For many people, pensions and other retirement accounts are the most valuable assets they have. The question of how those assets should be divided during a divorce can catch people off guard. During a divorce in Texas, many individuals are unaware that their retirement or pension accounts may be divided. Retirement and pension accounts are often the second biggest asset of divorcing couples. As such, one spouse may be entitled to a portion of the pension or retirement account or accounts of the other spouse.
When spouses divorce, their marital assets, including retirement accounts and pension plans are subject to equitable division. Texas law explicitly states that during a divorce, it is the job of the court to “determine the rights of both spouses” for retirement accounts. For questions regarding how retirement accounts and pension plans are divided upon divorce, contact our property division lawyer in Texas
Types of Retirement Accounts
Retirement accounts generally fall into one of two types of accounts:
Defined contribution accounts
These accounts hold assets that were contributed by a spouse and the value of the account is based on the amount of those contributions as well as any growth in the investments. For example: 401Ks and individual retirement accounts (IRAs).
To the extent the contributions to a defined contribution plan were made during marriage, those contributions are community property. Any increase in the value of the account during marriage is also community property and subject to division in your divorce.
Defined benefit accounts
These accounts provide a fixed benefit for a period of time during retirement. The amount of the benefit is usually determined by a formula based on the length of the employee spouse’s employment and the employee spouse’s salary. Pensions are a prime example of a defined benefit account.
To the extent that all of the employee’s credit under the plan was earned through employment during the marriage, the entire benefit is subject to a just and right division during divorce .
Dividing Retirement Accounts under Texas’s Community Property Rules
As Texas is a community property state, the same community property rules that apply to other types of property apply to retirement accounts. A spouse claiming that a retirement account is separate property during a divorce must show that it was owned prior to marriage or acquired by inheritance.
To the extent the assets in the account were earned during marriage, they are community property and subject to division during a divorce.
Retirement accounts that may be subject to division during the divorce process include:
- Pensions: specific retirement benefits that need to be addressed properly during divorce. These may include pensions, funds, and plans for police officers, teachers, firefighters, and others that may be subject to unique tax treatment, and other applicable regulations.
- 401(k) accounts (contribution plan): where an employee, or an employee and an employer who matches retirement, makes contributions on a regular basis.
- Deferred compensation accounts: a type of defined benefit plan, or pension, where employers promise a specified monthly payment during an employee’s retirement, or a lump-sum upon retirement based on an employee’s earning history, length of employment, and age.
Awarding Spouse’s Pension and Employment Benefits
The court has the power to award a spouse his or her pension plan, based on its present value, or to award each spouse a proportionate share of the benefits when they are paid.
To the extent that a married person accumulates an interest in a pension, retirement, profit sharing, or other employee benefit plan during the marriage, it is community and subject to division in the Dissolution of Marriage.
Resolving Retirement Account Division
Divorcing spouses still have a considerable amount of control when it comes to how the division of a retirement account will ultimately be resolved. Although your particular situation will influence which options may be available or appropriate for you, there are a few common ways spouses come to agreements that work for them, and which they can both agree upon. Common options for resolving retirement account division include:
Having retirement accounts – In cases where spouses who both have retirement accounts, and who may be divorcing on amicable terms or are keen to avoid added complexities in their case, to agree that retirement accounts can be left alone and not divided during their divorce. If one spouse’s retirement account is significantly larger, a potential solution may be to give the other spouse a portion of the larger account.
Dividing the retirement account – This requires an accurate evaluation of the community and separate property shares of a spouse’s retirement account, as well as a QDRO that outlines how the community property portion of the account will be divided.
Liquidating a portion of the retirement account – A spouse with a retirement account subject to division may have the option to liquidate a portion of the account needed to comply with the terms of property division and the QDRO and make a lump-sum payment to the other spouse. This option requires meeting complex conditions and isn’t as common as other resolution options.
Marital assets in exchange for retirement account –It involves a spouse who keeps all of their retirement account and relinquishes an equivalent or comparable share of their community property assets to the other spouse in lieu of dividing the account. A common example would be giving up their share of the family home to the non-account-holding spouse. Two important points to consider with this option is the future projected value of an account upon retirement, and long-term tax consequences.
Pre- or post-nuptial agreement– If spouses have agreed to and signed a prenuptial or postnuptial agreement regarding the division of property and the division of retirement accounts upon divorce, those terms will be followed.
See a Lawyer
Dividing retirement assets calls for aggressive representation and an attorney who understands how to properly characterize those assets as either part of the marital estate or as separate property. Contributions and growth to those assets which occurred prior to the marriage are separate property and need not be divided.
Oxner Legha Law Firm can help you secure a division of retirement assets that leaves you well situated for the future. We will work to craft the distribution you need. Contact us to schedule an appointment.