Apportioning premarital and marital components of retirement assets in collaborative cases can be tricky. How could the collaborative team approach the challenge?
One tool that may be useful as the collaborative team develops options for allocating the marital and nonmarital components of premarital individual retirement accounts (IRAs), investment accounts, and other plans:
Florida Law on Marital and Nonmarital Retirement Assets:
State law guides treatment of marital and nonmarital retirement assets.
In Florida, marital assets include:
- The enhancement in value and appreciation of nonmarital assets resulting from either party’s efforts during the marriage
- The enhancement in value and appreciation of nonmarital assets resulting from the contribution to or expenditure on nonmarital assets of marital funds or other forms of marital assets, or both.
Marital assets also include all vested and nonvested benfits, rights, and funds accrued during the marriage in retirement, pension, profit-sharing, annuity, deferred compensation, and insurance plans and programs. See 61.075(6)(a)1.d., Florida Statutes.
Nonmarital assets include assets acquired prior to the marriage and acquired in exchange for such assets. 61.075(6)(b), Florida Statutes.
In litigated divorce cases, judges may exercise discretion as circumstances require to determine the valuation date or dates for valuing assets as the judge determines is just and equitable under the circumstances. 61.075(7), Florida Statutes. The judge’s selection may or may not achieve the divorcing couple’s individual or mutual interests.
But collaborating couples may retain control to select dates for valuing retirement assets they believe best reflect their agreement about fairness and best achieve their interests.
To help the financial neutral and collaborative team, the retirement account owner should get statements showing (1) the balance of the retirement account closest to the date of marriage, (2) the balance on the date of separation, and (3) the balance currently. It would help to know the participant’s contributions to the account during the marriage.
An Approach for Determining Marital and Nonmarital Components: Time Rule (Coverture) Fraction:
A coverture fraction is a formula used by the trial court to determine the marital portion of a retirement or pension fund. Parry v. Parry, 933 So.2d 9, 14 (Fla. 2d DCA 2006). This process identifies contributions corresponding with when a party made them in relationship to an asset.
Suppose the asset being divided is a spouse’s interest in a 401(k) Plan. Consider if multiplying the coverture fraction, determined as of the date of separation, to the most current balance or the balance on a different date makes sense. To give the parties their fair share of ups and downs in the market since separation, determine the marital portion as of the agreed valuation date. This approach is consistent with case law. Byers v. Byers, 910 So.2d 336, 345-46 (Fla. 4th DCA 2005) (Abuse of discretion to value husband’s 401(k) retirement account as of date of petition where asset passively appreciated nearly $70,000 between filing date and date of hearing).
Imagine a ball of unbaked dough. Separate each party’s half of the marital dough ball as of the date of separation. Stick their portions in the fridge for as long as the rising (or deflation) continues. Both portions will rise (or deflate).
When it’s time to bake, each party gets his or her separated dough ball representing the marital piece. The participant gets an additional ball, plus the amount it has risen or deflated, reflecting premarital contributions.
Calculate a “coverture” or “time rule” fraction.
The numerator is the time the participant was married while participating in the Plan.
The denominator is the total time the participant has in the Plan.
To get a starting number of the marital value, multiply the fraction and the Plan’s current value (or, if the parties agree, value on a different date, such as their separation date).
That will yield the total present value of the retirement fund accruing during the marriage. The rest, allocable to the participant as nonmarital, would comprise the premarital balance contributed plus passive growth on that amount during the marriage.
For marital amounts net of joint expenses or marital debts paid with the marital portion of the retirement account, unless the parties differently agree, it would be fair each party benefit from gains or losses through the date of division of the retirement account.
In the usual case, the participant doesn’t actively manage the retirement plan of the employer, so there is no need to distinguish between enhancement from marital efforts and enhancement from passive forces, such as because of a bull market.
In litigated cases when enhancement comprises both active and passive pieces, the spouse claiming entitlement to enhancement of premarital contributions is passive, therefore also nonmarital, bears the burden of showing market growth by proving a relevant index (e.g., an industry Standard & Poor’s 500 Index) for measuring growth.
Unless there’s a basis for unequal distribution of marital assets, splitting 50-50 the marital pie would be fair, but, to achieve their goals, in the collaborative process, the parties may agree to split other than 50-50.
Interesting Florida Case Law on Retirement Assets for Collaborative Practitioners:
Horton v. Horton, 62 So. 3d 689, 691 (Fla. 2d DCA 2011) – To determine the amount of a retirement or pension fund accumulated during the marriage, the trial court “creat[es] a fraction where the numerator is the amount of time the employee was married while participating in the plan, and the denominator is the total time the employee has in the plan.” Trant v. Trant, 545 So.2d 428, 429 (Fla. 2d DCA 1989) (emphasis added). The trial court multiplies the plan’s present value by the coverture fraction to calculate the total present value of the retirement fund which accrued during the marriage. Id.
Abdnour v. Abdnour, 19 So. 3d 357, 360-61 (Fla. 2d DCA 2009) – The total enhancement in a husband’s Thrift Savings Plan was marital where he failed to show portion of enhanced value was nonmarital and exempt from equitable distribution.
Anson v. Anson, 772 So.2d 52, 55 (Fla. 5th DCA 2000) – The precise valuation of the marital portion normally requires the appreciation of the premarital portion be calculated separately from that of the marital portion.
Steele v. Steele, 945 So. 2d 601, 603 (Fla 4th DCA 2006) – Because the husband did not actively trade stocks or bonds and his management of his 401(k) investments was de minimis, enhancement in value of nonmarital 401(k) was nonmarital.
Chapman v. Chapman, 866 So.2d 118, 118 (Fla. 4th DCA 2004) – Affirming trial court’s finding that annual return on husband’s retirement fund was marital property because his brokerage records indicated that he actively traded stocks and bonds.
Mathers v. Brown, 21 So. 3d 834, 838 (Fla. 4th DCA 2009) – The burden fell on the husband claiming the increase in value of his nonmarital stock portfolio was also nonmarital to establish by competent evidence why a particular index, e.g., the S&P 500 Index, was appropriate to measure passive appreciation.
McNorton v. McNorton, 135 So. 3d 482, 483 (Fla. 2d DCA 2014) – Without evidence of the composition of the retirement investments, the increase in a Standard and Poor’s index had no probative value.
Byers v. Byers, 910 So.2d 336, 345-46 (Fla. 4th DCA 2005) – Abuse of discretion to value husband’s 401(k) retirement account as of date of petition where asset passively appreciated nearly $70,000 between filing date and date of hearing.
Schroll v. Schroll, Case No. 1D16-3590 (Fla. 1st DCA October 6, 2017) – Sums diminished during dissolution proceedings for purposes reasonably related to the marriage – paying living expenses, attorneys, debts, moving expenses – should not be included in an equitable distribution scheme.