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Pension Valuation Basics in Tennessee Divorce Law

Memphis Divorce details Tennessee divorce law and many different family law issues. With offices in Memphis and Nashville TN, divorce attorneys and family lawyers with the Crone & Mason, PLC Family Law Practice Group provide specific reference information, including answers to many frequently asked questions. Copyright, Crone & Mason, plc, 2009. Please see Warning and Disclaimer.

As retirement benefits have become one of the most important tools employers possess to attract valued employees and promote corporate personnel stability, the percentage of divorcing parties' net worth comprised of retirement benefits has also increased. In many divorces, retirement assets often account for more than seventy-five percent (75%) of net assets. Division of this category of asset is often misunderstood. A mistaken valuation resulting in a flawed settlement can cost a divorcing party a seriously altered lifestyle, especially during retirement. Pension valuation issues are serious business.

Each retirement plan is unique. There are different valuation techniques. The quality of the valuation and the advocate's ability to support and defend the chosen approach is directly proportional to the quality of the expert chosen. Pension valuation is not an exact science, but an art. Statistics, actuarial tables, government reports, tax tables, and investment market knowledge all play important roles in the process. The number of professional pension valuators and books are more than one might imagine. Just type "pension valuation" or "pension valuator" in any search engine or Amazon.com and see for yourself.

Most pensions are divisible, but not all. A divorce attorney may rely upon the forensic economist or accountant to review the pension document to confirm that a given retirement asset is divisible. After a trial or settlement, if a pension is divisible, pensions are divided by means of a document known as a Qualified Domestic Relation Order (QDRO). The QDRO will be drafted by either lawyer, or an attorney specializing in pensions engaged by one or both of the lawyers, and will generally be entered as an order of the court within thirty to sixty days following entry of the Final Decree of Divorce. The requirements of QDRO's are controlled by federal law regulating pensions. As for basic pension division law in Tennessee, we know that:

1. "Only the portion of retirement benefits accrued during the marriage are marital property subject to equitable division." ^[1]

2. "Retirement benefits accrued during the marriage are marital property subject to equitable division even though the non-employee spouse did not contribute to the increase in their value." ^[2]

3. "The value of retirement benefits must be determined at a date as near as possible to the date of the divorce."^[3]

4. "[M]arital property includes retirement benefits, both vested and unvested which accrue during the marriage."^[4] This means even unvested pension benefits must be considered and divided as part of the divorce.

5. Pensions may be valued by one of two methods.^[5] A trial court is free to choose its own method and need not be constrained by mathematical precision. The method chosen must only be fair.^[6]

a. The Present Cash Value Method "requires the trial court to place a present value on the retirement benefit as of the date of the final decree. To determine the present cash value, the anticipated number of months the employee spouse will collect the benefits (based on life expectancy) is multiplied by the current retirement benefit payable under the plan. This gross benefit figure is then discounted to present value allowing for various factors such as mortality, interest, inflation, and any applicable taxes. Once the present cash value is calculated, the court may award the retirement benefits to the employee-spouse and offset that award by distributing to the other spouse some portion of the marital estate that is equivalent to the spouse's share of the retirement interest."^[7]

b. The Deferred Distribution or Retained Jurisdiction Method eliminates the need "to determine the present value of the retirement benefit. Rather, the court may determine the formula for dividing the monthly benefit at the time of the decree, but delay the actual distribution until the benefits become payable."^[8] "The marital property interest is often expressed as a fraction or a percentage of the employee spouse's monthly benefit. The percentage may be derived by dividing the number of months of the marriage during which the benefits accrued by the total number of months during which the retirement benefits accumulate before being paid."^[9]

A few words of caution. If a retirement asset's monthly or quarterly statement lists a value, do not be fooled. Some "balances" may appear to be a valuation. Defined benefit valuation calculations for purposes of marital estate property division are not going to be the same as the value appearing on any statement issued by the asset manager. Also, understand that this process is not always a standardized process. Only trust experienced and trained professionals. Unfortunately, the victims of mistaken advice or poor judgment may never know what should or could have been.

For more information, please see the following important pension valuation resources on the Internet:

Bureau of Labor Statistics

Census Bureau

Department of Labor

Social Security Administration

^[1] Cohen v. Cohen, 937 S.W.2d 823, 830 (Tenn. 1996).

^[2] Id. at 830.

^[3] Id.

^[4] Id. at 830 (Tenn. 1996) (interpreting Tennessee Code Annotated Section 36-4-121(a)(1)). When offering reasoning against the argument that unvested retirement assets are speculative and contingent upon actually being received by the earning spouse and thus should not be subject to division as a marital asset, the Court commented: "Even 'vested' retirements may be contingent upon the employee's living until the age of retirement. Contingencies should be considered on the issue of method of distribution, perhaps, but not on the determination of classification." Cohen, 937 S.W.2d at 830.

^[5] The Supreme Court of Tennessee failed to instruct whether or not these were the only valuation methods which can be used. "The difficulty in dividing future benefits is aided by the use of elastic, equitable approaches. Most courts use one of two techniques." Cohen, 937 S.W.2d at 830 (citations omitted).

^[6] Cohen, 937 S.W.2d at 831-32 (citations omitted).

^[7] Cohen, 937 S.W.2d at 831 (citations omitted). "The present cash value method is preferable if the employee-spouse's retirement benefits can be accurately valued, if retirement is likely to occur in the near future, and if the marital estate includes sufficient assets to offset the award." Cohen, 937 S.W.2d at 831 (citations omitted).

^[8] Cohen, 937 S.W.2d at 831 (citations omitted). "This method has distinct advantages when the risk of forfeiture is great."

^[9] Cohen, 937 S.W.2d at 831 (citations omitted). "One advantage to the deferred distribution method is that it allows an equitable division without requiring present payment for a benefit not yet realized and potentially never obtained. Another advantage to the approach is that it equally apportions any risk of forfeiture. While a disadvantage may be that the approach requires a trial court to retain jurisdiction to oversee the payment, the entry of an order awarding a certain percentage of the benefits at the time of payment should lessen the administrative burden of the court." Cohen, 937 S.W.2d at 831 (citations omitted). See Cohen, 937 S.W.2d at 831 n.9, which reads: "For example, if retirement benefits had accrued during ten years of a twelve year marriage, and if the benefit payments would be payable at the end of twenty years, the ratio would be 120/240. Fifty percent of the potential benefit would be marital property. The trial court would then make an equitable division of that fifty percent allotting a portion to the nonemployee spouse."

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