Because California is a community property state, you know that any shared assets or debts you take on during your marriage will be split 50% between you and your spouse in a divorce.
Naturally, that includes any income, salary, real estate, or other types of property that you and your spouse acquired with shared funds or efforts while you were married. But what happens when you have ownership interest in assets that don’t vest or mature until later?
If you or your spouse put any money aside towards retirement during your time together, that counts as a part of your shared community property – even if the person holding the account doesn’t plan to retire until long after your divorce is finalized. The same goes for pension plans earned during your marriage that don’t start paying out until after your divorce.
Because retirement accounts and pension plans vest, mature, and pay out at separate points in time, they can complicate the divorce property division formula. Additionally, that formula could change based on how you decide to split these assets in your divorce. A knowledgeable and thorough divorce attorney can help you determine the best course of action for you.
How Does Property Division Work in a California Divorce?
In a divorce, each spouse gets an equal share of any community property they own together, splitting the value 50/50. This includes any income either spouse earned while they were married and any property they bought with their mutual funds during the marriage.
When you divorce, you get 100% of any separate property that you own independently from your spouse. This covers any income you earned and any property you acquired before or after your marriage. Any property you buy explicitly with separate funds also counts as separate property, even if acquired during your marriage. Individual gifts and inheritances also qualify as separate property. Similarly, any separate property owned by your spouse remains 100% theirs after a divorce – you are not entitled to any of it.
When it comes to characterizing community versus separate property, your date of marriage and your date of separation become extremely important.
Can Your Spouse Claim Half of Your Pension in a Divorce ?
Retirement accounts and pensions come with unique challenges. You may get these benefits before, during, and after your marriage. That means retirement accounts and pension plans can have both community property and separate property interests.
- For example: John starts earning a pension as soon as he begins work at his company on January 1st, 2000. He marries Jill in July 2010 and they separate at the end of 2015. John retires in 2020 after 20 years at his company and the two divorce.
At this point, California family courts must apportion out how much of the pension or retirement plan is community property and how much counts as separate property.
When determining how to properly apportion retirement benefits, California rules have wide discretion to use the “time rule.” You compare the employee’s total time of employment to the length of time they were also married during their employment.
- In the example above, the community portion would equal 5.5/20 of the total pension. Jill would get half of that portion. John would keep the other half plus the remaining 14.5/20 that is his own separate property earned outside of his marriage with Jill.
So can your spouse claim half of your retirement or pension plan? Your spouse is entitled to 50% of the community’s claim. If you were married the entire time you earned your pension or contributed to your retirement plan, then the entire plan counts as community property. In this case, your spouse could indeed claim 50% of your pension or retirement plan.
But the time rule may not always apply. California courts have the power to use other methods of apportionment, so long as the final outcome is reasonable and fairly representative of the contributions of both spouses. Retirement and pension benefits are often based on the length of employment. However, some plans are based on performance or goal-oriented points. In these cases, the time rule wouldn’t be appropriate and the court could take a more tailored approach.
How to Split IRAs, 401(k)s, and Other Retirement Plans in a Divorce
The way you choose to split retirement and pension benefits after your divorce also changes how much you can expect to receive. There are two methods for going about this division:
- With asset distribution and cash-out division, the court will determine the current value of the community’s ownership, award it to one spouse, then offset the other spouse’s share with an equal amount of community property or cash. The employee will keep their pension in full and their spouse will get the market value in other assets.
- With in-kind division, courts may divide retirement plans and pension plans in-kind between spouses. This means that the retirement or pension plan will send payments to both spouses over time as the benefits mature and pay out. Family courts will have jurisdiction to supervise and modify the payments in the future.
Both approaches have pros and cons. With the immediate asset distribution and cash-out option, you don’t have to wait for a payout. You also don’t have to worry about coming back to modify or enforce the payment structure in the future. You get to take your share and move on. This also makes sense if your marriage was short and the total value of the benefit is low.
But the cash-out approach is based on the retirement plan’s current market value. If you decide to use the in-kind method, you get to share in any of the increased benefits based on the actual date your spouse retires. By then, the retirement or pension plan could be worth much more. However, you also take on the risk of your spouse retiring before the optimal time.
In-kind division also helps simplify the process – you get your portion of the benefits as they mature and pay out. You don’t have to do complicated valuations to determine its present worth. With qualified domestic relation orders (QDRO) , you could even get the pension or retirement plan to pay out your portion directly to you, without going through your spouse first.
Of course, you and your spouse may have created a prenuptial or postnuptial agreement where you determined yourselves how to split these assets. You can also negotiate over how to split retirement and pension benefits in a divorce settlement agreement .
A forensic accountant can help you establish the value of retirement and pension plans so that you can negotiate a satisfactory agreement that keeps your divorce out of court . Your family lawyer can help you determine the best way for you to move forward with these complex assets.