The Tricky Task of Navigating Pension Division in Divorce in California

Dividing community property in a California divorce seems like it should be simple. Each spouse gets half, right?

Well, the process is more complicated than that, particularly when dealing with certain assets such as pensions and retirement benefits. It is important to handle valuation and division carefully to get your fair share of community property and avoid added fees or tax liability.

How Much of the Pension is Considered Community Property?

When couples divorce in California, they equally divide up property that is considered community marital property. However, any property that is legally considered to belong to a spouse individually does not get divided—it stays with that spouse. Sometimes assets can be made up of a combination of both separate property and community. With careful tracing, it is possible to separate the value so that the spouse who is rightfully entitled to keep some of the value as separate property is able to do so.

So, when is a pension separate property and when is it community property? The issue comes down to when the interest in the pension or retirement benefits was earned. Any amount earned before the marriage began should be the separate property of that spouse. Amounts earned during the course of the marriage, by contrast, are treated as community property belonging equally to both spouses, even though only one spouse did the work to earn the benefits and despite the fact that they are held in the name of one spouse only. To further confuse matters, retirement benefits earned after the date you separate are also considered separate property, even though the divorce is not final. So establishing the date of separation is crucial.

To get your rightful share of pension and retirement benefits—both your own and those of your spouse—it is important to consider records very closely and work with an attorney who is prepared to help you comb through the details to find all community property and properly allocate all your separate property.

Factors That Make Pensions and Other Retirement Benefits Complicated in a California Divorce

For many couples, particularly those in advanced stages of their careers, retirement benefits and employment compensation packages represent some of the most valuable assets in their portfolio. Both partners have an expectation of being able to rely on the retirement benefits earned to provide support during a comfortable retirement. So there is a lot at stake both financially and emotionally when it comes to dividing pension benefits.

Traditional pensions are a type of deferred compensation. A worker may earn them during the marriage, but they don’t have the right to receive the payout until years later. Trying to establish a current value for the future payments can be tricky, especially if the benefits are only partially vested at the time of divorce. An employee might have earned a certain amount of pension credit but not be entitled to receive it unless they remain employed by the same company for an additional term, and there is no way to predict whether that employment will continue.

Another factor that complicates retirement benefits in divorce is the tax treatment. Assets in a “qualified” retirement plan involve tax-deferred contributions. If those assets are not handled according to federal requirements, a hefty tax bill could become due immediately after a divorce.

The Need for a QDRO

Pension plans and other retirement benefits are held in the name of the spouse who earned them, even if they are entirely treated as community property under California law. Therefore, the companies that manage these plans need to have a specific type of court order before they are able to pay out any of the funds to the other spouse. For qualified retirement benefits, a qualified domestic relations order (QDRO) is necessary. This is a specialized document usually prepared by a professional with particular expertise. It is important to plan ahead to ensure that the preparation of the QDRO does not delay the divorce process or add any unnecessary expense.

Work with a Legal Team That Knows How to Protect Your Interests in Retirement Plans and Other Complex Assets

Some aspects of a divorce settlement, such as alimony and custody determinations, can be revisited later. But the classification and division of marital property is one aspect of divorce that is nearly impossible to change, so it is important to get it right the first time.

The Certified Family Law Specialists and associates at Holstrom, Block & Parke, APLC know how to work effectively and efficiently to protect your property interests in a California divorce. Schedule a consultation today to learn more about how we can help.

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