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INCREASE IN VALUE OF RETIREMENT ACCOUNTS
© 1999 National Legal Research Group, Inc.
VIRGINIA: Moran v. Moran, 29 Va. App. 408, 512 S.E.2d 834 (1999).
The husband should been awarded the passive increase in value on his premarital investment in his employer's defined contribution pension plan.
INDIANA: Paxton v. Paxton, 709 N.E.2d 31 (Ind. Ct. App. 1999).
The husband should receive as his share of the wife's IRA not only the amount awarded to him in the parties' dissolution decree but also the proportionate increase in value of his share of the IRA from the decree until payment.
Defined contribution pension accounts and individual retirement accounts have generally increased in value greatly in recent years, thanks to the lengthy bull market. Moran v. Moran and Paxton v. Paxton both deal with classifying these increases in value as part of the equitable distribution of property.
Growth of Premarital Investment During Marriage. Before and during the parties' 12-year marriage in Moran v. Moran, the husband participated in his employer's defined contribution pension plan. The value of the plan at the beginning of the marriage was $17,489, but by the date of the parties' separation it was worth $198,000.
At trial, the husband testified that throughout the existence of the plan he invested his contributions into three separate funds, each with varying degrees of risk and rates of return. He testified that, although he had authority to direct the disposition of his investments within the three funds, he transferred investments among the funds only two or three times during the course of the marriage.
Since the husband could not reconstruct how much was invested in each particular fund during the marriage, the husband's expert witness calculated the amount that $17,489 would have earned or increased in value during the 12 years of marriage using various scenarios depending on which fund or funds contained the money. If the $17,489 were invested solely in the fund that performed the poorest during the marriage, its value would have increased in 12 years to $61,978 by the time of separation, for an increase in value of at least $44,489. On the other hand, had the separate funds been invested entirely in the fund yielding the highest rate of return, the increase in value would have been $135,900. Despite the expert's testimony, the trial court awarded the husband only his premarital contribution and no part of its increase in value.
The Virginia Court of Appeals held that the trial court erred by failing to determine the amount of income derived from the husband's premarital separate investment of $17,489 in the pension fund.
The court noted that the Virginia equitable distribution statute defines income received from separate property as separate if not attributable to the personal efforts of either party. Va. Code Ann. 20-107.3(A)(1)(iv). Accordingly, the court held, passive income earned on premarital contributions to a defined contribution pension plan is separate property. The court noted that a previous case, Mann v. Mann, 22 Va. App. 459, 470 S.E.2d 605 (1996), suggested that incongruous results would be achieved if the "time rule," which allocates the value of the separate portion of a pension based on the length of the spouse's participation in the plan before marriage, were applied to a defined contribution plan. The court also observed that Mann had cited with approval an Oklahoma case which outlined the following method to calculate the marital share of a defined contribution plan:
(1) [M]ultiply the fund's beginning balance . . . at the date of the marriage . . . (2) times the average earning of the pension account [during the marriage] and . . . (3) compound annually the interest until the date of separation . . . (4) subtract that amount from . . . the value of the fund . . . [on the date of separation] to arrive at a divisible marital asset.
Moran v. Moran, 512 S.E.2d at 838 (quoting Thielenhaus v. Thielenhaus, 890 P.2d 925, 929-30 (Okla. 1995)) (Thielenhaus court's emphasis). Steps (1) through (3) yield the value of the premarital separate investment as of the date of separation, the court observed.
The husband's expert here used the same method employed in Thielenhaus and presented credible evidence establishing the minimum amount that the premarital contribution would have earned if it were invested in the fund with the lowest rate of return.
The trial court erred when it failed to classify as the husband's separate property at least the minimum passive growth on the husband's premarital investment of separate property in the defined contribution plan, the court concluded.
Increase in Value After Award but Before Actual Division. The dispute in Paxton v. Paxton centered on the increase in value of a retirement account after the decree granting equitable distribution.
The dissolution decree provided for the wife to receive 55% of the marital estate. To achieve this result, a qualified domestic relations order (QDRO) was to be issued in the husband's favor for the sum of $19,940 from the amount then existing in an IRA owned by the wife on a specified date in 1995.
The husband unsuccessfully appealed, after which the QDRO was finally entered, nearly three years after the dissolution decree. The parties later determined, however, that because the account in question was a self-directed IRA as opposed to an employee pension plan governed by the Employee Retirement Income Security Act, the transfer of the amount awarded to the husband could not be effectuated by a QDRO and could instead be obtained only through a court order transferring the money.
The trial court subsequently entered such an order. As for the amount, the order noted that the husband had been awarded a money judgment in the amount of $19,940, which drew interest by law at 8%, for a total sum now due in the amount of $24,592.55.
The husband contended, however, that, in the almost three years which elapsed between the decree of dissolution and the order of transfer, the $19,940 award was not segregated from the wife's other funds in the IRA and thus grew at a rate of over 16%. The application of the judgment-interest rate of 8% was inadequate in light of the money's actual growth of over twice that figure, he argued. In effect, he contended, the wife was allowed to profit unfairly from the additional increase in the husband's share of the funds.
The Indiana Court of Appeals agreed. A money judgment adjudges the payment of a sum, as distinguished from a judgment directing that an act be done or that property be restored or transferred, the court noted, citing Black's Law Dictionary at 844 (6th ed. 1990). The money allocated to the husband by the dissolution decree, the court said, was not a money judgment, but an order for transfer of property, namely the in-kind asset allocation of a portion of the wife's IRA. Hence, the judgment-interest statute did not apply, and the trial court erred in awarding interest pursuant to the statute. The court observed that the QDRO contemplated by the dissolution decree and later replaced by the order of transfer did not give the husband an immediate right to the $19,940, but rather a right to a portion of the wife's IRA subject to the restrictions imposed on the account, including penalties for early withdrawal. Consequently, the court decided, any growth and any loss attributable to the husband's share of the IRA after the dissolution decree inured to the husband. Moreover, the court held, the trial court's order permitted the wife to profit unfairly from the difference between the rate at which the husband's portion of the IRA was growing and the rate she was ordered to pay. The windfall resulted in the wife receiving more than the dissolution decree awarded to her, and failed to distribute the marital property in a just and reasonable manner.
Instead, the court decided, the trial court should order the transfer of the original amount awarded to the husband, plus a proportionate share of the growth or loss in the account, to another self-directed IRA in the husband's name.
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