UPDATE TO MY BLOG POSTS DATED JULY 20 & JULY 29, 2014: THE REST OF THE STORY

Complaint by the Medina County Bar Association to the Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio

Filed: September 4, 2014

What Happens ‘Behind the Scenes’ When a QDRO is Not Timely Administered?

If you’ve read this blog before, you know I try my best to avoid dropping the “M-bomb” whenever possible. However, occasionally, there is just no getting around it. 

[ENTER STAGE LEFT]  The attorney in this disciplinary case allegedly failed to file a QDRO attendant to a 1995 divorce action.  I share this case on the heels of two of my recent posts, wherein the courts in both Kentucky and Ohio were forced to deal with the aftermath of a party attempting to enter a QDRO 20 years after the decree of dissolution was entered. 

We all know what can happen in twenty years. Just ask my graying hair, thinning lips, and ever-increasing waistline (my wit only gets sharper with age, as you can plainly see). What happens is that we experience ‘life changes’ (no, don’t worry, that’s not where I’m going with this one)... Loss of employment, divorce, remarriage, divorce again, remarriage, financial crises, retirement, and death (taxes go in there somewhere too). Particularly in today’s climate where retirement assets are often a couple’s greatest (or only) marital asset, the negative consequences in failing to timely enter a QDRO can be significant, even life-altering, for the non-employee spouse.   

But what happens to the attorney who represents the client of a forgotten QDRO? Harkening back to another of my blog posts from the past, I think I’ll let someone else much more privy drop the M-Bomb:

[I]n response to the rising number of QDRO-related claims, it seems appropriate that this quarter’s Lawyers Mutual Insurance Company of Kentucky (LMICK) newsletter, The Risk Manager, spotlights “Avoiding Legal Malpractice and Bar Complaints in Family Law Cases”. The front page article, authored by Ms. Baxter, highlights the predominance of QDRO claims in Kentucky, and identifies two specific areas of attorney error in the preparation of a QDRO, including: (1) the failure of the QDRO to include the proper language, and (2) the failure to process the QDRO correctly. In presenting a solution, LMICK suggests that practitioners who anticipate a potential claim in this area should, among other things, retain a company or individual who specializes in the preparation of QDROS.

In its Complaint before the Board of Commissioners on Grievances and Discipline, The Medina County Bar Association asserted that an attorney’s failure to ensure a QDRO was filed with the court and submitted to the retirement plan (after nearly twenty years) was violative of the professional code of conduct, specifically alleging that “such neglect caused irreparable harm to the grievant” and was “prejudicial to the administration of justice”. 

As you’ll see, I’ve redacted the names on the Complaint. That is because there’s no picking on this particular attorney for his failure to timely administer a QDRO. Rather, this is a recently exposed pandemic in the divorce world, as revealed by reiteration of my blog post above and my more recent blog posts dated July 20 and July 29, 2014. So what happens to the attorney that represents the client of a forgotten QDRO? The Medina County Bar Association alleged that an attorney’s failure to timely secure a QDRO in the course of representation is chargeable as professional misconduct, and requested disciplinary measures be taken by the Supreme Court of Ohio. 

As Paul Harvey would say (many more than twenty years ago)... And now you know the rest of the story.

Ohio's Highest Court Speaks on Unvested Retirement Benefits in Divorce

Daniel v. Daniel, Slip Opinion No. 2014-Ohio-1161 (March 26, 2014)
Unvested Military Retirement Benefits Earned During Marriage Constitute Marital Property

Decided: March 26, 2014
To be Published
Judgment Reversed and Cause Remanded

In Daniel v. Daniel, Slip Opinion No. 2014-Ohio-1161 (March 26, 2014), the Supreme Court of Ohio squarely addressed the issue of whether an unvested military pension earned during the marriage should be considered marital property subject to equitable division.  This case was brought to my attention by a colleague, after our recent discussion regarding the status of unvested retirement benefits in divorce under Ohio law.  If there was any question, this author's opinion is that the matter has finally been put to rest by Daniel:  Unvested retirement benefits earned during the marriage constitute marital property subject to equitable division by either the present cash value or deferred distribution method (via QDRO, or other similar court order).

An unvested retirement benefit is one where the employee has not yet fully earned the right to receive the benefit. Typically, companies – or federal/state/municipal agencies and the military – require a certain number of years of service before an employee becomes vested, and the employee often becomes vested in increments.  An employee is said to be vested when he or she completes the minimum terms of employment necessary to be entitled to receive retirement pay in the future.

By statute in Ohio, under R.C. 3105.171(A)(3)(a)(i) and (ii), trial courts must consider "the retirement benefits of the spouses" acquired during the marriage when dividing marital property in accord with R.C. 3105.171(C).  According to Ohio’s intermediate appellate courts, this mandate extends beyond vested retirement benefits to include unvested benefits as well.  See Lemon v. Lemon, 42 Ohio App. 3d 142, 537 N.E. 2d 246, 248 (4th Dist. Hocking County 1988); see also Younkin v. Younkin, 1998 WL 894849, *3 (Ohio App. 10th Dist. Franklin County 1998); Varns v. Varns, 1992 WL 6649, *1 (Ohio App. 9th Dist. Wayne County 1992); Haller v. Haller, 1996 WL 116140, *2 (Ohio App. 12th Dist. Warren County 1996)(citing numerous cases from the 10th and 12th Districts).  As a matter of first impression in Ohio, in Lemon, a seminal and oft-cited case on point, the Appellate Court determined that the trial court erred in failing to consider Husband's unvested Ohio Operating Engineers Pension Plan (a private-employment defined benefit plan) a marital asset subject to division upon the parties' divorce.  The Lemon Court held that the controlling statute clearly required consideration of unvested retirement benefits as marital assets.  Lemon, like the Daniel Court, interpreted the applicable statute to have broad reach, concluding that the legislature must have intended so; both Courts expressly observed that no statutory distinction was made between vested and unvested retirement benefits (see Lemon at 249; Daniel at Paragraph 9, page 4; see generally Daniel's "Syllabus of the Court"). 

Of note, and a basis upon which to read the Daniel Opinion as having a general application beyond that of military benefits, the Daniel Court referenced Wilson v. Wilson, 116 Ohio St.3d 268, 2007-Ohio-6056, 878 N.E.2d 16 (2007).  In Wilson, the trial court awarded one-half of Husband’s Teamsters' pension earned during the marriage to Wife, “if and when it becomes vested”.  After acknowledging the private-employment nature of the Teamsters' pension, as opposed to a non-private military pension, the Daniel Court aptly reflected: 

Our holding in Wilson v. Wilson, 116 Ohio St.3d 268, 2007-Ohio-6056, 878 N.E.2d 16, provides a useful example of the “deferred distribution” method of accomplishing an equitable division of an unvested retirement benefit.

(See Daniel at Paragraph 12 & FN1, page 5).  

After Daniel and Wilson, as well as Lemon and its progeny, I think it a safe position to take that in Ohio, both vested and unvested retirement benefits earned during marriage fall within the ambit of “martial property” as defined by R.C. 3105.171(A)(3)(a).  Thus, such benefits are subject to equitable division pursuant to R.C. 3105.171(C), and trial courts may utilize a QDRO, or other similar order, as a mechanism to defer distribution until benefits become fully vested and mature.  

BOTH SIDES OF THE RIVER?

Kentucky appellate courts have taken the same position – i.e., that vested and unvested retirement benefits earned during the course of the marriage constitute marital property subject to equitable division.  See Poe v. Poe, 711 S.W.2d 849, 856 (Ky. App. 1986); Smith v. Rice, 139 S.W.3d 539, 541 (Ky. App. 2004).  As a matter of fact, and as observed by the Daniel Court, the majority of states have reached the same conclusion (see Daniel at Paragraph 10, page 4, citing a Tennessee Supreme Court case listing similar cases from 37 states). 

To that end, of the six states bordering the Ohio River, there is only one state that considers unvested benefits separate non-marital property.  In Indiana, unvested retirement benefits belong to the employee-spouse and are not divisible in divorce (however, the court may consider their eventual value as part of dividing other marital property).  Under Indiana’s statute, the determinative factor as to whether retirement benefits constitute "martial property" subject to distribution falls upon whether the employee-spouse “possesses” the funds.  To the extent retirement benefits remain unvested at the time of equitable distribution, such will be "acquired," if at all, only after the dissolution and therefore should not be characterized as a divisible marital asset.  See Bizik v. Bizik, 753 N.E.2d 762 (Ind. App. 2001); Harvey v. Harvey, 695 N.E.2d 162 (Ind. App. 1998).

TODAY’S ‘TAKE HOME’ FOR FAMILY LAW PRACTITIONERS ON BOTH SIDES OF THE RIVER

Thus, in Ohio and Kentucky, when classifying and dividing retirement benefits in divorce, both vested and unvested benefits earned during the marriage should be considered marital property subject to equitable distribution.  This means that whether in settlement negotiations or at trial, these amounts are ‘on the table’. Especially when representing the Alternate Payee, you do not want to leave the table without having ensured appropriate allocations; the Alternate Payee should maintain the same vesting status as the Participant and distributions should be made accordingly. 

VEST, VESTED, VESTING -- Words That Should Never be Arbitrarily Used in a QDRO

Don’t inadvertently short-change your client’s rights.  As seen by the canvas of cases above, it is state law, not ERISA, that determines how much of an employee’s retirement benefit is available for distribution in divorce (for non-ERISA plans, the same is also generally true, though there are exceptions, such as the Federal Thrift Savings Plan).  In fact, ERISA allows the assignment to an Alternate Payee of 100% of the current or future retirement benefits of the employee-spouse. 

However, most defined contribution plan model QDRO forms limit the Alternate Payee's award to a portion of the Participant's “total vested account balance”.  This is because the plan’s model is designed in an effort to ease the plan’s administrative and financial burdens by attempting to avoid the additional bookkeeping involved with an award of unvested benefits to an Alternate Payee.  Therefore, when using a retirement plan’s model QDRO, when you see the words "vest, vested, or vesting", first look to controlling state law to determine whether there is indeed any such restriction on divisibility with regard to unvested benefits.  The bottom line in Ohio or Kentucky?  When the plan's model language assigns only "vested" benefits to the Alternate Payee, if such language differs from your client’s goal or the parties’ intent, make sure you use your own language, not the plan’s.

Also, be aware that some plans may (wrongly) resist language assigning unvested benefits to the Alternate Payee, or even flatly reject a QDRO until the Participant’s account has vested.  To get around such obstacles, if the intent is to award a portion of the unvested benefits to the Alternate Payee, make sure you’ve included language in the parties' property settlement agreement (or trial order) that will make the Participant personally liable to the Alternate Payee for any such amounts.  A motion holding the employee in contempt may be less expensive and time consuming than trying to force the plan through litigation to pay unvested amounts, or the risk and expense associated with waiting to submit a later QDRO, once the unvested amounts ultimately vest with the Participant.

Finally, make sure to review the Participant’s most recent account statement, particularly with a defined contribution plan.  If the entire account balance is vested, non-vesting is obviously a non-issue, and saves a fight with a recalcitrant plan (for another day...).

“QDRO” DOESN’T HAVE TO BE A FOUR LETTER WORD: PRACTICE PREVENTATIVELY TO MANAGE RISK (PART I OF II)

The Risk Manager, a Newsletter by Lawyers Mutual Insurance Company of Kentucky
Avoiding Legal Malpractice and Bar Complaints in Family Law Cases
WINTER 2014, Volume 26, Issue 1

Well, I've tried to avoid dropping the M-Bomb outright in my blog for as long as I could, as I would like to keep from disenfranchising my readership (nod to TM, perhaps the only attorney that reads this blog unforced).  Although my December 7, 2013 post emphasized a certain “malpractice trap”, it was Appeals Court Judge Taylor that actually used those words, not me.

For the faint at heart, I always try to 'skirt the elephant' by turning the M-Bomb around.  Instead of saying, "If you do that, you'll be in big trouble", I say rather, "If you don't do that, you'll be your client’s hero".  It may be a smoke and mirror trick that most of you see right through, but I’m sure only with the fondest appreciation for my attempted benevolence.  You’re welcome.

But alas, it is time.  And it isn't me who says so.  It's Lawyers Mutual Insurance Company of Kentucky (LMICK), and the exponentially increasing number of QDRO-related cases being brought before the courts (just take a look at Part II of II of today's posts, as well as my earlier posts featuring recent appeals cases).

So here it goes...   Take a deep breath, this is going to hurt a little.  And remove any sharp objects from your wingspan.

Malpractice.  There. I said it. Now how do we identify it (you know, in some other attorney, of course) and what can we do about it to provide better services to our clients?

While attending the Northern Kentucky Bar Association’s Family Law Seminar a few months ago, Ms. Ruth Baxter (Crawford & Baxter, PSC, Carrollton, Kentucky) led an eye-opening session aptly entitled, “Avoid Being Sued or Disciplined While Practicing Family Law”.  It was the first session of the morning, and let’s just say it wasn’t the coffee that woke us all up and had us on the edge of our seats.  Ms. Baxter is the current President at LMICK, and has sat as a Director there for more than fifteen years, and has been on the claims committee for the past ten years.  Ms. Baxter shared her first-hand experience in watching the proliferation of QDRO-related claims and increased malpractice risk to family law attorneys over the past decade.  In fact, Ms. Baxter observed that during the past two years she has seen claims relating to QDROs take over the much-feared #1 spot for the highest percentage of claims in the area of family law.  (Ms. Baxter gave me permission to share her observations, as I felt it was a shame for only the attorneys present to become privy to this pervasive malpractice trend).

After hearing Ms. Baxter, and in response to the rising number of QDRO-related claims, it seems appropriate that this quarter’s LMICK newsletter, The Risk Manager, spotlights “Avoiding Legal Malpractice and Bar Complaints in Family Law Cases”.  The front page article, authored by Ms. Baxter, highlights the predominance of QDRO claims in Kentucky, and identifies two specific areas of attorney error in the preparation of a QDRO, including: (1) the failure of the QDRO to include the proper language, and (2) the failure to process the QDRO correctly.  In presenting a solution, LMICK suggests that practitioners who anticipate a potential claim in this area should, among other things, retain a company or individual who specializes in the preparation of QDROS. 

There’s not much I can value-add here; my views on this issue are probably (and I’m sure without bias) crystal clear.   The ‘take home’ is that there is almost always a solution that can preventatively manage risk (for both the attorney and the client) when dealing with retirement assets.  Ask around, get help.  We don’t know what we don’t know.  And if we do know that we don’t know, there is simply no justification for not engaging the assistance of someone who does know.  Maybe that means you retain a third-party with particular knowledge of the subject matter, or maybe that you consult with a mentor to see what he/she does to manage such risk, or perhaps it means that you just simply pick up the phone and brainstorm with a colleague. 

* I would be remiss if I did not give credit where credit is due.  In this case, my catchy two-part post title ("QDRO" Doesn't Have to be a Four Letter Word) came from marketing genius of my friend Erin Loudner Emerson, Director of Marketing at the Cincinnati Bar Association.

“QDRO” Doesn’t Have to be a Four Letter Word: Practice Preventatively to Manage Risk (PART II of II)

Bowman v. Cortellessa, No. 2012-CA-000416-MR (Ky. App. 2014)
Failure to Properly Discover and Divide All Retirement Benefit Plans

Rendered: January 31, 2014
Not to be Published
Opinion Affirming

As luck would (or would not) have it, it was only two weeks after I received this quarter’s The Risk Manager that the Kentucky Court of Appeals decided Bowman v. Cortellessa, No. 2012-CA-000416-MR (Ky. App. 2014).   For anyone counting, Bowman accentuates yet another area of potential attorney error we can add to the proverbial “Top Ten QDRO Mistakes” list, that is, the failure to discover and divide all marital retirement plans (and no, I did not get permission from Dave Letterman, I’m hoping my blog is somehow passing under his radar).  

The parties in Bowman were divorced in 1984.  During the course of litigation, Wife’s counsel took Husband’s deposition, wherein he testified that he had a non-vested interest in military retirement plans through both the Reserves and the Guard.  Husband further testified that he did not know how the two plans interacted or what the value of the plans were.  The subsequent Domestic Relations Commissioner (DRC) report - incorporated into the Decree - did not mention Husband’s military retirement accounts.  Beginning in 1994, and continuing over the next two decades, Wife filed various motions, pro se, seeking a domestic relations order that would entitle her to the marital portion (1971-1984) of Husband’s military retirement accounts.  Wife argued that the marital retirement assets had been previously hidden from her, purposefully, by Husband and his counsel.  Wife’s motions were all denied for various procedural reasons.  

Thirty years after the parties’ divorce decree was entered (yes, I said that), the Court of Appeals denied Wife’s Rule 60 motion.  The Court found nothing in the record to indicate that Husband or his attorney did anything to prevent Wife or her attorney from contacting personnel in the Guard and/or the Reserves who could have provided the necessary details regarding the accounts (of which, the Court duly noted, Husband admitted to the existence of in his deposition).  Insert M-Bomb here.  The potential malpractice, as seen through the eyes of the Court:

While [Wife] may argue that her attorney in 1984 should have raised this issue prior to when she discharged him, any error by counsel is imputed to the client and is not grounds for relief under CR 60.02(f).

Keeping with my practice of always offering solutions, the answer here (or one of them) is to obtain written disclosure regarding the other spouse’s retirement plans.  Before your client signs any settlement agreement, did you receive a written disclosure statement from the other spouse confirming all plans of coverage?  Without the written disclosure, it may be difficult to reopen the case upon the later discovery of the existence of a plan (concealed or not).  The rest of the solution?  When retirement assets are disclosed, through either a sworn statement or deposition as in Bowman, find out if any portion is marital.  Then follow through to ensure an appropriate classification and division of such property before any agreement is signed or trial findings are entered by the court.

Now this blog post comes full circle, and back to this quarter’s The Risk Manager, and where I will end this post in the good hands of LMICK.  The aforementioned LMICK article suggests the inclusion of certain language in the separation agreement to avoid future problems regarding nondisclosure by a spouse in divorce.  LMICK’s proposed language is based upon the AOC’s Preliminary and Final Disclosure Statements (see AOC PDF Forms 238 at Paragraph F.7., and 239 at Paragraph E.7.; see also FCRPP 2):

The parties have based this Agreement upon the information provided in their respective Preliminary Verified Disclosure Statements – AOC 238, exchanged between the parties during this divorce action. 

And if the Disclosure is not to be filed with the record, as is often the case when the parties come to an agreement, or when otherwise not required by the court, LMICK suggests further adding:

Each party waives the final requirement that the other party file a Preliminary/Final Verified Disclosure Statement.

Disregarding any statute of limitations on potential attorney malpractice in Bowman, the threat is real.  The ‘take home’ again is that there is almost always a solution that can preventatively manage risk (for both the attorney and the client) when dealing with retirement assets.  The key is to identify the potential risks, and have appropriate protective mechanisms in place.  Maybe it is a checklist, maybe it is a more detailed agreement with your client, and maybe it is retaining a third-party with particular knowledge of the subject matter.  Whatever your druthers, act affirmatively. 

* I would be remiss if I did not give credit where credit is due.  In this case, my catchy two-part post title ("QDRO" Doesn't Have to be a Four Letter Word) came from marketing genius of my friend Erin Loudner Emerson, Director of Marketing at the Cincinnati Bar Association.

AVOIDING PITFALLS – IDENTIFYING THE VALUATION DATE

Jones v. Spencer, No. 2013-CA-000522-MR (Ky. App. 2014)
Retirement Assets are Valued at Dissolution Unless the Parties Otherwise Unambiguously Agree

Rendered: February 7, 2014
Not to be Published
Opinion Affirming

The trend in QDRO case law across the country is clear:  A QDRO must be consistent with the benefits assigned by the underlying property settlement agreement and/or divorce decree.  This Opinion is yet another illustrative case of this trend being embraced by the laws of the Commonwealth.

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On January 18, 2013, some twenty years after dissolution, Wife filed a Motion for Entry of a Qualified Domestic Relations Order.  Upon considering the Motion, the trial court determined that the settlement agreement’s provision regarding the division of retirement benefits was ambiguous; specifically finding the phrase “the benefit” subject to more than one interpretation (e.g., the benefit at the time of dissolution, or the benefit at the time of retirement).  The trial court sought to determine the parties’ intent from the agreement as a whole, and applied relevant case law wherein pensions in divorce proceedings are valued as of the date of dissolution.  Also entering into the court’s calculus was its recognition that Husband had continued contributing to the plan for twenty years after the dissolution, during which time Wife remarried.  Ultimately, the trial court sustained Wife’s Motion, but valued the benefits at the time of dissolution.  Wife’s appeal followed.

On Appeal, Wife argued that the trial court erred in fixing the valuation of her former husband’s retirement account as of the date of dissolution rather than his retirement date.  She premised her argument on the language of the parties’ property settlement agreement, contending that the trial court “twisted and turned the English language in a way harking back to Bill Clinton” in reaching its finding of ambiguity.  The relevant portion of the agreement read:

RETIREMENT: Husband acknowledges that he is vested in a Dayton Power and Light Retirement account.  The parties agree that benefit payable [sic] under this plan, upon Husband’s actual retirement thereto, will be payable one-half to Husband and one-half to Wife.

The Court of Appeals recognized that as a general rule, parties in a dissolution proceeding are free to agree to a division of retirement assets that varies from controlling law so long as the terms of the settlement agreement do not run afoul of public policy or otherwise offend the sensibilities of the court.  The Court found that the parties’ agreement was determined to be conscionable at the time of divorce.  The Court further found, in affirming, that the language pertaining to the retirement benefit was indeed ambiguous, i.e., subject to more than one meaning, and that the trial court then, in conformity with applicable case law, appropriately attempted to determine the parties’ intention from the four corners of the agreement.  The Appeals Court agreed with Wife that the parties could have contracted to divide the benefits at retirement, but that to have done so effectively, it must have been done without ambiguity. 

This Opinion observed from the outset that both parties were represented by counsel in the execution of their settlement agreement.  That’s a reminder for me to provide pro-active direction to my colleagues as part of these blog entries, especially after recitation of any QDRO-related case, if for no other reason than because my reader’s anticipatory angst is palatable to me as I write.  So here’s the ‘take home’ for today --

Kentucky case law values retirement benefits at the time of dissolution.  See Armstrong v. Armstrong, 34 S.W.3d 83, 86 (Ky. App. 2000).  However, parties can, of course, agree to a different valuation date, such as the date of actual retirement.  KRS 403.180; see also McCullin v. McCullin, 338 S.W.3d 315, 322 (Ky. App. 2011).  This case, however, makes clear that whatever the valuation date for retirement assets, the determined date must be unambiguously identified in any agreement between the parties.  As a practical matter, when the valuation date is determined at the inception of a case, counsel may then request appropriate documents and account statements.  This can aid in preventing ambiguity in the settlement agreement by the inclusion of more detailed language.

This case also provides an incentive for attorneys to enter the QDRO concurrently with the divorce decree.  When the parties agree to divide retirement assets, a ‘draft’ domestic relations order setting forth all essential terms may be incorporated into the property settlement agreement.  This secures both parties’ interests in negotiations, and can prevent the protracted litigation seen in this case when attempting to enforce the settlement agreement terms through a subsequently drafted QDRO.  (Not to mention the headaches, lost time and money associated with attempting to capture the parties’ intent several months, or even years, after their agreement when later drafting the QDRO).

Beneficiary Designation - The Form Prevails

Sadler v. Buskirk, No. 2012-CA-001157-MR (Ky. App. 2013)
Court Denies Widow's Request that Former Spouse Should have No Rights as Beneficiary

Rendered: November 22, 2013
Opinion Affirming 

I think I can capture your attention by simply skipping right to Judge Taylor’s Concurring Opinion:  

[F]or domestic relations practitioners in Kentucky, this area of law remains a malpractice trap and should be reviewed and scrutinized closely in every divorce.

Okay, now some backdrop, and then I’ll get right to how to best avoid said “malpractice trap”. 

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In the underlying divorce action, the property settlement agreement (PSA) awarded each spouse his or her own IRA and they each waived any claim to the other’s IRA.  The parties further waived their rights to take against each other’s estate upon death.  Husband later remarried but – before his passing – failed to change his beneficiary designation to someone other than Former Wife.  The IRA administrator informed Husband’s ‘new’ wife (Widow) that Former Wife was the named beneficiary on the internal IRA account forms.

As the administrative executrix of Husband’s estate, Widow then filed motions to intervene and to declare that Former Wife had no rights to the IRA account.  Widow argued that Former Wife had no right to the IRA because of the terms of the PSA.  The trial court denied Widow’s declaratory motion.  In affirming, the Court of Appeals duly noted that Husband had ownership of the IRA, and as owner, he had the authority to designate a beneficiary as he did, designating Former Wife.  The Court further concluded that Former Wife was not claiming any ownership of the IRA itself, but rather, she was the passive recipient receiving only a beneficial interest because of Husband’s act.  Thus, the Court held that the PSA was not thwarted because “[Former Wife] is not claiming ownership of the IRA but merely receiving, as a result of Husband’s authority as owner of the account, the concomitant result of his beneficiary designation.”

So how do you avoid the malpractice trap?  When applicable, specifically include in the PSA a mutual waiver of the parties’ right to ownership and any beneficial interest of the retirement account, including the right to receive the proceeds upon the death of the party who owns the account.  Aside from the state retirement system, most plans will not have a proviso automatically terminating the former spouse’s beneficial interest upon divorce.  Kentucky law relating to non-testamentary transfers and multiple party and payable on death accounts all have the same effect, i.e., divorce does not terminate a former spouse’s beneficial interest.

A final note, qualified retirement plans (e.g., 401(k) or traditional pensions) under ERISA’s “Plan Documents Rule” preempt state law as to any waiver as part of a divorce decree.  See Kennedy v. Plan Adm'r for DuPont Sav. and Inv. Plan, 497 F.3d 426 (2009).  So, as with the IRA in this case, a qualified plan will always pay the beneficiary designated on the plan’s forms despite any decree or PSA to the contrary.  But, as seen in this case, the Widow’s declaratory motion may have met a more favorable result had the above language been included in the PSA.

Of course, Husband simply changing his beneficiary designation with the account administrator would have obviated all of this.  A not-so-subtle reminder that when representing the owner of a retirement account, it may be prudent to advise, perhaps as part of any client closing letter, that divorce does not automatically terminate the account beneficiary designation and that he or she must contact their retirement account plan if they wish to change the designation.

Avoiding Pitfalls - Defining the "Marital Portion"

Triplett v. Triplett, No. 2011-CA-002076-MR (Ky. App. 2013)
Assigning and Dividing Marital Property Under a Defined Benefit Pension

Rendered: July 5, 2013
Opinion Affirming

In this appeal arising from a dissolution of marriage action, Wife challenged the orders of the Jefferson Family Court related to the division of Husband’s pension, specifically the designation of marital and non-marital property, and the ultimate percentage award made to Wife.

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Wife failed to preserve for appellate review her specific claim that the subtraction method, rather than a marriage coverture fraction, should have been used to identify the marital and non-marital portions of Husband's pension, as well as her calculation of value of Husband's pension plan at time of dissolution according to a “bright-line rule”.  In direct conflict, Wife argued before the trial court that a coverture fraction should have been used, and she relied upon a different calculation with respect to bright-line rule in her appellate brief than she used before trial court.

Confusing?  Yes.  But have no fear.  Since Wife failed to preserve her claims, the impact of the decision is fairly limited.  But there are still lessons to be learned. 

As a preliminary matter, practitioners must take heed when negotiating and drafting a property settlement agreement.  It is not enough to say that the “parties agree that the marital portion of said pension shall be awarded 50% to Petitioner and 50% to the Respondent.”  When the term “marital portion” is not defined in the agreement, it opens the door to protracted litigation when the proposed QDRO is later prepared.

There are various ways to assign and divide the marital/non-marital portions of a defined benefit pension.  Of course, each method will either be more or less advantageous to your client.  Under a defined benefit plan where the amount of retirement benefits is substantially related to the number of years of service, a marriage coverture fraction may be the best method of protecting the alternate payee’s interests.  Where a coverture fraction is the preferred method, whether in negotiating and drafting a property settlement, or when presenting your client’s case at trial, it is absolutely critical that the nature of the coverture fraction be understood, as drastic and unintended results can occur depending on the formula used.

This lesson could not have been made plainer than in Triplett.  The initial coverture fraction Wife presented to the trial court resulted in her seeking 27.5% of Husband’s pension.  Based on its own coverture formula, the trial court instead awarded Wife just 10%.  Of note, in her CR 59.05 motion, Wife sought an award of 13.91%, and on appeal sought 22%, both percentages based on alternative coverture formulas.  After years of litigation, the Court of Appeals affirmed the award of 10% to Wife, substantially less than she sought at any point during the litigation.