“Someday” and “Maybe” Numbers: The Challenge of Dividing Retirement Assets – Part 2

{4:00 minutes to read} Just because we determine a value for something does not mean we divide it! Often spouses are concerned that the mere mention of an asset puts it on the auction block and forfeits their exclusive rights to it. Not so!

Getting a comprehensive picture and value of ALL assets is an important part of creating a solid settlement agreement. An agreement should even specify assets whose separate nature is undisputed, with the other party waiving any rights, title or interest thereto. Full disclosure helps an agreement stand – stopping either party from claiming he entered into the agreement without full knowledge of the vital facts upon which he relied.

Retirement assets can be complex; difficult to understand and value. Determining the portion of an asset that is actually subject to equitable distribution is one of the intricacies parsed out below.

Marital vs Non-Marital

If the parties were married for the entire time the participant [in the retirement plan] worked and the pension plan was in effect, its whole value is marital, and the “alternate” spouse will be entitled to an equitable share. Depending on multiple factors, including the length of the marriage, this share could be as much as 50%.

Sometimes a portion of the pension was premarital.

If, for example, the plan participant worked for 5 years prior to the marriage, the portion earned during those 5 years is premarital. That means it is separate property and not subject to equitable distribution.

However, how do you determine the premarital value of the 5 years of pension? You cannot simply look at its value on the date of the marriage! Stay with me here. Because early contributions accrue interest, that interest is also separate property and needs to be valued.

So if a plan is worth $10,000 at the date of marriage, you can’t simply subtract $10,000 from the total as the nonmarital portion – you must also see what the gains on the $10,000 were for the length of the marriage until the filing of the complaint. How was the $10,000 invested? How did each of those funds perform over the 5 years? This requires analysis! The $10,000 might actually be worth $30,000. This is not visible to the naked eye.

The eye of the actuary, however, is greater than 20/20!

So, to summarize: the pre-marital portion must be qualified, backed out, and then a present value given for the marital portion. Defined benefit plans, usually pensions, are complex assets that typically require the expertise of an actuary to properly value.

What does the actuary do?

An actuary (or other expert such as a forensic accountant) must read the pension statement, annual benefits description, and Summary Plan Description (SPD) to understand the benefits. She will look at dates of birth of both parties, date of marriage, actuarial tables, life expectancy for the beneficiary and the alternate beneficiary. Then, the expert will provide a present value and, if necessary, the marital and non-marital shares of the asset.

In the final Part of this series, we will talk about some popular options that divorcing couples use to divide assets with a theoretical “present value.”