When a couple divorces, a family law court must divide up all of the assets of the marriage. The bigger ticket items are often points of contention, especially the marital home, as well as retirement assets.
Because retirement accounts tend to make up the bulk of total marital assets, many clients are concerned about how these assets will be handled in the divorce.
Community Property Law
When property is divided in any Texas divorce case, the courts try to distinguish between what is considered separate property and what is community property.
Community property includes any property that was acquired by the parties during marriage. If the retirement accounts were secured during the marriage, they are considered community property, meaning they need to be divided fairly between the parties.
However, if the retirement accounts were secured before the marriage, they may be considered separate property of the spouse who is the account holder.
Depending on how long the parties were married, part of the account may have been secured before the marriage while the bulk of it was secured during the marriage. The tricky part can be distinguishing what is community property and what is not.
Many times, the accounts will need to be reviewed by experts and properly valued to come to that determination. Like so many things in law, things are not always so black and white.
Dividing the Retirement Account
It can be tricky to come to an agreement on how to divide a retirement account. For the party who accumulated the asset, it may seem unfair to have to give up something for which that person has worked so hard.
For example, if one spouse stayed at home to raise children while the other spouse worked, the spouse who worked and earned the money in that retirement account may be less likely to want to give up some of that money. On the other hand, the spouse who stayed at home with the children may argue that because he or she raised the children, that allowed the income-earning spouse to earn that money and save that income. As a result, he or she has a valid claim to some of that money, as well.
Many different factors go into proving what a fair settlement would be for a retirement account. One consideration are the tax penalties and fees that the spouses could face if they do not properly divide up the retirement account.
The type of account can also affect how the division is made. Accounts, such as 401(k)s or IRAs can be divided by language within the court order, but pension plans are not so easily distributed.
Pension accounts require a special court order known as a qualified domestic relations order (QDRO), which must be issued by the court for each retirement account that requires division. QDROs must be accurate and specific for each account and should specify what percentage the distribution will be, instead of a set dollar amount. This percentage makes it possible so that distributions are properly made and avoids inequities in the account. An attorney is almost always required to properly draft a QDRO, as even experienced attorneys may require more than one submission before the QDRO is approved.
Because QDROs can be complicated and can result in some fees and tax consequences, it may be beneficial to offset the division of property by a lump sum payment to the other spouse or by dividing other property to offset any imbalance in assets received. This possibility may be even more appealing if both parties are looking to keep legal fees lower and want the process to move along quicker than a QDRO will allow.
It may also be helpful to consult with a financial advisor if a retirement plan will be divided. Cashing in a retirement plan before it is vested can be costly and will almost always result in fees and penalties.
It can be possible to avoid these issues by rolling a sum of the retirement plan over into a new or already-existing plan for the other spouse. It accomplishes the goals that both spouses want in dividing the property but protects them from having to pay unnecessary fees and penalties.
Consult a family law attorney on any questions about how best to proceed with a retirement account as a marital asset.
Contact A Family Lawyer Today
If you have questions about how retirement accounts will be handled in your divorce, contact family lawyers at Scott M. Brown and Associates. Call us at (979) 318-3075. We have offices in Angleton, League City/Clear Lake, and Pearland.