Retirement Benefits and Divorce

Although never easy, divorce can be an especially complex time for people approaching retirement. You work your entire life and dutifully save away the money you are supposed to, but then these savings can be jeopardized in the event of divorce. There are special Social Security provisions for marriages that last ten years or more that can vest some of your benefits with your spouse. Divorce in long-term marriage can also be more complicated because there are typically more assets to divide, even if child custody and support are usually no longer an issue.

Divorce filings in the over-50 population demographic have roughly doubled since 1990. However, studies indicate that this population is also much more likely to engage in collaborative divorce where both sides work together to achieve the best long-term financial outcomes for each party instead of battling it out in court. The added maturity that comes with being a 50-plus couple going through a divorce can be especially important to maintain when there are illiquid assets such as pensions involved.

Although some older divorcing couples may have contracted for the division of assets in case of divorce in a prenuptial agreement, federal labor laws generally do not allow prenuptial agreements to dictate survivor benefits for retirement plans.

In order for a retirement account to be not subject to distribution upon divorce, the account must have been established before your marriage and not have had any contributions made to it from the date of your marriage through the date of divorce filing. The most common example of this is when you have a rollover IRA or 401(k) that was established before you got married from a previous employer. Neither of you would have received any benefit from that employer—employee contributions, employer matches, deferred compensation options, etc.—during the marriage. When this happens, the retirement account is considered separate and not marital property.

It can be important to keep copies of statements for these accounts up until the date of your marriage to prove their value. Many brokerage houses do not keep account statements longer than 10 years. Give these documents to your family law attorney handling your divorce.

Divorce law in North Carolina mandates that any pension or retirement benefits acquired during a marriage, whether they are vested or non-vested, are considered marital property that is subject to equitable distribution upon divorce. A vested benefit is one the employee has completed the required number of years of service to start receiving. Equitable distribution does not necessarily mean debt and property will be divided equally, although there is a strong presumption in North Carolina that a 50-50 division of property is equitable.

In cases where parties want to avoid dividing up other assets that are tied to a professional practice or business, or where other marital assets might be insufficient, a 50-50 divide might not be equitable and a North Carolina court can award more than 50 percent of one spouse’s retirement benefit to the other. For a spouse on either side, it is important to have a skilled family law attorney to represent your interests.

If a retirement account 1) was begun prior to marriage but you made some contributions to it during the marriage or 2) still had some benefits vest during the marriage, that account will be partially subject to distribution upon divorce. You are entitled to keep 100 percent of your retirement account that accumulated before your marriage. However, the money your employer deposited during the marriage will be subject to equitable distribution.

Good recordkeeping is just as important here as with accounts that finish vesting before marriage. Account statements through the date of your marriage can help prove what value is exempt from distribution upon divorce. However, the valuing and dividing of retirement plans upon divorce can be extremely complex.

If parties must partially or completely divide a retirement account, they can either agree to split the actual pension payments once they start, or the spouse that is receiving the pension can offer the other spouse a lump-sum buyout. Having a good family law attorney on your side to help negotiate this can be critical, regardless of your other assets.

The court will generally order what is called a “qualified domestic relations order” to establish a former spouse’s right to a part of the other former spouse’s retirement benefit. Otherwise, the tax liability for both shares goes to the employee-spouse.

If you are facing a family law issue such as divorce or drafting a marital agreement, it is important to have the help of an experienced family law attorney. Arnold & Smith, PLLC has a family law practice group of skilled and dedicated family law attorneys who practice in the family courts of Charlotte, Mecklenburg, Cabarrus, Union, Iredell, Gaston and the surrounding counties. Contact us today for an initial consultation.