Divorce Without Going Broke
By Janet Bouma, CDFA

Pensions as Marital Property- Part I: Present Valuations

There are always lots of questions and decisions to be made regarding pensions in the equitable distribution process of divorce. Basically, once a pension is determined to be marital property, the choice is: should we get the pension present-valued, or should we divide the future income stream between the spouses, via a Qualified Domestic Relations Order (QDRO)? This month, I am going to address the first choice—getting a present valuation of your future monthly stream and next month, I'll talk about QDROs.

Let's assume you are getting divorced and you or your spouse has a pension from his current place of employment, or from his past place of employment. Ninety percent of the pensions in the United States are held by men, as most of the companies that offer pensions are manufacturing plants, steel mills, etc., which traditionally have employed men. If you are the Plan Participant, you probably feel that you worked very hard for that pension, and don't want to give it up in equitable distribution. Let's use a real life example:

Ted and Alice are getting divorced. Their date of marriage is June 1, 1986, and their date of separation is January 1, 2006. Ted has worked for XYZ Manufacturing for 25 years, since February 1, 1981. He is 52 years old and Alice is 50 years old. Ted indicates to his attorney that he doesn't want to share any of his pension with Alice; he would rather give her other assets in exchange--in particular, the marital home. Because Ted wants to keep the entire pension, his attorney recommends that he get a present valuation calculation done. To facilitate the task, Ted asks his Human Resource Department to provide him with a statement of what his pension amount would be at his earliest retirement date, if he would have separated from service on their date of separation, January 1, 2006. His company stated that Ted's monthly pension value as of date of separation is $2,500. Ted's attorney then recommended that he hire someone to do a Present Valuation Calculation to determine what lump sum of money would need to be invested at the date of separation, to supply Ted with a $2,500 monthly pension for the rest of his life, starting at his retirement date, at age 65.

Before I, or anyone else, can do the present valuation calculation, I will need to determine what portion of the pension is marital property; a coverture fraction is used for this purpose. The numerator of the coverture fraction is the number of months or days that Ted worked while married, and the denominator is the number of months or days Ted worked up until his date of separation.

In our example, let's say that the numerator is 228—the number of months Ted worked while married, and denominator is 299—the number of months Ted worked up until their date of separation; i.e 228/299=.78, or 78% of the pension is a marital asset, subject to division. Using the $2,500 pension amount, and other variables, we determine that the present value of the marital portion of the pension is $116,050.

Since Ted wants his pension and wants his wife to keep the house, his proposal will show $116,050 on Ted's side of the asset list, and the equity of the house, $102,000, on his wife's side of the ledger. (Equity is determined by subtracting one's mortgage(s) from the fair market value of the home, minus selling costs.) In addition, there are other assets available to even up the split, his wife keeps the house, and Ted gets to keep his pension.

But what if the house has been sold, the assets spent, and there is not enough money available to offset the pension, if Ted gets 100% of its marital value on his side? Then Ted's proposal will not financially work, and a future income split might be the only viable choice of splitting the pension.

Third possible situation...what if Alice wants a percentage of Ted's future monthly pension stream of income? She doesn't have a pension or any retirement account of her own. She has only worked a few years during their marriage. She is eligible for half of his social security, while he will get 100%; and if she agrees to his proposal, he will also get 100% of his pension. If Alice and her attorney win on that negotiating point, a Qualified Domestic Relations Order QDRO) will need to be drafted and approved, in order for Alice to get a percentage of Ted's future pension.

Tune in next month to learn about Qualified Domestic Relations Orders and your divorce.

Janet Bouma is a Certified Divorce Financial Analyst (CDFA), Regional Director for the Institute for Divorce Financial Analysts, a fully licensed Financial Consultant for over 23 years, and a trained Family Mediator, specializing in the equitable distribution process of divorce. Ms. Bouma is a frequent guest host on "Dealing With Divorce," KQV AM 1410 on your dial, Thursdays at 8PM. She is the managing member of J. Bouma & Associates, LLC, with offices in Station Square and Upper St. Clair. You can reach Janet by phone: 412-697-3118, to schedule a consultation, or through her website: www.BoumaDivorceSolutions.com

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