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SOCIAL SECURITY BENEFITS AND EQUITABLE DISTRIBUTION
© 1995 National Legal Research Group, Inc.
In almost every equitable distribution case, at least one of the spouses will qualify for federal Social Security benefits upon satisfying the necessary age requirements. Surprisingly, however, quite a few states have no case law addressing the interplay of Social Security and equitable distribution.
What explains the relatively low number of reported decisions? For one thing, nearly all the courts that have addressed the classification of Social Security benefits have determined that federal law preempts state courts from dividing these benefits as marital property. Although this issue technically remains open in quite a few states, courts in future cases are unlikely to depart from the overwhelming majority rule.
On the other hand, several related issues remain unsettled in most states. The most important issue is: May Social Security benefits be considered as a factor in distributing marital property? Are state substitutes for Social Security exempt from equitable distribution? The former question comes into play whenever one spouse's expected Social Security benefits exceed those expected by the other spouse, while the latter arises in the relatively few number of cases involving government employees who do not participate in the Social Security system.
Part I of this article discusses the law on Social Security benefits as property subject to distribution. Part II reviews case law on Social Security benefits as a factor in the final award. Part III examines the split of authority on the treatment of pension benefits that function as a substitute for Social Security.
I. Social Security Benefits as Distributable Property
Federal Preemption. Under the Social Security Act, the right to future payments is nontransferable and nonassignable, and Social Security benefits are not subject to legal process. Specifically, the Act states:
(a) The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.
42 U.S.C.A. Sec. 407(a) (West 1991). Effective in 1975, Congress excepted alimony and child support from the ban on legal process. Id. Sec. 659(a). In 1977, Congress added a definitional statute to the Social Security Act, providing that "alimony" means "periodic payments of funds for the support and maintenance of the spouse (or former spouse)" of an insured individual, and does not include "any payment or transfer of property or its value by an individual to his spouse or former spouse in compliance with any community property settlement, equitable distribution of property, or other division of property between spouses or former spouses." Id. Sec. 662(c).
The United States Supreme Court has never directly addressed whether federal law precludes state courts from distributing Social Security benefits upon marriage dissolution. But it discussed Social Security benefits in Hisquierdo v. Hisquierdo , 439 U.S. 572 (1979), when it decided that federal law preempted states from treating railroad retirement benefits as community property. Noting that the lower tier of railroad retirement benefits corresponds exactly to those an employee would expect to receive if he were covered by the Social Security Act, the Court discussed the Act and made repeated references to it. Perhaps most significantly, the Court said that it was logical to conclude that Congress, in adopting Sec. 462(c) [42 U.S.C. Sec. 662(c)], thought that a family's need for support could justify garnishment, even if it deflected other federal benefit programs from their intended goals, but that community property claims, which are not based on need, could not do so.
Id. at 587. After Hisquierdo , Congress amended the antiassignment clause of the Railroad Retirement Act to permit distribution of "tier II" benefits in divorce cases, 45 U.S.C. Sec. 231m(b)(2), but in the same year Congress amended the antiassignment provision of the Social Security Act to include this caveat: "No other provision of law, enacted before, on, or after April 20, 1983, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section." 42 U.S.C.A. 407(b). This legislative response to Hisquierdo strengthens the argument that Congress intended to preclude state courts from distributing Social Security benefits upon marriage dissolution, the Iowa Supreme Court said. In re Marriage of Boyer , 538 N.W.2d 293 (Iowa 1995).
The decision in Boyer is the latest in a long line of post- Hisquierdo cases holding that state-court distribution of Social Security benefits is preempted by federal law. The first such decision was In re Marriage of Hillerman , 109 Cal. App. 3d 334, 167 Cal. Rptr. 240 (1980), and a leading case that discusses the issue in depth is Olson v. Olson , 445 N.W.2d 1 (N.D. 1980). Accord Mann v. Mann , 778 P.2d 590 (Alaska 1989); Wisner v. Wisner , 129 Ariz. 333, 631 P.2d 115 (Ct. App. 1981); Sherry v. Sherry , 108 Idaho 645, 701 P.2d 265 (Ct. App. 1987); In re Marriage of Hawkins , 160 Ill. App. 3d 71, 513 N.E.2d 143 (1987); In re Marriage of Knipp , 15 Kan. App. 2d 494, 809 P.2d 562 (1991); Pleasant v. Pleasant , 97 Md. App. 711, 632 A.2d 202 (1993); Cruise v. Cruise , 92 N.C. App. 586, 374 S.E.2d 882 (1989); Umber v. Umber , 591 P.2d 299 (Okla. 1979); In re Marriage of Swan , 301 Or. 167, 720 P.2d 747 (1986); Kirk v. Kirk , 577 A.2d 976 (R.I. 1990); Richard v. Richard , 659 S.W.2d 746 (Tex. Ct. App. 1983); Loudermilk v. Loudermilk , 183 W. Va. 616, 397 S.E.2d 905 (1990).
If an employee spouse agrees to pay the other a share of his or her Social Security benefits as part of the property division, the agreement is probably unenforceable. Philpott v. Essex County Welfare Board , 409 U.S. 413 (1973) (welfare agency could not, pursuant to reimbursement agreement, attach Social Security disability benefits received and deposited in bank). But an agreement that merely uses Social Security benefits as a measure of a spouse's payment obligation, without subjecting the benefits to legal process or transferring the receipt or control of the benefits to the other spouse, does not violate the Social Security Act's antiassignment provision, the Idaho Supreme Court held. Phipps v. Phipps , 124 Idaho 775, 864 P.2d 613 (1993). To obviate the possibility of future litigation, it is wise to avoid an agreement that could present this issue. Instead, if the employee is willing to share his Social Security payments, the recipient's share should be denominated "alimony" so that the antiassignment issue does not arise.
Minority View. Before Hisquierdo , several courts held that Social Security benefits are distributable property. Locke v. Locke , 246 N.W.2d 246 (Iowa 1976); Zagajewski v. Zagajewski , 161 Ind. App. 98, 314 N.E.2d 843 (1974); Harmon v. Harmon , 161 N.J. Super. 206, 391 A.2d 552 (App. Div. 1978); Cleaver v. Cleaver , 10 Wash. App. 14, 516 P.2d 508 (1973). These cases did not specifically address the issue of preemption and have been characterized as outdated in post- Hisquierdo decisions. E.g., Olson v. Olson, supra , 445 N.W.2d at 1; In re Marriage of Swan, supra , 720 P.2d at 752 n.3. In a few post- Hisquierdo cases, courts have treated Social Security benefits as distributable property. None of these cases is particularly persuasive, however:
- In In re Marriage of Wilson , 449 N.W.2d 890 (Iowa Ct. App. 1989), the court approved a decree dividing a husband's Social Security benefits, but it did so without any mention of the federal preemption issue, and it is contrary to the Iowa Supreme Court's statement in In re Marriage of Boyer, supra , that federal law prohibits distribution of Social Security benefits.
- In Wiercinski v. Wiercinski , 116 A.D.2d 789, 497 N.Y.S.2d 179 (1986), the court held that Social Security payments are marital property, and it distinguished Hisquierdo as involving Railroad Retirement Act benefits. The Social Security Act does not shield benefits from equitable distribution, the court said, since equitable distribution constitutes an essential familial obligation as distinguished from a creditor's claim. However, the Social Security benefits had already been paid, and the court stressed that point in its decision.
- In Lee v. Lee , 191 Mich. App. 73, 477 N.W.2d 429 (1991), the wife had been receiving Social Security benefits since 1977, and the trial court held that the benefits the wife received were part of the marital estate. The appellate court affirmed that part of the ruling without reference to any potential supremacy clause problems.
- In Burt v. Burt , 799 P.2d 1166 (Utah Ct. App. 1990), a Utah appellate court declared, without discussion, that the wife's Social Security benefits were marital property.
Classification Under State Law. The federal preemption issue need not be reached if state law itself requires that a spouse's Social Security benefits be classified as separate property. For example, in Mason v. Mason , 319 Ark. 722, 895 S.W.2d 513 (1995), the husband's Social Security disability benefits were held to be his separate property in view of a provision in the state equitable distribution statute exempting benefits received or to be received from a Social Security claim when those benefits are for any degree of permanent disability or future medical expenses.
An argument against classifying Social Security benefits as marital property can be supported by citing Flemming v. Nestor , 363 U.S. 603 (1960), where the United States Supreme Court declared that Social Security is not "an accrued property right" and cannot be analogized to an annuity. In Powell v. Powell , 395 Pa. Super. 345, 577 A.2d 576 (1990), a Pennsylvania appeals court cited Flemming v. Nestor as authority for its holding that Social Security benefits are not subject to equitable distribution. Similarly, the Oklahoma Supreme Court cited Flemming v. Nestor when it declared that "because Congress can alter or retract social security benefits at any time, they cannot be considered to be an accrued property right." Crocker v. Crocker , 824 P.2d at 1117, 1124 (Okla. 1991). Along the same lines, North Dakota's high court, citing Flemming v. Nestor , held that Social Security benefits cannot be treated as distributable property, because the "retained power to alter, amend, or repeal benefits makes it awkward for courts to count benefits as assets of definable value." Olson v. Olson, supra , 445 N.W.2d at 6; accord Loudermilk v. Loudermilk, supra ; see also Hoyt v. Hoyt , 53 Ohio St. 3d 177, 559 N.E.2d 1292, 1294 n.3 (1990) (Social Security benefits are an exception to the general rule that retirement benefits earned during marriage are marital assets).
Without mentioning Flemming v. Nestor or Hisquierdo , a Missouri appeals court decided that "social security benefits do not fall within our state law definitions of marital or separate property." Rudden v. Rudden , 765 S.W.2d 719, 720 (Mo. Ct. App. 1989). The court rejected a husband's argument that his wife's Social Security rights were akin to a pension and should have been classified as marital property. As authority for its ruling, the court cited a Missouri case holding that railroad retirement benefits are not marital property. See also Smith v. Smith , 91 Ohio App. 3d 248, 632 N.E.2d 555 (1993) (holding, without mentioning federal preemption issue, that Social Security is not a marital asset and not subject to division).
Social Security Disability Benefits. Most cases discussing the classification of Social Security benefits have involved old-age insurance benefits, but as with old-age benefits, courts have held that federal law preempts distribution of Social Security disability benefits as marital or community property. E.g., Luna v. Luna , 125 Ariz. 120, 608 P.2d 57 (Ct. App. 1979); In re Marriage of Knipp, supra ; Richard v. Richard, supra . Contra Wiercinski v. Wiercinski, supra (Social Security Act's antiassignment provision does not extend to essential family obligation such as equitable distribution; federal law did not preclude trial court from including a husband's Social Security disability benefits as marital property, where the payments had already been received and placed in a joint bank account).
Hence, even in states that classify disability benefits as marital property, Social Security disability payments are sheltered from distribution by federal law. See Crocker v. Crocker, supra (court distinguished Social Security disability benefits from other disability benefits that would be considered distribution under Oklahoma law).
In some states Social Security disability benefits may be the injured spouse's separate property as a matter of state law because the benefits represent compensation for disability. See Wiercinski v. Wiercinski, supra (court acknowledged that disability benefits are recipient's separate property to the extent they represent compensation for personal injuries, but decided that husband's Social Security disability payments became marital property when they were placed in spouses' joint account).
Benefits Already Received. Does the federal preemption problem vanish when the case involves Social Security benefits that have already been received? In In re Marriage of Knipp, supra , the wife, seeking to share in the husband's lump-sum Social Security disability benefits, argued that the Social Security Act's antiassignment provision applies only to prospective benefits and not to benefits already received, because that section, 42 U.S.C. Sec. 407(a), specifically refers to "future payment." The Kansas Court of Appeals disagreed, however, noting the United States Supreme Court's holding in Philpott v. Essex County Welfare Board, supra , that Sec. 407(a) applies broadly to benefits already received and deposited into a savings account. Citing Philpott , the court characterized the antiassignment statute as being "all-inclusive" and further commented that Sec. 407(a) "imposes a broad bar against the use of any legal process to reach all social security benefits," In re Marriage of Knipp, supra , 809 P.2d at 563 (quoting Philpott v. Essex County Welfare Board, supra , 409 U.S. at 417).
Similarly, the Iowa Court of Appeals held that the doctrine of federal preemption applies not only to Social Security benefits payable in the future but also to those paid during marriage, since the Act's antiassignment provision prohibits legal process against "moneys paid or payable." The court decided that Social Security benefits received by a husband and deposited into bank accounts during the marriage were his separate property unless the benefits had been transmuted into community property by being commingled with community funds. Bowlden v. Bowlden , 118 Idaho 89, 794 P.2d 1145 (Ct. App. 1989), overruled on other grounds , 118 Idaho 84, 794 P.2d 1140 (1990).
In a few cases, courts have classified Social Security benefits already received by the employee spouse as marital property. Lee v. Lee, supra ; Wiercinski v. Wiercinski, supra .
II. Social Security Benefits as a Factor in the Award
Offsetting Awards. In Hisquierdo v. Hisquierdo, supra , the wife argued that even if federal law precluded state courts from dividing railroad retirement benefits, the court could nevertheless award her offsetting assets of equal value. Rejecting that argument, the Supreme Court declared that an offsetting award would upset the statutory balance and impair the employee's economic security just as surely as would a regular deduction from his benefit check. Similarly, in McCarty v. McCarty , 453 U.S. 210 (1981), the Court said that state courts could not compensate for a military spouse's pension rights by making an offsetting award to the other spouse of property of equal or comparable value.
State courts that have addressed the role of Social Security in property distributions agree that federal law precludes not only distribution of the benefits themselves but also any offsetting award. Luna v. Luna, supra ; In re Marriage of Hawkins, supra ; English v. English , 118 N.M. 170, 879 P.2d 802 (Ct. App. 1994); Olson v. Olson, supra .
Receipt of Social Security as a Factor Bearing upon Distribution. Most courts interpreted McCarty as limited to an actual division of the military pension or an offsetting award, and hence found it permissible to consider the receipt of benefits as an economic circumstance bearing on distribution of other property. E.g., In re Marriage of Hapaniewski , 107 Ill. App. 3d 848, 438 N.E.2d 466 (1982); Gronquist v. Gronquist , 7 Kan. App. 583, 644 P.2d 1365 (1982).
The rationale of these cases arguably permits consideration of Social Security benefits as a factor bearing on the distribution of other property. Indeed, most courts that have considered the issue after Hisquierdo and McCarty have held that Social Security benefits may be considered in arriving at an equitable distribution of property. E.g., In re Marriage of Boyer, supra ; In re Marriage of Knipp, supra (Social Security Act's antiassignment provision does not preclude state courts from considering the value of the lump-sum benefit when dividing marital property); Pongonis v. Pongonis , 606 A.2d 1055 (Me. 1992) (value of wife's anticipated Social Security benefits could be recognized as a factor in division of property); Pleasant v. Pleasant, supra (in an appropriate case a judge may consider the fact that a spouse is receiving, or will receive, Social Security benefits as "any other factor" in determining whether to make a monetary award under Maryland's equitable distribution statute); Knapp v. Knapp , 874 S.W.2d 520 (Mo. Ct. App. 1994) (property division was not inequitable even though wife's entire pension was set aside as her nonmarital property, given that she did not acquire Social Security benefits through her employment while husband did acquire Social Security benefits through his employment); Rudden v. Rudden, supra (Social Security benefits need not be ignored in equitable distribution proceedings and may be considered, along with other factors, in the disposition of marital property). Courts in pre- Hisquierdo cases also permitted consideration of Social Security benefits as a factor in the division of property. E.g., Elliott v. Elliott , 274 N.W.2d 75 (Minn. 1978) (in pre- Hisquierdo ruling, court held that spouse's receipt of income from Social Security may be considered as a factor in dividing other property that is subject to distribution); Harmon v. Harmon , 161 N.J. Super. 206, 391 A.2d 552 (App. Div. 1978) (Social Security benefits properly considered as a factor in equitable division of marital property).
The most recent of these cases is In re Marriage of Boyer, supra , where the Iowa Supreme Court reversed an en banc ruling by the state court of appeals that Social Security may not be considered in the equitable distribution of property. The appeals court had reasoned that since Congress preempted state law by enacting its own scheme for providing Social Security benefits for divorced spouses, it would be improper to consider them in the overall property division. The supreme court agreed that federal law precludes state courts from dividing Social Security benefits either directly or through a setoff, but it held that when determining an equitable property division, courts may consider the fact that one spouse expects higher Social Security benefits than the other. Federal law does not require courts to ignore the spouses' differing economic resources, the court declared.
In contrast, the Alaska Supreme Court rejected the argument that Social Security benefits may be taken into account in making an equitable distribution. "Given the speculative nature of future Social Security benefits, we do not consider this approach to be wise," the court declared, approving the trial court's refusal to consider the wife's Social Security benefits. Cox v. Cox , 882 P.2d 909 (Alaska 1994); accord In re Marriage of Swan, supra (error even to consider Social Security benefits in the context of an equitable distribution of property, given Hisquierdo 's prohibition against an offsetting award).
Without announcing a hard-and-fast rule, the North Dakota Supreme Court in Olson v. Olson, supra , affirmed a trial court decision not to consider the Social Security benefits of either spouse. One judge concurred in the result but asserted that neither federal statutes nor the prevailing case law requires trial courts to close their eyes to Social Security. Social Security benefits may be considered as part of the entire financial condition of the party receiving the benefits, the judge declared.
III. Substitute Benefits
Under some public pension plans, government employees do not participate in the Social Security system. For these employees, their pension constitutes a substitute for Social Security. Should these substitute pension benefits be treated similarly to Social Security benefits and thus be sheltered from equitable distribution?
Substitute Benefits as Marital Property. Several courts have concluded that a pension which is a substitute for Social Security may nonetheless be treated as marital property. Mann v. Mann, supra (state benefits at stake here were created and governed by state law, so their division did not infringe upon federal law); In re Marriage of Sedbrook , 16 Kan. App. 2d 668, 827 P.2d 1222 (1992) (firefighter's pension held marital even though those pension rights were in lieu of Social Security benefits); Olson v. Olson, supra (highway patrolman's retirement fund was a substitute for Social Security but was not akin to Social Security and thus could be treated as marital property); Loudermilk v. Loudermilk, supra (correct to include as marital property husband's federal civil service pension, which he would receive in lieu of Social Security, while not including the wife's contributions to her Social Security account).
Some Pennsylvania cases have held, however, that pension benefits which function as a substitute for Social Security should be excluded from the marital estate. The leading case is Cornbleth v. Cornbleth , 397 Pa. Super. 431, 580 A.2d 369 (1990), which held that a portion of a spouse's federal civil service pension was exempted from the marital estate to the extent that it was in lieu of a Social Security benefit. Even though the husband's nonparticipation in Social Security did not trigger any federal preemption, that nonparticipation made it fair to exclude a portion of the pension from the marital estate as a matter of state law, the court decided. Explaining how to put Social Security participants and civil service retirement system participants on an equal footing, the court in Cornbleth said that the first step is to compute the present value of Social Security benefits had the employee been participating in the Social Security system. This present value should then be deducted from the present value of the employee's pension to arrive at a figure for the marital portion of the pension, the court said.
Cornbleth was followed in Twilla v. Twilla , ___ Pa. Super. ___, 664 A.2d 1020 (1995) (husband's federal civil service pension should not be included as a marital asset, where the value of that pension benefit was less than the amount of Social Security benefits that he would have accrued if he had participated in the Social Security system), and Endy v. Endy , 412 Pa. Super. 398, 603 A.2d 641 (1992) (where state police officer would receive no Social Security benefits, the portion of his pension that might figuratively be considered in place of a Social Security benefit should be excluded from the marital estate).
Offset or Factor in Award. Several other courts have decided that cases involving substitutes for Social Security require special treatment. In Coats v. Coats , 63 Ohio Misc. 2d 299, 626 N.E.2d 707 (C.P. 1993), an Ohio court held that a portion of a spouse's civil service pension should not be exempted from the marital estate to the extent that it is in lieu of Social Security benefits, but an offset for the value of the other spouse's Social Security benefits may be equitable in some cases. Calculating the present value of a spouse's Social Security and using that value as a full or partial setoff against the present value of the other spouse's pension does not violate the Social Security Act, the court declared, as this does not amount to a transfer of benefits and simply treats Social Security as one factor among many which may be considered in order to achieve an equitable property division.
In Eickelberger v. Eickelberger , 93 Ohio App. 3d 221, 638 N.E.2d 130 (1994), an Ohio appeals court went even further and held that as a matter of public policy a spouse's Social Security benefits must be considered when allocating the pension benefits of a spouse who did not participate in the Social Security system. If the private employee's Social Security vested during the marriage, the trial court should calculate the potential future monthly Social Security benefits and offset them against the public employee's potential monthly retirement benefits before equitably apportioning the balance of the marital assets, the court said. Accord Smith v. Smith, supra , (Social Security is not a marital asset but must be considered when allocating pension benefits); see also Bain v. Bain , 553 So. 2d 1389 (Fla. DCA 1990) (inequitable to award portion of one spouse's retirement plan, which is in lieu of Social Security, to another spouse as part of property distribution, when the other spouse can also receive Social Security payments under his or her own earnings).
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