Most divorcing couples know that a pension acquired in whole or in part during a marriage, is in fact a marital asset just like their house, and as such, is subject to distribution in a final divorce judgment. In many cases, it is one of the most valuable assets a couple possesses.
There are many factors that go into a decision to subject the marital share of the pension to future distribution or trade its value off against some other asset, and each case turns on the value of the assets and the needs of the parties.
However, inasmuch as Courts typically order a division of the pension benefits if a Judge is called upon to make the decision, and because many litigants also agree to a future division of pension payments, this article will focus on the keys to securing those benefits, particularly in the event of the death of the pension holder. Pension benefits are awarded after divorce in what is referred to as a Qualified Domestic Relations or a Domestic Relations Order and as such this article presumes such an Order is or will be issued for the pension division.
The party who holds the pension, usually as a result of their employment, is referred to as the Participant. Their spouse, who wishes to make a claim to their marital rights in the pension is referred to as the Alternate Payee. The first step for the Alternate Payee to insure that they are getting the full value of their interest in their spouse’s pension, is to secure details about the pension early in the divorce and negotiation process.
Cost of living increases
Each pension has its own terms with many offering cost of living increases or other supplemental benefits. If these added benefits are not identified and specifically addressed in the agreement or judgment as subject to division, then the Alternate Payee will have lost the rights to their future interest. For example, if no rights to cost of living adjustments is included, an Alternate Payee may receive the same amount of benefits monthly the first year they start collecting as in the 15th year they are collecting. Meanwhile, the Participant will have seen a regular increase in their monthly benefits.
Pre-retirement death benefits
The next major consideration should be to secure pre-retirement death benefits. If at the time of the judgment, the Participant is not yet retired, then the Alternate Payee will likely have to await the Participant reaching retirement age, or even under some plans, their actual retirement, to begin receiving their monthly payments from the Plan. But what if the Participant dies before they retire or reach retirement age. If your agreement or judgment does not award you pre-retirement death benefits, you may never see a dime of that pension.
An Agreement or judgment, however, if it names the Alternate Payee as the beneficiary of a pre-retirement death benefit, then the Plan will pay the Alternate Payee a death benefit to take the place of their pension rights. Those benefits vary from plan to plan, but act as a kind of insurance policy to make sure that death does not prevent an Alternate Payee from receiving a pension benefit.
Finally, although not the last consideration in the area of pensions, is to secure a post-retirement benefit, often referred to as a survivor annuity for the Alternate Payee. A survivor annuity allows for the continued payment of pension benefits to the Alternate Payee in the event the Participant dies after they start collecting their pension benefits. By way of example, a Participant begins receiving their monthly pension payments at age 68, and thus, so does the Alternate Payee, who for our example, is age 58. If at age 69, the Participant dies, and a survivor annuity was not negotiated in the agreement or included in the divorce judgment, the Alternate Payee would stop receiving their benefits upon the death of the Participant. Had a survivor annuity been chosen, the Alternate Payee would receive ongoing monthly payments until their own death.
Arguably the failure to secure a survivor annuity could translate into over 20 years of lost monthly pension benefits. A significant loss in many cases.
There are often several options for selecting the pre- and post-retirement benefits allowing the Participant to limit their pay out to only half of the value of their pension or a percentage allowable so as to secure the Alternate Payee’s future interest.
There are often also costs associated with the survivor annuity options. It is therefore essential that you get advice from a knowledgeable attorney on pensions and their divisions if you are considering a legal separation or divorce. The case law is very clear, that if you do not secure those interests at the time of your agreement or divorce, they cannot be added or created later.