One of the casualties of this pandemic and economic shutdown has been the stock market and, with it, the values of retirement accounts. Defined contribution accounts, both private and employment-based, have taken significant investment hits. You may be wondering how this downturn will affect the consideration of plans such as 401Ks and IRAs in your divorce case.
Depending on where your divorce is in the process, due to COVID-19, there may be many retirement account considerations.
My divorce is ongoing, and my retirement account values are changing. What should I do?
As divorce cases proceed, things change, including asset values. In the current crisis, this is especially true for fluctuating assets like defined contribution accounts. Keep your lawyer informed and rest assured that prior values placed on retirement assets and disclosed in court documents like inventories are not set in stone. If the market is to blame for declining values, your attorney can update documents as part of an ongoing process.
However, do not make voluntary decisions that may affect the values of your accounts without checking with counsel. One of the factors considered in property distribution — called Equitable Distribution — is the contribution to or dissipation of an asset. If you panic and take all of your money out of the market and put it into cash holdings, that could be regarded as dissipation.
However, sometimes it is prudent in a volatile market to make alternative investment choices to preserve value. Any changes should be made with advice from your investment professional as well as with disclosure to your lawyer.
Because of the pandemic, you can also remove money from a defined contribution account without the usual penalties. However, do not consider doing this without first consulting your attorney. Any removal of money from marital accounts can be considered as dissipation of the asset even if there is no penalty.
My case is before the Divorce Master, so how will my account be valued if it fluctuates?
Any division of property is to be “equitable.” The concept of fairness applies to the method by which the court divides these accounts. This becomes particularly important when retirement accounts fluctuate. There are ways that a lawyer can and should ask the court to address the current situation of changing values.
The court looks at the latest statement of value for any retirement account as such accounts are to be divided as closely as possible to the hearing date. But it would be totally unfair to divide the account without considering that the value may change. Therefore, any division of that account should refer specifically to the date of the value used, and any division utilizing that value should have that “as of” date.
For example, what if an account is worth $50,000 based on a statement from March 31, 2020, and it is to be divided with a specific sum of $20,000 to the other party? The court can direct the division of that sum to be made “as of March 31, 2020.” When the actual division of the account happens, the investment plan administrator will consider that $20,000 as having been distributed that day. The payment will be subject to whatever happens in the market since that time up until the distribution. So, it may be more or less, depending on investment performance in the meantime.
There is also a special consideration if the retirement account was begun before the marriage —called a “pre-marital value”. In this situation, the court determines and divides only the “increase in value” of the asset as part of marital property. The increase in value refers to the growth of the asset during the marriage. The Divorce Code specifies that this is calculated as the difference between the value of the account on the date of marriage and the date of separation or the date of distribution, whichever increase is the smaller amount.
Always make sure your lawyer has the most current values of your accounts so you can run the numbers both ways. Historically, most often the date of separation would be the smaller increase. However, with the economic downturns during this pandemic, that is less likely to be the case now.
What about fluctuation in the accounts if I am signing a Postnuptial Agreement?
The same considerations apply whether you are before the court or settling your case.
If you resolve your divorce case, a binding property settlement agreement, also known as a Postnuptial Agreement, controls the division of property. Sometimes, you will have negotiated a set monetary amount to be taken from a retirement account, and the amount is not linked to market fluctuation. I would guess that after this unprecedented pandemic, we will see fewer agreements for such guaranteed amounts.
But typically, if you are dividing retirement accounts, the agreement usually spells out the account values as well as the “as of” dates. If there is a division of the account and a percentage or sum payable to the other party, the common language is that this amount is “segregated” to the party as of a certain date. This may be the date of an agreed-upon value, a certain statement value or the execution date of the agreement.
After that segregation date, the amount is subject to market fluctuations until actual distribution. A court order called a QDRO- a Qualified Domestic Relations Order is what accomplishes the actual distribution. An expert actuary often drafts that order, which contains very specific instructions about the division, including market fluctuations.
No matter where you are in the process of your divorce case, the family lawyers at Russell Krafft and Gruber, LLC are here to advise you in this ever-changing legal environment.