Divorce and Soft Assets
In addition to “hard assets” there are “soft assets” that are part of marital property. Some examples of “soft assets” are stock options and pensions/retirement plans.
Retirement Plans – Retirement plans and pensions are usually the second largest assets in most families after the family home. Most spouses don’t know enough about such benefits. Find out.
Pensions commonly are either benefit plans or defined contributions plans. In a benefit plan, the pension pays out a fixed amount of money to the employee between retirement and death. The money must be taken as a fixed stream of income, usually in monthly payments. Contributions to defined plans are generally calculated on the basis of statistics and probabilities compiled by company actuaries. This type of plan is not as easy to value as a defined contribution plan.
A defined contributions plan is a separated employee account into which an employee pays. Upon retirement, the employee is entitled to the cumulative value. In case of divorce, the lump sum can be withdrawn, usually with a penalty, or paid out as a stream of income. Examples include: profit-sharing plan & money purchase plan (often known as Keogh plans), tax-sheltered annuity (403 (p) plan), stock bonus plans, thrift plan, 410(k) plans and employee stock ownership plan (ESOP).
Vested pensions, which cannot be lost if the employee quits before retirement, are also divisible in a divorce. Things to consider:
- The defined benefit plans and defined contributions plan are valued differently.
- You will need the expertise of an accountant or actuary who has experience in valuing pensions/retirement plans. This is an added, but necessary cost to understanding what your total marital property value is.
- If you are the spouse of a highly compensated executive, look for executive benefit plans or nonqualified compensation plans, designed to get around tax lawyers and potential buyouts or takeovers. These plans are easy to miss in normal discovery and may include supplemental retirement plans, special “top hat” benefits for the top two percent of employees and special trusts and annuities.
Once you know what type of retirement plan you or your spouse has, you can then create The Qualified Domestic Relations Order (QDRO). A QDRO is a legally binding document that orders a part of an employee’s pension to be transferred to the non-employed spouse.
Note: There are a few exceptions to retirement plans needing a QDRO. For example: Simple, Roth and Traditional IRA’s do not require a QDRO and can be split by court order. They do, however, still need to be properly valued.
Click here for Pensions: 12 Worst Mistakes Lawyers Make
Click here for 7 Key Questions to Ask About Retirement Benefits
For more information on how you can get the most out of your pension plan at divorce, check out Divorce and Money by Gayle Rosenwald Smith in our Books section.
Stock Options- In today’s job market, employees sometimes receive stocks as perks or bonuses either for work already completed or for future work. Couples may also have investments they have made on their own, both prior and during the marriage. Stock options are difficult to value as there is often controversy over their valuation date.
Things to consider:
- In most states, stock options that were given to an employee during marriage are considered marital property.
- If one spouse knows that they will be heading for divorce, they can ask their employer to hold off on giving them stock options so they are not considered part of the marital property.
- Because a stocks’ value can fluctuate, you may want to weigh the value of taking stock options with taking some other, more financially stable, piece of property.
- Speak with a qualified financial expert about the risks involved with taking stock options as, depending on the type, tax consequences differ.
Social Security Benefits- If you are approaching age 62, you may want to delay your divorce for a year or two. If you have been married for at least 10 years and don’t remarry, you may be eligible to collect Social Security based on your spouse’s earnings or receive part of a military pension. For a free booklet on divorce directly from the Social Security Administration click here.
Business or Professional Practice – Not only are values hard to determine, but the spouse/owner may try to hide the true value. Hire an expert witness to assess the value of any business you or your spouse owns individually or jointly. Courts want to see financial statements, book value, capitalization of earnings and how much each of you contributed to the business. If you’re a partner in a business with your spouse, you may find yourself forced to cooperate during and even after the divorce for the sake of the business.
Licenses, Degrees and Education – If you live in Minnesota, New York and Wisconsin, professional licenses or degrees are considered marital property, particularly if you put your spouse through school or gave up your own career to advance your spouse’s career. Most states prevent courts from considering such sheepskins as marital property, but they end up being an issue in divorce settlement negotiations anyway, because they represent present or future increased earnings.