to defeat the nonretiree spouse's undisputed right to his or her share of this community property asset. Unquestionably the trial court has authority in a dissolution proceeding to effect the division of property by ordering the retiree to pay over the other's pro rata share of undivided benefits already received.
In re Marriage of Farner, 216 Cal. App. 3d 1370, 1375, 265 Cal. Rptr. 531, 533 (1989).
If retirement benefits due before the final property division order are marital property, can the court order the owning spouse to pay the nonowning spouse a portion of the marital share of such payments? This is a much harder question, and the answer depends upon the facts.
The complexity is most easily seen by looking at another type of benefit which constitutes marital property: salary. Salary received between the date of marriage and the date of classification is unquestionably marital property. Assuming that an equal division is equitable, can the court order one spouse to pay the other a sum of money equal to 50% of all salary earned during the marriage? In theory, such an award might be permissible; salary earned during the marriage is clearly marital property.
The problem, however, is that salary earned during the marriage has often been spent by the time of the divorce. If the salary has been spent to acquire an asset, and the asset is being treated as marital property, it would be gross error to treat the salary as an independent marital asset. Such treatment would include the value of the salary in the marital estate twice. Past salary payments, used to acquire marital property, no longer exist at the time of the divorce. Their value continues to be marital property, however, in the form of the assets acquired. It is possible that the assets acquired may have gained or lost value since the time of acquisition, but that risk is present with any asset. The marital estate, like any other owner of property, must bear the risk that the market value of the asset will go down as of course it shares the gain if the value of the asset goes up.
More commonly, salary earned during the marriage is spent to pay marital debts, such as the living expenses of the parties. The parties are permitted, of course, to use marital funds to meet marital obligations. Such use has no direct effect upon the value of the marital estate, as an equivalent marital debt would exist on the date of classification if the marital funds had not been so used. At an indirect level, such use clearly benefits the marital estate, as interest would be charged (and marital credit possibly damaged) in the event of nonpayment. To the extent that marital salary has been used to pay marital expenses, no remaining value exists at the time of divorce.
One situation exists, however, in which past marital salary payments may generate value which exists on the date of the divorce. When one spouse unilaterally takes control of marital property and uses it for nonmarital purposes, dissipation has resulted. Two clear examples are the use of marital funds to purchase gifts for a paramour or to pay unreasonable gambling expenses. When marital funds are improperly dissipated, the trial court can generally order the dissipating spouse to pay the nondissipating spouse the value of the amount so spent. Turner, supra, 6.30.
Dissipation is often a time-limited exception. In some states, it applies only to payments made during or after the marital breakdown. Earlier payments can be treated as a division factor, but they are not dissipation in the strict sense of the word. Other states avoid a formal time limit, but there is still general agreement that dissipation is improper expenditures made in anticipation of divorce. Only in rare circumstances will improper payments made before the marital breakdown result in a monetary award. Informally, if not formally, there is usually a presumption that expenditures made before the marital breakdown were proper. See generally id. The presumption that expenditures made before the marital breakdown were for a valid purpose is generally parallel to the presumption that assets acquired during the marriage are marital.
The general rule with regard to salary received before the date of classification therefore is that it is not a marital asset existing at the time of divorce. The normal presumption is that such salary was used to acquire other marital property, or spent for marital purposes. This presumption can be rebutted in most states by positive proof of improper expenditures; the result will be either a monetary award or an unequal division of the remaining property. If the expenditure occurred during or after the breakdown of the marriage, it is often possible to cast upon the spending spouse at least the burden of producing evidence of the purpose of the expenditure, and frequently the full burden of proving that the expenditure was legitimate.
The above series of points apply fully to retirement benefits received before the final property division order. Payments received before the date of classification are generally not treated as marital property existing at the time of divorce. Since the date of classification varies from state to state, these cases reach different results depending on the facts. They all agree, however, that payments due before the date of classification (whatever that date may be) are ordinarily not part of the marital estate. See Collins v. Collins, 144 Md. App. 395, 798 A.2d 1155 (2002) (date of divorce); Johnson v. Johnson, 297 A.D.2d 279, 746 N.Y.S.2d 302 (2002) (date of filing); Knight v. Knight, 258 A.D.2d 955, 685 N.Y.S.2d 560 (1999) (error to award a share of payments due before the date of filing).
The above cases hold that no marital interest results under the law of dividing retirement benefits. But a marital interest still might arise under the law of dissipation. Collins expressly so held, noting that a retroactive award for the period before the date of classification could be justified if previously received benefits were dissipated. Seeing no immediate evidence of dissipation, the court reversed the retroactive award and remanded the case back to the trial court with instructions to expressly consider whether dissipation had occurred. Johnson likewise instructed the trial court to consider upon remand whether part of the benefits had been spent for various valid purposes, including taxes due on the payments themselves.
In states which do not have a general rule against awards retroactive to a date before the date of classification, the courts have been sensitive to the risk of double counting. In Faulkner v. Faulkner, 361 N.J. Super. 158, 166-67, 824 A.2d 283, 288 (App. Div. 2003), for example, the court found on the facts that the husband's past "pension checks were an income stream which had been used to support the family unit and to meet their living expenses." "To give [the wife] a retroactive lump sum distribution of that pension would give her a share of the same funds twice." Id.
Benefits due between the date of classification and the date of the property division order have not been discussed in a great body of reported cases. In general, the same set of concerns should apply: The payments are marital in theory, but cannot be independently divided if they have been spent to acquire marital property or used to pay marital debts or expenses. Because the burden of accounting for missing marital property is often placed upon the spouse who lost it, the spouse who received the pension may bear the burden of proving that marital funds were spent for a proper purpose.
The New York decisions in Knight and Johnson held that the trial court may divide retirement benefits retroactively to the date of classification, and a retroactive award was affirmed on the facts. See also Avery v. Avery, 2002 WL 360296 (Ohio Ct. App. 2002) (award should ordinarily be retroactive to the date of divorce). But none of these cases held that a retroactive award was mandatory. Logically, this reasoning opens the door for not making a retroactive award in the Faulkner situation where past benefits were spent for a valid marital purpose. Since the parties will almost by definition be separated after the date of classification, it seems fair to hold that the burden is on the spouse who claims a valid expenditure. If no claim is made, or if the burden is not met, an award retroactive to the date of classification would normally be proper.
An Iowa court addressed this fact situation in In re Marriage of Duggan, 659 N.W.2d 556 (Iowa 2003), but the court's reasoning may be incomplete. Duggan held that the wife was entitled to receive her share of the benefits which had already been received by the husband before the award was made. The court saw no reason why payments made to the husband should reduce the wife's rights. As noted earlier in this article, this point is entirely correct. The court missed, however, the Faulkner issue. To the extent that the benefits already received were spent to acquire marital property or to reduce marital debt, the value of the payments was already included in the marital estate. Duggan seemed to imply that the husband had wasted the past payments; if so, the wife never received their benefit, and the case reached the right result on the facts. To the extent that the past payments were spent for marital purposes, however, the effect of the retroactive award was to include the marital share of the past payments in the marital estate twice.
Avery also held that a provision of federal law setting forth the earliest date on which the federal government would start paying part of the husband's military pension directly to the wife was not relevant to the question. The provision controlled the starting date for payments from the government, but it did not prevent the state court from ordering that earlier payments be made by the husband individually, if otherwise permitted by state law.
The marital share of retirement benefits is always marital property, regardless of when it is received. The marital property received in the past, however, is not an independent marital asset for purposes of the divorce case if it has been spent to acquire marital property or to pay marital expenses. This is true regardless of whether the marital property takes the form of salary, retirement benefits, or some other source of marital funds.
Marital property received before the onset of the marital breakdown is generally presumed to have been spent for a valid purpose. If this presumption can be rebutted at all, it normally takes very strong proof. Marital property received between the onset of the marital breakdown and the date of the divorce hearing is ordinarily not presumed to have been spent for a valid purpose. In most states, the spouse who spent the funds bears the burden of producing evidence to account for their purpose; in some states, that spouse bears the full burden of proof.
Because of the latter presumption, the general rule in those cases which have addressed the issue seems to be that a deferred distribution of matured retirement benefits should be retroactive to the date of classification. Collins; Knight; Johnson; Avery. If the marital share of the benefits was spent before the date of classification for an improper purpose, the court has the discretion either to increase the period of retroactivity or to make a separate award under the law of dissipation. If the marital share was spent after the date of classification for a proper marital purpose, the court should either move forward the date of retroactivity or give the spending spouse credit for the funds properly spent. If this step is not taken, the effective result will be to include the value of the expenditure in the marital estate twice. Faulkner.
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