“Someday” and “Maybe” Numbers: The Challenge of Dividing Retirement Assets Part 3
{4:00 minutes to read} In Part 2, we discussed marital vs non-marital retirement assets and how some of those assets require an actuary or other expert to figure out the “present value” before the asset can be divided.
We now arrive here: How do folks equitably divide these assets? Particularly because the present value doesn’t actually exist in a divisible form. It’s a theoretical, projected number!
Below are some popular options:
QDRO (NJ QDRO Overview)
A court order goes to the plan administrator, directing it to divide the asset in the way set forth in the order. This method avoids any tax consequences pursuant to this division at the time it is made. When the plan participant retires, each party receives a monthly sum directly from the plan administrator, as if each had a separate pension. Once this is complete, the parties need not have contact with one another regarding distribution as the administrator manages this directly with each party.
Offset Against Other Assets
Sometimes parties chose not to divide the retirement asset at all, and instead trade its value against another asset. For example, maybe there’s $200,000 of equity in the marital home (the husband and wife each entitled to $100,000) and $200,000 present value in the pension to which each party would be entitled to $100,000. The husband might keep the pension and wife keep the marital home. Admittedly, these are different asset classes; however, part of equitable distribution is not just halving the baby but identifying workable solutions aligned with the family’s particular needs and choices at the time.
Life Insurance Policy
A bit more creative, instead of dividing the pension at the time of divorce, the parties agree that when it is in payout status, the recipient will pay a portion to the alternate payee directly, perhaps as alimony or equitable distribution, depending upon tax consequences and legal restrictions. Parties might choose this option for two reasons:
The monthly amount is not discounted by the administrator, the way it would be if it was divided into two separate pensions pursuant to a QDRO.
The parties avoid the costs of a QDRO, which, though not significant, can increase the costs and timetable of the divorce.
To compensate for the risk taken by the alternate payee – one of which is that the participant spouse dies before reaching the date of pension payout, forfeiting the entire pension – the participant will obtain a life insurance policy benefitting the alternate spouse in an amount that will replace the pension payments in the event of the participant’s death. Having the life insurance covering at least some of the risk is an essential part of this approach.
Conclusion
Informed decisions make for better agreements and a better night’s sleep. Knowing the values of assets, even if you ultimately wish to waive any interest you have in them, is good practice. It helps with clarity and can inform other aspects of your agreement. Divorce is laden with pitfalls that can lead to regrets, nausea and insomnia. In my opinion, taking the additional time and making the investment to learn the values of potentially significant assets can help people sidestep all three.