Property such as a bank account can be divided without much thought or effort and its value is known. Other assets such as a spouse’s pension, retirement account or business can be difficult.
Dividing and valuing a pension or retirement plan. When a married person accumulates an interest in a pension, retirement, profit sharing, or other employee benefit plan during the marriage, the part that was accumulated during the marriage it is community property and subject to division in a divorce. The amount that the owner spouse contributed or accumulated before the marriage and after separation is the separate property of the owner spouse. The separate property interest needs to be identified, disclosed, and valued and is not included in the division of the parties’ community property interest.
The Cash-Out Option:
The spouse who owns the retirement plan can out right pay the other spouse for the non-owner spouse’s share of the community interest with his or her separate property or by dividing community property in such a way as to compensate the non-owner spouse.
To arrive at a fair value for a pension can involve hiring an expert to conduct a “actuarial evaluation.” An actuary is an expert who deals with statistical and financial evaluations of insurance policies, annuities, and pensions. By reviewing the plan description as well as the accumulations on the account of the employed spouse, the actuary can determine the “present value” of the community share of the pension plan. With a cash-out, the employed spouse receives the pension plan in its entirety, and the other spouse receives other community property assets of equivalent value.
The Reservation of Jurisdiction Option:
Alternatively, the court can reserve jurisdiction to have each spouse receive a proportionate share of the benefits when benefits are paid. That means, once the owner spouse starts receiving pension or retirement payments, the non-owner spouse would then begin to receive a percentage of the payments.
A simple way to think about this option, is if an owner spouse has a retirement based on 20 years of employment and 10 years of it he or she was married then the non-owner’s spouse’s share of each monthly payment would be 25%. Arrived at as follows: 50% or 10 years of contributions would be the owner spouse’s separate property and 50% would be the community property interest that is divided in half to arrive at the non-owner spouses 25% share.
Under a Reservation of Jurisdiction, a Qualified Domestic Relations Order,” or “Q.D.R.O.” (pronounced “quadro”), is prepared to protect the non-owner spouse and requires the employer to comply with the terms of the court’s order.
The Reservation of Jurisdiction is the most common way in which pension plans are handled. The non-employee spouse can elect to receive his or her share of the employee spouse’s pension benefits at the earliest time that the employed spouse could retire. This means that if the employed spouse chooses not to retire at the earliest opportunity, that spouse will have to pay the other spouse what the non-employee spouse would have received if the employed spouse had retired.
Dividing and valuing a closely held business or professional practice. Like any other asset, a business or professional practice must be considered in the valuation and division of community property. To the extent that a business or practice has been developed during the marriage, there is a community property interest that must be dealt with in the divorce.
The most difficult and time-consuming aspect of determining the value of a business or professional practice is valuing its “goodwill.” This is the intangible value that most businesses have, which is based on the expectation of future business, based on established name or reputation. If the business or practice is operated by one of the spouses, it has a goodwill value even if it could not be sold on the open market.
Often, a business person or professional will say, “How can there be any goodwill . . . if I stop working, the office does not make any money?” The law’s answer is that the goodwill of a business or professional practice is valued as a “going concern.” That is, the law assumes that the business will continue operating and will not lose any customers that would otherwise have been lost if it were sold to another owner. To arrive at a value, a certified public accountant and business appraisers are hired to determine the value of a business or professional practice. The accountant or appraiser who is hired reviews the books and records of the business or practice and prepares a written report.
What about educational degrees and professional licenses? In California, where a spouse has earned a college degree or a professional license during the marriage, the community estate is entitled to be reimbursed for the costs of acquiring the degree or license. These costs are normally limited to such things as tuition, fees, and books. The other spouse is not, however, entitled to a percentage of the enhanced earning ability of the spouse who acquired the degree or license.
Determining what is community property and separate property can be complicated and difficult to value and divide. It is, therefore, important to discuss your unique situation with an attorney that has a firm grasp of family law. We can help you obtain a fair division of property during a divorce.