Jun 29, 2019 11:36 AM EDT
How Does Divorce Affect Your Pension?
Divorce can be an emotional rollercoaster, but it can also have a long-lasting impact on your financial status. In addition to the common assets you accumulated during your marriage, your pension may also be at stake.
What Happens to Your Pension in a Divorce?
"Pensions are considered marital property in a divorce in most cases, however, how a pension is divided and whether survivor's benefits are payable is generally up to the divorce court," says Erlich Law Office, LLC. "All or a portion of a spouse's pension could be considered in the couple's marital assets."
Of course, the rules vary from one state to the next.
Although your pension may be at stake, the division isn't necessarily automatic. Your ex would have to make a specific request for a share of the pension before the divorce is finalized. In most cases, this means having to file a Qualified Domestic Relations Order (QDRO) before any benefits from your retirement account or pension can be granted.
How are Pensions Divided in a Divorce?
In a divorce, the court focuses on dividing your marital property, which will likely include your pension. How that pension is divided will depend on state laws and the court.
If you live in a community property state, marital property is split right down the middle (50/50) between the spouses.
If you live in an equitable distribution state, marital property will be divided according to fairness instead.
Dividing a Pension is Complicated
Let's say that a couple gets married later in life. They both have established careers and a pension or other retirement benefits in place. After a decade of marriage, the couple decides to divorce.
When dividing the pension, only those ten years of marriage would count as marital property. Any retirement benefits earned prior to the marriage would remain with the spouse and be considered separate property. This can complicate matters.
The court may use coverture fracture when determining how much the non-beneficiary spouse is entitled to. Coverture fracture is a tool used by appraisers to separate a portion of the benefits which were earned during the marriage from those earned before the marriage.
It's important to understand the details of your pension plan, including the method used to distribute payments and whether the plan offers survivor's benefits.
Generally, pensions have a single-life payout or joint-life payout. With the former option, payments stop upon your death, but with the latter option, your spouse would continue receiving payments after your death.
If your plan has survivor's benefits, you may be able to persuade your ex-spouse to maintain that benefit rather than seek the lump-sum distribution.
If you wish to preserve your pension, you might consider giving up other assets in exchange for keeping it. Essentially, the goal is to offset what your ex would receive from the pension with something else of equal value.
If your spouse also has retirement accounts or a pension, you may both be able to preserve your accounts, especially if both of your nest eggs are similar in size.
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