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Retirement Benefits - Survivor Benefits - Immediate Offset
© 2005 National Legal Research Group, Inc.
ALASKA: Tanghe v. Tanghe, 2005 WL 1491760 (Alaska 2005).
The trial court did not err by dividing survivor benefits by deferred distribution, rather than by immediate offset of their present value. The result was to leave the wife with benefits of greater value because of her longer life expectancy but that fact arose from preexisting gender-related differences in life expectancy, and not from the trial court's order. The trial court erred by using a time formula to classify the parties' 401(k) plans, rather than tracing the actual separate property contributions to the plans.
Both spouses worked for CSX during the marriage. Included in their compensation was the right to participate in the company's defined benefit pension plan. Among the features of that plan was the right to elect post-retirement survivor benefits. The husband retired during the marriage, naming the wife as his survivor beneficiary.
Upon divorce, both spouses agreed that their respective post-retirement survivor benefits were marital property. The pension plans were divided by deferred distribution, which was enforced through the entry of matched QDROs.
Among other things, the QDROs ordered the husband to retain his wife as his survivor beneficiary. The husband appealed, arguing that the trial court's treatment of the survivor benefits was incomplete. The court described his argument:
Gary argues that according to actuarial tables Jackie will live 12.4 years longer than he. If reality matches the tables Jackie will receive half of Gary's pension, some $1,409 per month, after he dies. She would also receive during that period half of the marital value of her own pension representing the amounts that were previously being paid to Gary. According to an expert witness, when capitalized, Jackie's survivorship interest in Gary's pension is worth about $52,000 and her reversionary interest in her own pension after the projected date of Gary's death is worth about $13,000. Gary argues that the court should have assigned values for these interests to Jackie's side of the ledger.
2005 WL 1491760, at *1. Thus, the husband essentially argued that the trial court was required to compute the present value of the net survivor benefits due to the spouse who is actuarially more likely to survive the other, and treat this amount as a marital asset awarded to that spouse. The supreme court rejected the husband's argument:
The income streams in the present case will have value for Jackie only if Gary dies before she does. This type of survivor benefit resembles a nonvested pension because one party bears all the risk that the benefit may never be realized. In Laing v. Laing, we rejected the capitalization [immediate offset] method for nonvested pensions. "Since the non-employee spouse receives his or her share in a lump sum at the time of divorce, the method unfairly places all risk of possible forfeiture on the employee spouse." Similarly, in the present case, the capitalization method would place the risk of not outliving Gary, or not outliving him by 12.4 years, on Jackie.
Id. at *2 (quoting Laing v. Laing, 741 P.2d 649, 657 (Alaska 1987)). The court admitted that "what may at first glance appear to be an equal division of pension benefits under a QDRO might actually be unequal because of the differences in life expectancy of the parties." 2005 WL 1491760, at *2. But women receive a financial benefit from their longer actuarial life expectancies even where divorce does not occur. "[T]he risk of not benefitting from his wife's pension was the same risk that the husband had faced during the marriage, given the parties' age differences. This risk was not increased by the QDRO." Id. (footnote omitted).
The husband and wife also each owned a 401(k) plan which was started before the marriage. The trial court computed the marital interest in the plans by dividing the total months of plan participation during the marriage by the total months of plan participation the formula generally used to compute the marital share of a defined benefit plan.
The husband appealed, arguing that the court should have classified the plans under the law of tracing, so that the separate interests would be equal to the separate contributions, plus passive investment return on those contributions. The supreme court agreed. A time-based formula implicitly assumes that equal contributions are made in every month or year, but this is rarely true on the facts. The trial court reasoned that the absence of records for the first eighteen months of the wife's plan made tracing unduly difficult, but the supreme court believed that the missing figures could be inferred from other evidence. Moreover, the absence of a small portion of the relevant records is generally not a valid reason for adopting a rule of law which reaches an inaccurate result. "We do not agree that the absence of a year and a half's information concerning Jackie's plan would justify using a method that yields a manifestly inaccurate result as to Gary's plan." Id. at *3. The case was remanded with instructions to classify both 401(k) plans under the law of tracing.
Editor's Note: The strong general rule is that defined contribution plans should be classified under the law of tracing and not by a time fraction. See, e.g., Mann v. Mann, 22 Va. App. 459, 470 S.E.2d 605 (1996); Paulone v. Paulone, 437 Pa. Super. 130, 649 A.2d 691 (1994); Smith v. Smith, 22 S.W.3d 140 (Tex. App. 2000). See generally Turner, supra, 6.10.
A simple example explains why use of a time fraction is error. Assume that three husbands start defined contribution retirement plans five years before their marriage. Each is married for ten years, and contributes regularly to the plan through salary withholding. In addition, the first husband contributes $50,000 in separate property to the plan before the marriage, and the second husband contributes $50,000 in marital savings to the plan after the marriage. The third husband contributes nothing, but his wife contributes $50,000 in her separate property to the plan. If a time-based fraction is applied, the marital share of the plan is 10/15 or two-thirds in all three cases, even though the facts of the three cases are greatly different.
The net effect of the time fraction is to hold that the classification of the $50,000 contributed to the above plan makes no difference. Regardless of whether the $50,000 is marital property, separate property of the husband, or separate property of the wife, the classification of the plan is exactly the same. A rule of classification which ignores factual differences of that magnitude is not good policy.
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