October 22, 2017

Retirement Plans – Divorce Pitfalls

Retirement Plans – Divorce Pitfalls

Since October of 2015, a divorcing couple with no children of the marriage and limited assets and who both agree to be divorced can get divorced without having to start a legal law suit against one another, wait the usual 90 days, or even appear in court.  All without the need for lawyers.  However, the expedited procedure isn’t available if either spouse has in interest in a pension.  There is a good reason for that exception.

In many cases, the pension or retirement plan (let’s just call them “plans”) represents a significant asset of one or both spouses.  Frequently, as part of the property settlement, it will be agreed that one spouse will get some of the money or some of the benefits from the other spouse’s plan.  Sounds simple.  However, there numerous issues that are not obvious that must be considered and addressed.  Here are some examples.

Most plans provide that if the employment is terminated within some period of time stated in the plan, that the employee is not entitled to any benefits on account of employer contributions to the plan.  So, one cannot rely on getting the full value from the plan until that period, called the “vesting period”, is over and the right of the employee has “vested.”  If the spouse with the plan changes jobs frequently the anticipated benefits might be substantially reduced or non-existent.  Nonetheless, plan benefits should be considered.  Alternative arrangements can be made to address the risk.

If the plan is a “defined contribution plan”, that is the type of plan where money is put into an account by the employer and/or the employee, the benefit at retirement is the employee’s account balance.  But if a spouse is to get a portion of the employee spouse’s account, there are adverse income tax consequences if the money is simply paid out to the recipient.  To obtain favorable tax consequences, there needs to be a “qualified domestic relations order” (QDRO, pronounced “QUAD-row”).  A QDRO must be written to reflect the terms of the plan (usually a complex document) and to meet the tax law requirements.  QDROs have become so complex that even experienced divorce lawyers rely upon specialized pension lawyers to assist in writing them.

Connecticut Teachers Retirement, municipal plans and church plans all have their own unique rules and characteristics.  For example, generally speaking, if the teacher should remarry, the law provides that the new spouse will get the benefits on the death of the teacher, regardless of the intention and agreement of the former spouse and the teacher.  Again, alternative arrangements can be made to address the risk and protect against frustration of the expectations of the former spouse.

Individual retirement accounts (IRAs) also have their own set of rules and characteristics.  For example, the IRA beneficiary designation typically controls no matter what the divorce agreement or court order says.

If you want to avoid leaving money on the table or, worse, having expectations of financial security thwarted, it is smart to use the services of qualified legal and/or financial professionals to divide pension assets.  Bottom line: dealing with division of pension or retirement plans is not a “do it yourself” project.  Contact me for the guidance you need to protect yourself.  I can be reached at 203-271-3888  or lcappalli@cappallihill.com.

Thanks to RJ Media Group for publishing this article in the October 19, 2017 Cheshire Citizen.

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