What Happens To Retirement Accounts After Divorce?
Every divorce will require a division of property. This can be accomplished via a settlement approved by the court or by decision of the court after a trial. Unlike other aspects of the divorce, such as child custody or alimony, the property division cannot be revisited and modified by the court after it has been ordered. This is generally not an issue, as the property will be instantly divided and the ex-spouses will move on with their separate lives. However, included in the property that must be divided are retirement plans and pension plans. This property is divided along with all other property at divorce, but that effect lasts for decades after the divorce is finalized. Below is an overview of how the court will divide retirement accounts in the property division of a divorce.
Property Division In Kansas
Kansas allows a court to divide all property in a divorce, not just property acquired during marriage. This is because Kansas uses the “equitable distribution” process rather than the “community property” process. In a community property state, all property is split evenly (50/50) in every divorce. In Kansas and other equitable distribution states, the court will make a fair division of the property. This does not necessarily mean a 50/50 split. The court considers a set of ten factors listed in Section 23-2802(c) to determine which property goes to each spouse. These factors include the length of the marriage, age of the parties, and other aspects of the divorce.
As mentioned above, all property is up for grabs in a divorce. Courts will consider the manner and means of acquiring property, specifically including whether the property is classified as martial or non-martial. Martial property is all property acquired during the marriage; non-martial property is all other property, including property given directly to a spouse as a gift or inheritance, even if during marriage. Kansas is careful to recognize the contributions of non-working spouses to martial property and assets. A spouse may forego a career or education to raise children or take care of the martial home. Kansas does not punish this spouse by preventing the non-working spouse from collecting property acquired with the assistance of this non-economic resource. This is part of the reason all property, not just martial property, is divided.
Types Of Retirement Accounts
Before discussing how and why retirement plans are divided, it is helpful to look at how family law treats these accounts. Court cases largely divide all retirement and pension accounts into two classifications: defined-contribution plans and defined-benefit plans. Defined-contribution plans are ones in which the employee-spouse makes monthly contributions that are invested. Traditionally, these investments would be controlled by a third-party (known as a trustee in legal jargon). The plus side of these plans is the potential to produce a large amount of money over time. The down side is that the amount that will be paid is completely fluid. The spouses will have a prediction and hopes of what the account will produce, but it will really be a mystery until the time for payments arrives. Common examples of these plans include profit-sharing plans such as 401(k)s, money-purchase plans, and stock-bonus plans.
Defined-benefit plans are a more conservative type of retirement plan. This is because the end result is known from the onset; there is no gambling as with a defined-contribution plan. The employee-spouse is entitled to a monthly benefit from retirement until death based upon a set formula to determine the amount. These plans are generally accomplished using a life annuity for the employee-spouse. Some companies may offer a lump-sum payment in place of monthly payments or even a survivorship option for the spouse. These plans generally only require service time, rather than monthly contributions by the employee-spouse.
Dividing Retirement Accounts
As discussed above, a retirement account can be divided even when it was started before a marriage and solely contributed to by one spouse. These factors may affect how the interest in retirement accounts are divided, but it is rare that the court will not grant each spouse some degree of interest in the future benefits. Dividing this interest may seem difficult, as naturally the court cannot simply “split” the account. However, by using a Qualified Domestic Relations Order, the court is able to assign benefits to the nonemployee-spouse. This type of order must be used when the retirement plan is defined as a “qualified retirement plan” for federal tax purposes. Commonly, this covers both benefit-defined and contribution-defined plans. When the plan does not fall within the qualified retirement plan definition, a Domestic Relations Order is appropriate. Once one of these orders is in place, the benefits will be transferred to a new account held for the nonemployee-spouse.
Each spouse must submit to the court an alleged value of a retirement account. The court has to know the value of the plan so it can fairly divide the interest and potential benefits of the plan between the spouses. Here, contribution-defined plans can pose a difficulty for the court. By their nature, contribution-defined plans are gambles. The court must predict the value as best it can. There are several methods and tools available to help do this. However, if the court gets it wrong—if it assigns a value that ends up being too great or too small—there is no remedy available. Courts will not reopen a property division after it has been ordered, so the spouses are left with whatever the market produces.
Retirement plans are often among the largest assets to be divided in a divorce, second only to the martial home. This means dividing these accounts can quickly turn aggressive and difficult. An experienced attorney will be better equipped and prepared to navigate dividing this type of investment property. A fair division of retirement accounts ensure that spouses aren’t required to restart their retirement savings following divorce, making experienced counsel a valuable investment when getting divorced. If you have questions about divorce and property distribution after a divorce, contact the experienced Johnson County divorce lawyers at Roth Davies.
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