If you and your wife are like most divorcing couples, one or both of you obtained or contributed to a retirement account during your marriage. In all states, retirement accounts are marital property eligible to be divided between the spouses at divorce, and, in most states, the rule requires a fifty-fifty division for the amount that accrued during the marriage - regardless of which spouse actually contribute in work hours and pay to the account. Yes, there are some, limited exceptions to this rule, such as a prenuptial agreement and circumstances of financial or marital fault - but these are rare exceptions. And that's a hard reality to face for a guy who's spent several decades working to retire peacefully only to learn that the wife who is divorcing him is taking half of his work efforts with her.
"Fifty-fifty," however, only begins the inquiry. Whether settling your case or preparing with your attorney and financial advisor for trial, be sure to ask these essential questions:
1. What if I am already in pay status? If you are already receiving payments from your retirement account, then your and your soon-to-be-ex's options for dividing the account are limited. Generally, she must receive her share of the payout as you receive yours. In other words, she cannot liquidate her share or wait to her retirement age to begin receiving her share. One or both of you may also be precluded from naming survivors, other than each other, to receive benefits upon each of your deaths.
2. How will pre-marriage amounts be treated? While your during-marriage work efforts are all marital, the amount of your retirement that accrued prior to the date of your marriage is yours, unless the court finds compelling need to invade that share. Be sure to identify the "date of division" as the date of marriage through the date of divorce (or separation, or some other date the divorce judge selects), rather than the date of commencement of the account, to keep that premarital share all yours.
3. What happens with the money I contribute after divorce? Similarly, the amount of your account that accrues after your date of divorce is your separate, non-marital property. Be sure your agreement specifies the end-date for your fifty-fifty division as the same date of divorce, date of separation or other date set by the divorce judge to preserve those later contributions.
4. Can I divide this the way I want? Retirement accounts come in all types of complex set ups, some being tax-deferred, others not, some guaranteeing lifetime benefits, others not, and so forth. Under federal law, plan administrators for many of these plans have exclusive authority to determine what types of divisions are permitted. Also consider timing and the tax consequences for withdrawing funds, rather than transferring them incident to a divorce judgment. For example, some of the Big Three in the automotive industry require specific trusts for survivors or irreversible selections of benefits. Therefore, before finalizing your settlement offer or trial brief, consult with your plan administrator to determine which options are actually available to you and your spouse.
5. What happens if my ex predeceases me? If your retirement plan allows, you and your spouse may agree that each other will be the beneficiary for survivor benefits (rather than a new spouse or someone else). Or, you may decide that your then-ex will not receive any survivor benefits, or will only receive a portion so that you can name someone else (a child or second spouse) as survivor for the rest. Check with your plan for the options available to you.
6. Can we equalize? Some retirement accounts require specified orders, called domestic relations orders, or DROs, to divide. These orders can be expensive to prepare, and some plans require pre-approval, at an additional cost to the spouses, before account division. If you and your wife have multiple retirement accounts, consider having a financial advisor equalize the accounts -that is, determine which ones each of you will keep and how much to divide so that you each have an equal amount of retirement - so as to minimize the number of DROs to purchase and approve.
7. Is a life insurance policy better? Depending on your ages and whether your retirement is already in that pay status, you might find that the premium for a life insurance policy on your wife is cheaper than the cost to divide your retirement and allocate a survivor benefit to your then ex to receive after your death. Always check with your financial planner to determine the best policy, if any, for your family. And be sure to address the costs for this policy in your divorce judgment.
Most of all, do not accept "fifty-fifty" and move on. Yes, it is often a bitter pill to swallow, but if you are going to divide your retirement, you must make sure you are dividing it in the most financially effective manner.