A gray divorce may not have been on one’s bucket list, but as noted in a recent story by The New York Times, the divorce rate among those fifty years and older has doubled since 1990. These so-called “gray divorces” are expected to rise in the coming decades, with as many as 800,000 predicted to occur annually. In addition to the heartache and headache of ending a marriage, these divorcing couples face another problem: financial strains. Just as retirement was right around the bend, many recently divorced seniors find that their post-divorce retirement accounts are too small to provide for their twilight years.
Grey Divorce in California
According to California law, divorcing spouses are entitled to fifty percent of all community property assets. Community property is presumed to be any property acquired during the course of marriage. Such property may include the family home, the family business, bank accounts, vehicles, and many personal assets. Absent an agreement between divorcing spouses, a California court will divide these community property assets right down the middle.
Retirement Accounts as Community Property in California
What about pensions and other types of retirement accounts? In California, any interest in a pension, retirement, profit sharing, or other employee benefit plan acquired during marriage is considered part of the community property. Note that the value of these assets only include that portion accumulated during the marriage, and does not include contributions made before marriage or after separation.
Such investment accounts may include 401k plans, 403k plans, IRAs, military pensions, veteran’s educational benefits, ERISa funds, Employee Stock Option Plans (ESOPS), or the like. Note that Social Security payments, compensation for military injuries, or workers’ compensation disability awards are not considered community property.
Dividing Retirement Accounts During a Divorce
Divorcing spouses have two options when dividing retirement plans during a divorce: reservation of jurisdiction and a buy-out.
- Reservation of jurisdiction - One option is for divorcing spouses to wait until the retirement funds are distributed to divide the assets. In short, when the employed spouse retires the other spouse receives a percentage of each pension check. The court will determine the percentage by dividing the number of years when the spouses were married by the total number of years that the employed spouse participated in the pension plan. Under this scheme, the court retains jurisdiction to ensure that retirement funds are properly distributed between divorced spouses. Under the Federal Retirement Equity Act of 1984, a court may prepare a Qualified Domestic Relations Order (QDRO), which requires an employer to follow the terms of the order when distributing retirement benefits. Preparation of a QDRO is an often expensive part of a divorce proceeding.
- Buy-out - A second option for divorcing spouses is a buy-out. Under this scheme, a court will determine a present value of the pension fund (often by the use of an actuarial evaluation) for purposes of letting one divorcing spouse buy-out the other divorcing spouse’s interest. With a buy-out, the employed spouse will own the pension plan in its entirety and the other spouse will receive other community property assets of proportional value.