Pensions

Jun/Jul 2021 : Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished

Posted by Joseph W. Cunningham, JD, CPA

View / Download June/July 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • In their Consent Judgment of Divorce, it was provided that W would receive a coverture fraction share of H’s Civil Service Retirement System (CSRS) pension plan (Plan).
  • The Judgment also provided that W would be “entitled to her prorated share of any and all other ancillary benefits associated with the Plan.”
  • W submitted a proposed Court Order Acceptable for Processing (COAP—essentially a QDRO for CSRS plans—which provided her with a survivor benefit.
  • H objected, claiming that in the divorce negotiations it was noted that his pension did not provide a survivor annuity for W.
  • He further claimed that creating a survivor benefit for W would reduce his pension benefit by 10%.
  • H’s counsel stated that a survivor annuity was not a regular part of the Plan and that such a benefit “would be a separate and distinct benefit.”
  • W’s counsel stated that under MCL 552.101(4), all components of a pension plan are assigned with a retirement plan benefit divided in divorce.
  • The trial court noted that the parties negotiated the specific percentage that W would receive and, further, that they made no provisions applicable on the death of either party.
  • Hence, the court ruled that the parties did not contemplate survivor benefits and that the COAP should not provide for any.
  • W appealed.

Court of Appeals Decision

  • In an unpublished decision, the Court upheld the trial court’s ruling.
  • In doing so, the Court noted that the situation was similar to that in the published case of Hudson v. Hudson, 314 Mich App 28 (2016).
  • In Hudson, the Court ruled that H, an alternate payee of 39.5% of W’s state pension, could not elect a benefit option of a single life annuity based on his life, an option to which W was not entitled to elect on her share of H’s federal pension.
  • H claimed that pursuant to MCL 552.101(4), he was entitled to all components associated with W’s pension.
  • To this the Hudson Court stated the question was whether the right to select a particular payment option was a “component” of the plan subject to the statute. The Court ruled that it was not such a component and held against H’s claim.
  • The Court in Gray held that W’s assertion that the survivor benefit – specifically referred to as a “component” in MCL 552.101(4) – was “foreclosed for the reasons this Court articulated in Hudson.”
  • In a persuasive dissent, Judge Ronayne Krause essentially stated that (1) Hudson did not apply to the Gray circumstances and (2) under the plain meaning of MCL 552.101(4), a survivor benefit is a component of a plan.

Comments on the Case

  • The facts in the Gray case are complicated, including that:
    • The plan involved was federal pension about which less is generally understood than with the more common commercial company plans.
    • It was noted in the trial transcript that it had been agreed at mediation that W’s lawyer was to prepare a letter with questions about the government plan. Apparently this letter, if sent, did not ask about survivor benefits.
    • And, according to H’s counsel, survivor benefits were not part of the plan but rather were “separate
      and distinct.”
  • Takeaway – It is virtually always preferable to specify in the Judgment or Settlement Agreement, as the case may be, what benefits are included with the transfer of a retirement benefit.

Otherwise, issues such as those in Gray and Hudson may arise.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished”
View / Download June/July 2021 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Jun/Jul 2021 : Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished”

Nov 2020 : Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)

Posted by Joseph W. Cunningham, JD, CPA

View / Download November 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • After a 35-year marriage, H and W agreed to a settlement which provided, inter alia, that (1) H was awarded his pension – “free and clear of any claim” of W – and (2) W received the marital residence which had an equity of around $100,000.
    • However, they asked the trial court to determine spousal support. The judge awarded W, who had some health issues, permanent spousal support of $2,000 a month.
    • The judge notified the parties that H could ask for spousal support to be modified when he retired.
    • When H did retire, he took an approximately $440,000 lump sum pay-out for his pension which is what he had to live on for the rest of his life.
    • H petitioned the court to terminate spousal support since his only source of income was his pension which he received as his property in the settlement.
    • The trial court, after reviewing the circumstances of each party – including the disparity between $440,000 pension and the $100,000 home equity – reduced spousal support to $961.50, calculated by taking the approximate $300,000 difference and dividing it by W’s life expectancy.
    • H appealed.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision to reduce, but not terminate, spousal support.
  • But, the Court ruled that the trial court failed to consider several relevant factors including:
    • The taxes H had to pay on receipt of the lump-sum;
    • That contributions were likely made to H’s retirement after the divorce and, hence, were not marital; and,
    • That the lump-sum was all H had to live on for the rest of his life.
  • The Court noted that the parties agreed that H would have the pension as his property and, further, that once an asset is awarded, it “is not subject to invasion by the former spouse, even indirectly, which is precisely what occurred when the trial court … considered the pension” as H’s income for determining spousal support.
  • However, the Court also noted that a previously awarded pension is a consideration in balancing the “incomes and needs of the parties in a way that will not impoverish either party.”
  • Thus, the Court remanded the case so that the trial court takes these factors into account.

Comments on the Case

  • The Court’s ruling is essentially as follows:
    • Income from a retirement bene/t awarded as property in a divorce settlement may not be included as income in a subsequent modification of spousal support.
    • But, such income is properly a consideration when doing so because the principles governing modification of spousal support are that “support must be just and reasonable under the circumstances and should balance the incomes and needs of the parties” so as not to impoverish either.
    • The tension between these two principles presents a tightrope to tread in attempting to achieve an equitable result in the “case specific” nature of divorce.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)”
View / Download November 2020 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Nov 2020 : Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)”

June / July 2020 : Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)

Posted by Joseph W. Cunningham, JD, CPA

View / Download June-July 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H and W both had pensions to divide after a nineteen year marriage.
  • W had a Michigan county pension and H a Michigan public school pension.
  • A CPA testified that there were two basic differences in the pensions:
    1. H’s school pension included an automatic COLA provision (MIP) by which it would increase by 3% a year. W’s county pension had no such provision.
    2. Also, H’s school pension allowed an alternate payee to access his/her share before the participant retired.
      W’s county pension, however, did not allow alternate payee access until the participant actually retired.
  • H, 45 years old, could retire at age 48 and intended to do so. He was free to seek other employment after retiring. W, also 45, had to wait until age 60 to retire.
  • The CPA proposed a partial offset method to adjust for the differences in the two pensions.
  • The trial court ruled that “the most equitable method for division” was to award each party a 50% interest in the other’s pension.
  • H appealed, claiming in part that when he retired at age 48, he could not live on half of his pension.
  • He also claimed that his ability to work after retiring would be relevant only if the court were determining an award for spousal support.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision.
  • Essentially, the Court ruled that both pensions, with their respective features, were marital assets and that dividing them equally was appropriate.
  • The Court also noted that earnings ability is relevant to property distribution as well as to spousal support.

Comments on the Case

  • Since H stated no reason (e.g., health) why he could not work after retiring at age 48, his claim was not very persuasive.
  • Determining the present values of the two pensions would not likely have provided a workable solution in this case. Reason – H’s pension would probably have been far more valuable than W’s pension – making an offset not feasible because:
    1. It was payable from age 48 for life vs. W’s being payable from age 60 for life.
    2. The twelve extra years were earlier, more valuable years in the present value calculation.
    3. H’s pension increased each year whereas W’s did not.
  • Though not an issue in the Reed case, whenever dealing with a Michigan public school pension, one needs to be mindful of recoupment.
    Recoupment occurs if (1) the alternate payee begins drawing his/her share before the participant (1) is age 60 and (2) retires, and (2) the participant works beyond normal retirement age of 60. The resulting reduction of the participant’s bene.t is drastic.
    A way to prevent recoupment is to provide that the alternate payee cannot begin drawing before the participant reaches age 60.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)”
View / Download June-July 2020 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “June / July 2020 : Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)”

November 2017 : Court of Appeals (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were separated in 2014, in part due to alleged multiple incidents of spousal abuse, and were subsequently divorced after 27 years of marriage.
  • At the time of divorce, H, 55, was receiving a pension of $51,880 annually while W, 54, was earning $15,058 at a parochial school district where she had worked for 22 years.
  • Part of H’s pension was accrued before the 1987 marriage.
  • H had health insurance as part of his retirement package while W did not have employer paid health insurance.
  • In view of (1) H’s fault for the breakdown of the marriage and (2) the disparate financial circumstances of the parties, the trial court awarded W 55% of H’s pension as spousal support.
  • H appealed, claiming that by awardingW 55% of his pension, the trial court inappropriately invaded his separate property.

Court of Appeals (COA/Court) Decision

  • The COA upheld the trial court decision and ruled that it did not invade H’s separate estate.
  • The COA stated the following regarding whether a trial court’s jurisdiction was limited to retirement plan contributions made during marriage:
[M CL 552.18(1)} does not expressly restrict the circuit court’s jurisdiction to pension contributions made within the confines of the marriage. Although that statutory provision
provides that pension contributions made during the marriage must be considered, it does not expressly provide that contributions made before the marriage may not be considered. That is, the language is inclusive and mandates what must be taken into account, but does not expressly exclude consideration of other contributions. [Boonstra, 209 Mich App at 562]
  • Further, the Court stated that the following rationale has been adopted regarding whether pension benefits accrued pre-marriage may be divided in divorce:

The major consideration is the security of the family and the court may utilize any property in the real and personal estate of either party to achieve suitable support for the family as the court considers just and reasonable after considering the ability of either party to pay and the character and the situation of the parties, and all the other circumstances of the case. [Booth, 194 Mich App 284,290(1992); Pickering, 268 Mich App 1,9(2005).

  • Thus, the COA decided that in light of the circumstances of the case,“it was ‘just and reasonable’ for the trial court to include in its considerations the portion of Defendant’s pension that had accrued before the marriage. Booth, 194 Mich App 291.”
  • Finally, the Court stated that because the trial court did not consider H’s pension accrued before marriage as his separate property, it did not have to consider the statutory exceptions (i.e., need or contribution) for invading a separate estate under MCL552.23.

Comments on the Case

  • Essentially, the COA ruled that when pre-marital retirement benefits are involved, a “just and reasonable” standard for providing “suitable support of the family” is the paramount consideration.
  • And, if awarded as spousal support, neither exception for invading separate property need be established to justify the award.
    Rather, ensuring the “suitable support of the family” takes precedence.
  • This seems to run counter to typical compliance with the Reeves mandate to first identify the (1) marital and (2) separate components of the parties’ various property interests.
  • What then is done in lock-step fashion is to treat the respective marital and separate property components of the total estate accordingly.
  • But, as we know, if one party establishes “need” under MCL552.23, the other’s separate property may be invaded to suitably provide for the need.
  • What the unpublished Koch decision indicates is that when a pre-marital retirement benefit is involved and need is established, paying it as spousal support vs. an invasion of separate property is an option.
  • This seems somewhat at odds with the 1997 Reeves decision mandate. However, if “need” is established, the substantive result is similar either way – that is, use of pre-marital retirement benefits to satisfy the need.

Food for Thought

  • “Need” sometimes consists of inadequate retirement security coupled with the lack of ability and/or time post-divorce to establish sufficient funds for support in retirement years.
  • In such a case, if the other party has a 401(k) or qualified plan savings account which includes a pre-marital component, the, “suitable support of the family” standard might justify use of one party’s pre-marital retirement account to provide for the other’s suitable support in retirement years.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

……

Download the PDF file below… “Court of Appeals (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)”
View / Download November 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “November 2017 : Court of Appeals (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)”

Aug / Sept 2017 : In a Published Case, Court of Appeals Approves Entry of QDRO 12 Years Post Date of Divorce–JOUGHIN, No. 329993 (7/11/2017)

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were divorced on April 28, 2003.
  • The Judgment of Divorce (JOD) awarded W (1) 50% of H’s pension accrued as of April 30, 2002 and (2) $23,823 from his profit-sharing plan account.
  • The JOD provided that both parties “shall cooperate” in obtaining and processing the QDROs necessary to effectuate the transfers to W.
  • For reasons not apparent on the record, the QDROs were not promptly filed. Instead, W submitted the QDROs for entry with the trial court on June 30, 2015- more than 12 years post-divorce.
  • H objected claiming that W’s submission of the QDROs for entry was an attempt to enforce the 2003 JOD and, hence, was time-barred under MCL 600.5809(3), which provides a 10-year statute of limitations applicable to attempts to enforce a noncontractual money obligation.
  • W responded that because her claim did not arise until H reached retirement age, that the statute had not yet begun to run.
  • Because H had not retired nor received any of his retirement benefits, the trial court entered the QDROs.
  • H appealed.

Court of Appeals Decision

  • The Court disagreed with the parties’ position that MCL 600.5809 applied to entry of a QDRO.
  • Rather, the Court cited a previous decision that “when a judgment of divorce requires a QDRO to be entered, the QDRO is to be considered as part of the divorce judgment.”
  • Accordingly, the Court stated that “because the QDRO is part of the judgment, it necessarily cannot be viewed as enforcing the same judgment.” *** “Instead, we hold that under these circumstances, the act to obtain entry of a proposed QDRO is a ministerial task done in conjunction with the divorce judgment itself.”
  • Thus, the Court concluded that entry of the QDROs was not time-barred
  • Judge Kathleen Jansen wrote a vigorous dissent claiming, for various reasons, that entry of the QDRO after 10 years was barred by the statute of limitations.

Comments on the Case

  • Obviously, the case is a “poster child” for the importance of preparing and processing QDROs promptly – either contemporaneous with entry of the divorce judgment or soon thereafter.
  • Based on many years’ experience of preparing QDROs for legal aid clients under a pro bono program administered by the State Bar, QDROs unfiled for years following divorce are not uncommon. This case – a rare family law published case – indicates that the passage of 10 years or more does not bar entry of a QDRO.
  • However, in Joughin, the participant had not begun to receive benefits. Had he done so, or remarried, or died, the situation would likely have been much more problematic for the alternate payee.
  • And, the Joughin judgment provision reprinted in the Court’s opinion did not provide that W’s share of H’s profit-sharing plan account would be adjusted proportionately for gains or losses of plan investments. With the sharp advance of the stock market from 2003 through 2015, W paid a high price for not timely attending to the QDROs.
  • In this regard, there is no precedent regarding whether the right to receive a proportional share of plan gains and losses passes automatically under state law with the transfer via QDRO of an interest in an account balance plan such as a 401(k) or profit-sharing plan as in Joughin.
  • Unless transferring a set dollar amount, it is highly advisable to include such a provision in both the JOD and the QDRO.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download PDF file below… “In a Published Case, Court of Appeals Approves Entry of QDRO 12 Years Post Date of Divorce–JOUGHIN, No. 329993 (7/11/2017)”
View / Download Aug-Sept 2017 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Read More “Aug / Sept 2017 : In a Published Case, Court of Appeals Approves Entry of QDRO 12 Years Post Date of Divorce–JOUGHIN, No. 329993 (7/11/2017)”