If you’ve gone to one of those retirement planning sessions lately, you may already know that saving for life after work is not only incredibly important but also can be very complicated. These matters often become even more difficult in divorce cases, where spouses or a court have to decide how to divide savings that the parties can’t actually access yet. California’s Second District Court of Appeals recently considered such a case.
Husband and Wife separated in April 1998 after nearly 11 years of marriage. Husband had been working for the Los Angeles Fire Department for 18 years at the time and was eligible to retire in 2000. The couple entered into a marital settlement agreement in December 2000. The agreement divided the couple’s assets between the spouses and provided that all “income, earnings, employment benefits, or other property” acquired by one spouse after the separation date would be considered the spouse’s separate property. It also stated that Wife was entitled to half of Husband’s pension/retirement plan, due after he reached 30 years of service, if he decided to keep working past his earliest retirement date.
In 2010, Husband began participating in a new LAFD retirement program, the DROP program, which provides firefighters a lump sum payment upon their retirement, along with any monthly retirement allowance to which they are entitled under another plan. As a condition to the program, Husband agreed that his years of service and accrual amounts would freeze upon the date of his entry in the program. Money would be credited to his DROP account during the five-year period, and he would be able to access that money directly upon retirement.
Wife argued that the DROP money should be considered community property because Husband’s eligibility for it stemmed in part from the years of service on the job that he logged while they were married. Husband, on the other hand, said the money was clearly earned after the couple separated and therefore should be considered separate property under the terms of the separation agreement. At trial, the court agreed with Husband, finding that the money was a “benefit accrued post-separation with separate property funds.”
Reversing the decision on appeal, however, the Second District said the DROP money was a community asset because Husband’s right to it accrued in part during the course of the marriage. “Once the employee spouse has accrued a right to retirement benefits during marriage, the benefits themselves are stamped a community asset from then on,” the Court explained. “A subsequent enhancement in the amount of the retirement benefit is a modification of an asset, not the creation of a new one.”
Here, it noted in particular that Husband’s DROP account was credited each month with the money that he would have received from his other retirement plan had he actually retired. “In effect, Husband’s nominal DROP account holds his monthly retirement benefit until Husband exits the DROP, when he receives those benefits in a lump sum,” the Court said. “Wife has a community property interest in Husband’s monthly retirement benefit.” As a result, the Court said Wife had the same proportionate interest in the DROP account as she had in the other retirement money.
Disagreements over property are common in divorce cases. Although it may not be possible in every situation, divorcing spouses can often save a lot of time, money, and stress by taking advantage of litigation alternatives, such as collaborative divorce and mediation. With offices throughout the Bay Area, California divorce lawyer Lorna Jaynes provides innovative legal tools to resolve family law disputes without the bitterness and acrimony engendered by the adversarial process.
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