Many people believe their divorce will be simple: just split everything in half, retirement benefits included. Emotions often interfere with this, and on occasion, the law does as well. Each spouse’s concept of what is “fair” comes into conflict.
California is a community property state as it relates to divorce. In general terms, this means that all assets and debts acquired and incurred from the date of marriage to the date of separation will be divided equally upon divorce, even when the largest asset was earned through one spouse’s employment. Sadly, this concept of “50/50” is often misunderstood.
Pensions and social security are treated differently in a divorce
In many high asset California divorces, one of the most valuable assets is the pension plan. Pension benefits are a form of deferred compensation for services rendered during a spouse’s employment, or credits towards future income, to put it more simply. The employment contract will determine when an employee begins to earn those credits.
Pensions are different from an IRA or 401(K) plan in which money contributions made by the employer and/or employee can be immediately accessible for borrowing or early withdrawal. In a pension, there is no money in an account. The monthly payments are based on the credits earned and are distributed upon retirement.
In California, the legal precedent defining how pensions are treated in a divorce states: “If the right to retirement benefits accrues, in some part during marriage before separation, it is a community asset and is therefore owned by the community in which the nonemployee spouse as well as the employee spouse owns an interest 1. ”In addition, service credits (non-financial contributions to pension benefits), are also considered “a form of deferred compensation for services rendered” and therefore, community property 2.
Social Security benefits, on the other hand, are separate property under federal law, which preempts state law. Social Security is not transferable, nor can it be assigned by the wage earner. There are, however, derivative rights upon divorce if:
- Your marriage lasted 10 years or longer;
- You are unmarried;
- You are age 62 or older;
- Your ex-spouse is entitled to receive Social Security; and
- The benefit you are entitled to receive based on your own work is less than the benefit you would receive based on your former spouse’s work.
If each requirement is met, you could elect to receive either all of your own social security, or one-half of your former spouse’s social security, but not both.
When retirement benefits create an imbalance in a divorce
This difference between the state laws governing pensions and federal laws governing Social Security resulted in an extreme sense of imbalance for Annette Peterson in her divorce from her husband John Peterson. From Annette’s perspective, the law gave her husband 150% of the retirements benefits accumulated during the marriage (which included John’s Social Security). Annette, as a Deputy District Attorney for the county of Los Angeles, did not contribute to Social Security. In fact, she was prohibited from doing so because, as a county employee, she was a member of the Los Angeles County Employees Retirement Association (LACERA) Plan E, a defined-benefit retirement plan.3
LACERA members do not contribute to their plans (only the employer contributes). So instead of contributing to Social Security, Annette kept her income and her employer contributed to her LACERA plan. The amount of benefits is based on the member’s age at retirement, amount of service credits, and final compensation. At the time of her divorce, Annette had accumulated more than 14 years of service credits.
Annette’s LACERA benefits totaled between $200,000 and $216,000. Based on Social Security calculations, John’s Social Security benefits totaled $228,000. Annette argued that the laws governing LACERA pensions and the laws governing Social Security created an imbalance: she would receive half of her LACERA benefits and John would receive half of her LACERA benefits and ALL of his Social Security benefits. Remember, Annette was prohibited from contributing to Social Security—requirement number one for derivative benefits.
The trial court ruled in John’s favor, creating, in a practical sense, a 150% windfall for John. Annette asked the California Supreme Court to correct the imbalance, and gave several options on how to do so, including awarding John less than 50% of her LACERA benefits. The Supreme Court affirmed the trial court’s ruling, citing the requirement under California law that community assets be divided equally in a divorce4.
Since Social Security is not a “community asset”, the court properly divided the community assets and could not deviate from that “equal” division, even when it creates an unequal division overall.
The Supreme Court further noted that, although the court properly followed California law, it would have been “within the parties’ power to create a more equitable solution, even if the court could not do so. (See Ca. Family Code §2550, allowing for an unequal division “upon agreement of the parties, or on oral stipulation of the parties in open court”).”5
Today, there have been some adjustments made to limit this type of imbalance but depending on the amounts paid into social security and the amount of the pension benefit, even with these adjustments, the Peterson case would have resulted in a similar outcome.
How should you address retirement benefits in a divorce in California?
Working with an experienced collaborative divorce attorney and/or skilled family law mediator in California offers you an opportunity to create balance when the law does not. Those on John’s side of this equation may think “why would I agree to take less than the law would give me?”
John and Annette separated on February 17, 2010 and filed for divorce around that time. They agreed on all aspects of their divorce (their children and their assets and debts) with the exception of this one issue: the pension. The issue was tried at the superior court (county level) and then appealed to the California Supreme Court. That Supreme Court Ruling was filed January 11, 2016. That is nearly six years of uncertainty, court battles, and legal fees.
Given the fact that this case had to be tried, not once, but twice because of the appeal, John and Annette, conservatively, likely spent well over $50,000 each in legal fees, not to mention the years of court hearings and stress. Was it worth it? That’s your call.
In all divorce agreements, there must be value for those involved to be able to say “yes”. Finding efficient solutions is often more valuable than the costs of fighting for what the law gives you and taking the gamble that it will all be worth it in the end, especially when there are children and/or grandchildren involved.
Often times, in a high-income or high-asset divorce, there is enough to share. The struggle comes in when the emotions or the law create a sense of unfairness. No one wants to spend $100,000 or more on a divorce, but it happens, sometimes over a $100,000 pension plan or a $10,000 piano. “Legal entitlements” and “the principal” of the situation can make any divorce more damaging that it needs to be. Limiting those damages by working towards a “win-win” agreement can have future rewards in the form of a faster divorce recovery for co-parents, other affected family members, business partners, and even future relationships.
I’d be curious to ask Annette and John if they’d do it differently knowing the process and eventual outcome in advance. Luckily, you can benefit from their experience by choosing a process that educates you on the law and gives you the power to control the outcome through one of the many consensual (“alternative”) dispute resolution processes. You do not have to leave your fate in the hands of the divorce or appeals courts.
Related resources
- Determining Who Gets the House in a Divorce
- Video: How Are Assets Divided in a Divorce?
- Specific Divorce Concerns for Couples with High Net Worth
About the author
Diana L. Martinez is a skilled High Asset Divorce Lawyer, specializing in collaborative divorce and mediation in California, with offices in Corona, Riverside, San Diego, and Newport Beach.
Citations
1 In re Marriage of Lehman 18 Cal.4th 169, 179 (1998).
2 In re Marriage of Skaden 19 Cal.3d 679, 686 (1977); In re Marriage of Sonne 48 Cal.4th 118,125 (2010); In re Marriage of Green 56 Cal.4th 1130, 1134 (2013).
3 “Under the Windfall Elimination provision of the Social Security Act, 42 U.S.C. §415(a)(7) and the Government Pension Offset, 20 C.F.R. §404.408a(a), LACERA members are barred from receiving Social Security benefits, both individually and as the spouse of someone who contributed to Social Security.”
4 Ca. Family Code §2250.
5 In re Marriage of Peterson (2016) Los Angeles Co. Sup. Ct. No. BD520273, 16.
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