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MILITARY RETIREMENT PAY - POSTDIVORCE ELECTIONS
© 1999 National Legal Research Group, Inc.
Postdivorce waivers and elections which forgo military retirement benefits are producing a large amount of litigation and appellate case law.
Military retirees who become disabled may, and frequently do, waive some or all of their monthly benefits in order to receive tax-free disability pay. Similarly, military retirees who join the federal civil service may waive part of their military retirement pay in order to receive civil service compensation.
This article discusses case law on the impact of waiving military retirement benefits to receive disability pay or civil service compensation. Most courts have utilized some theory or mechanism to provide relief for the nonmilitary spouse. Part I of this article provides background information, and Part II examines pertinent case law.
This article does not address the somewhat similar problem that arises when a military spouse who has agreed or been ordered to share future retirement benefits separates from the service before retirement and receives special separation benefits, voluntary separation incentives, or separation pay. See Marsh v. Marsh, 973 P.2d 988 (Utah Ct. App. 1999) (separation pay that husband received after divorce upon involuntary separation from military service was not his separate property but rather was advance on military retirement benefits that he was required to share with wife pursuant to divorce decree).
I. Background
Disability Benefits. Disabled veterans may receive disability benefits only to the extent that they waive a corresponding amount of military retirement pay. Disabled veterans choose this waiver for its tax advantages because VA disability income is exempt from federal, state, and local taxes. Military retirement pay waived to receive disability payments is specifically excluded by the Uniformed Services Former Spouses' Protection Act (USFSPA) from the disposable retired pay that state courts may treat as property divisible in a divorce action. 10 U.S.C. 1408(a)(4)(B). Accordingly, state divorce courts may not treat military retirement pay that has been waived to receive veterans' disability benefits as distributable property. Mansell v. Mansell, 490 U.S. 581 (1989); In re Marriage of Bowman, 972 S.W.2d 635 (Mo. Ct. App. 1998); Carney v. Carney, 248 A.D.2d 163, 669 N.Y.S.2d 577 (1998).
It should be noted, however, that the military spouse in Mansell had retired and was receiving both retirement pay and disability benefits when the divorce judgment was entered. The judgment awarded the nonmilitary spouse 50% of the retirement pay, including the portion that had been waived to obtain the disability benefits. Thus, the Supreme Court in Mansell concluded that the division directly conflicted with the USFSPA.
Arguably, there is no such direct conflict when the waiver of retirement pay occurs after the judgment and new payments are ordered to enforce what had been a proper division of marital property, even if the payments reflect the military spouse's receipt of new benefits or pay which could not have been divided in the first instance. In re Marriage of Gaddis, 191 Ariz. 467, 957 P.2d 1010 (Ct. App. 1997).
Civil Service Benefits. A federal statute imposes a "dual compensation" pay-cap limitation for federal civil service employees who also draw military retirement pay. See 5 U.S.C. 5532. In this scenario, the military retiree may opt to waive part of his military retirement pay rather than part of his salary in order to come within the federally mandated pay cap. See, e.g., Adams v. Adams, 725 A.2d 824 (Pa. Super. Ct. 1999). Amounts deducted for this purpose are specifically excluded by the USFSPA from the disposable retired pay that state courts may treat as property divisible in a divorce action. 10 U.S.C. 1408(a)(4)(B).
A service member may also use his military retirement benefits to qualify for civil service retirement. See McLaurin v. McLaurin, 968 S.W.2d 947 (Tex. App. 1999).
Legal Commentary. Much helpful commentary exists on the issues that arise when a military spouse waives retirement pay in favor of disability or civil service pay. See Fenton, Uniformed Services Former Spouses' Protection Act and Veterans' Disability and Dual Compensation Act Awards, Feb. 1998 Army Law. 31; Block, Reduction in Disposable Retired Pay Triggered by Receipt of VA Disability Pay: A Basis for Reopening a Judgment of Divorce?, Oct. 1995 Army Law. 28; Cushing, The Ten Commandments of Military Divorce: Representing the Nonmilitary Spouse Part 2 , 69 Fla. B.J. 84 (1995); Gilbert, A Family Law Practitioner's Road Map to the Uniformed Services Former Spouses' Protection Act , 32 Santa Clara L. Rev. 61 (1992); Sullivan, Military Pension Division: Crossing the Minefield, 31 Fam. L.Q. 19 (1997).
II. Case Law on Impact of Postdivorce Elections
A majority of courts have found some mechanism or theory to compensate the nonmilitary spouse for the economic impact of the waiver of retirement pay.
Enforcement of Indemnification Provision. In some cases courts have enforced decrees which provided that the military spouse would take no action to diminish his or her retirement pay and would indemnify the nonmilitary spouse for any such diminution. E.g., Abernethy v. Fishkin, 699 So. 2d 235 (Fla. 1997); Owen v. Owen, 14 Va. App. 623, 419 S.E.2d 267 (1992); see also Jennings v. Jennings, 91 Wash. App. 543, 958 P.2d 358 (1998) (stating in dicta that nonmilitary spouse could protect her share by requiring military spouse to indemnify her for any reduction in retirement benefits), review granted, 137 Wash. 2d 1007, ___ P.2d ___ (1999).
In Abernethy v. Fishkin, the Florida Supreme Court acknowledged that federal law precludes state courts from enforcing a division of veterans' disability benefits. The court held, however, that state courts may enforce a final judgment which guarantees steady monthly payments to a former spouse through an indemnification provision calling for alternative payments to compensate for a reduction in nondisability retirement benefits. Specifically, the agreement precluded the husband from merging his retirement pay with another pension or from pursuing any course of action which would defeat the wife's right to receive the specified portion of his full net disposable retired or retainer pay. The provision protected the wife's right to receive the property or the value of the property she had been allocated by requiring the husband to indemnify her if he breached this provision. "Most significantly, though, the indemnification provision achieved both of these purposes without requiring that the indemnification funds come from disability benefits." 699 So. 2d at 240 (citations omitted).
In Owen v. Owen, the agreement included a promise by the military spouse that he would not take any action to reduce the wife's military pension benefits and that if he took such action he would compensate her for the difference. The provision appeared in the section of the agreement dealing with spousal support. When the husband elected to take disability benefits, triggering the obligation to make payments under that provision, the appeals court held that the payments were compensation for loss of spousal support rather than a prohibited division of disability benefits. This body of case law suggests that the possibility of the service member waiving retirement pay or converting it to another form of compensation should be anticipated and addressed in any property settlement agreement negotiated on behalf of the nonmilitary spouse by requiring the service member to indemnify the other spouse for any distributable military retirement benefits converted into another form of compensation or lost through other causes. See In re Marriage of Strassner, 895 S.W.2d 614 (Mo. Ct. App. 1995) (provisions of decree that prohibited husband from reducing his disposable retirement pay in the future by waiving his retirement pay and that required husband to indemnify wife for any reduction were enforceable).
Enforcement Without Indemnification Provision. Some courts have reached the same result even when there was no express indemnity agreement. For example, in Hisgen v. Hisgen, 554 N.W.2d 494 (S.D. 1996), the South Dakota Supreme Court held that the parties' divorce decree was properly interpreted to require the husband to pay the wife one-half of his gross retirement pay without deducting disability retirement benefits. The parties knew during the negotiations of the agreement that the husband was applying for disability benefits, yet they nevertheless undertook to provide the wife with one-half of his military retirement benefits. Mansell does not preclude state courts from interpreting divorce settlements to allow a spouse to receive property or money equivalent to one-half of a veteran's retirement pay as long as the spouse's share does not come from disability pay.
In an Arizona case, the parties' dissolution decree awarded the wife a share of the husband's military retirement benefits, and the husband subsequently waived part of his military retirement pay in order to receive civil service compensation. The Arizona Court of Appeals held that federal law did not require, and state law did not permit, a reduction in the wife's interest in the military retirement pay in order to reflect the reduction in military retired pay. A reduction in the wife's interest would amount to an improper de facto modification of the decree's property allocation, the court said, upholding a decision that prohibited the husband from reducing payments to the wife. In re Marriage of Gaddis, 191 Ariz. 467, 957 P.2d 1010 (Ct. App. 1997).
In a Texas case, the husband used his military retirement benefits to qualify for civil service retirement after entering into a property settlement, which was incorporated into a court order, granting the wife a share of his military retirement benefits. The Texas Court of Appeals upheld a trial court order stating that the wife was entitled to receive an equivalent amount of the husband's civil service retirement. A trial court has authority to make orders, such as the enforcement order entered here, necessary to carry its judgment into full effect, the court explained. The order here simply provided for the agreed payments from the pension fund into which the husband's military pension was deposited in order to ensure that the husband's unilateral act would not dispossess the wife of her property, the court added. McLaurin v. McLaurin, 968 S.W.2d 947 (Tex. App. 1998).
Similarly, the appeals court in another Texas case invoked the doctrine of res judicata in response to the husband's reliance on Mansell in a proceeding by his former wife to enforce his obligation under the parties's 1988 divorce decree. Although he had subsequently accepted veterans' disability benefits in lieu of an equivalent portion of retirement pay, the decree nevertheless entitled the wife to share in the amount that a person with the husband's rank and service period would receive, the court decided. The husband's response to the motion to enforce constituted a collateral attack that was barred by res judicata, the court concluded. Jones v. Jones, 900 S.W.2d 786 (Tex. App. 1995).
In Adams v. Adams, 725 A.2d 824 (Pa. Super. Ct. 1999), the husband filed a declaratory judgment action seeking a determination of the amount of monthly retirement pay owed to the wife under the parties' divorce decree. After the divorce, he joined the civil service, resulting in a reduction of his military retirement pay, and he claimed that the amount of military pay owed to the wife was correspondingly reduced. The parties' agreement provided for the wife to receive part of the husband's "disposable retirement pay," defined as "all military retirement benefits to which Husband is entitled reduced only by the survivor benefit plan premium if any." Id. at 825. The appeals court held that under the plain terms of the agreement the husband could not reduce the amount of pay to which the wife was entitled. Furthermore, the court decided that an award of attorney's fees to the wife was proper considering the husband's unilateral reduction in violation of the parties' agreement. See also McHugh v. McHugh, 124 Idaho 543, 861 P.2d 113 (Ct. App. 1993) (Mansell did not preclude wife from continuing to receive amount of military retirement pay awarded to her even though husband's disability pay had subsequently increased and reduced his military retirement pay); Dexter v. Dexter, 105 Md. App. 678, 661 A.2d 171 (1995) (husband's voluntary waiver of his military retirement benefits in favor of disability benefits was breach of contract for which measure of damages was amount wife would have received but for breach); Price v. Price, 325 S.C. 379, 480 S.E.2d 92 (Ct. App. 1996) (husband's agreement to pay specified percentage of gross retirement benefits to wife was enforceable even though he had waived part of those benefits to receive disability pay).
Modification of Property Division. A New Jersey appeals court held that where a husband had waived military pension benefits in favor of disability pay after the parties' divorce decree awarding the wife a percentage of his military pension exceptional and compelling circumstances required that she be awarded an increased percentage of the husband's remaining military pension payments or that some other adjustment be made to the equitable distribution. Torwich v. Torwich, 282 N.J. Super. 524, 660 A.2d 1214 (App. Div. 1995). The husband's waiver had a substantial adverse impact on the wife's equitable distribution award, so the judgment had to be reconsidered, the court said.
The Alaska Supreme Court likewise held that a property division should be reconsidered after the husband waived military retirement benefits in favor of disability benefits. Federal law does not preclude state courts from considering, when equitably allocating property between former spouses, the economic consequences of a decision to waive military retirement pay in order to receive disability pay, the court ruled. Clauson v. Clauson, 831 P.2d 1257 (Alaska 1992). Modification of Alimony. In Kramer v. Kramer, 252 Neb. 526, 567 N.W.2d 100 (1997), the Nebraska Supreme Court held that while a Nebraska court may not include service-connected disability benefits as part of the marital estate, it may consider such benefits and the corresponding waiver of retirement benefits in determining whether there has been a material change in circumstances which would justify modification of an alimony award to a former spouse who was previously awarded a fixed percentage of the retirement benefits.
Resulting Trust. In a case of first impression in California, an appeals court held that where an agreement provides for a nonmilitary spouse to receive a share of retirement benefits and the service member subsequently waives retirement benefits in favor of disability pay a resulting trust may be imposed on the disability benefits even without an express indemnification provision in the parties' property settlement agreement if they intended for the nonmilitary spouse to receive her original share of the retiree's military retirement pay even if he waived his retirement pay. In re Marriage of Krempin, ___ Cal. App. 4th ___, 83 Cal. Rptr. 2d 134 (1999).
"Impression of a resulting trust on the proceeds of retirement pay previously awarded to the non-military spouse would be consistent with the nationwide practice of equitably protecting those spouses against post-judgment waivers of that pay," the court declared. 83 Cal. Rptr. 2d at 143. Mansell would not be violated by the resulting trust as long as the military retiree remained free to satisfy the obligation with other assets, the court said.
No Relief for Nonmilitary Spouse. Not all recent decisions have favored the nonmilitary spouse, however. For example, the Washington Court of Appeals held that a substantial decrease in the value of military retirement benefits awarded to a service member's spouse, as a consequence of the service member's waiver of retirement pay in favor of disability pay, does not constitute extraordinary circumstances that warrant vacating the dissolution decree. Jennings v. Jennings, 91 Wash. App. 543, 958 P.2d 358 (1998), review granted,, 137 Wash. 2d 1007, ___ P.2d ___ (1999).
The court reviewed state case law and found that Washington dissolution decrees had been vacated for extraordinary circumstances after judgment only in cases involving the retroactive application of the USFSPA. Although the husband's waiver of military retirement benefits in order to receive disability benefits resulted in a substantial decline in the wife's share of that asset, the decline in value was not grounds for relief from the dissolution judgment, the court decided. A nonmilitary spouse can protect her asset by requiring the military spouse to indemnify her for any reduction in retirement benefits, the court said.
In a Nebraska case, the state's high court held that a former spouse (the wife) had to reimburse the military spouse (the husband) to the extent that she had been overpaid by receiving military retirement benefits which he had waived retroactively in favor of disability benefits. To permit her to retain the overpayment would have the effect of awarding her a percentage of the husband's disability benefits, which is prohibited by federal law, the court explained. Kramer v. Kramer, 252 Neb. 526, 567 N.W.2d 100 (1997).
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