Are pension and other retirement plans considered marital assets and subject to division in divorce?

Yes, retirement plans are marital assets subject to division to the extent they were earned during the marriage. State laws differ on how to determine exactly what “earned during marriage” means so be sure to check with a local expert. In California the presumption is that any pension plans, 401K balances and other retirement accounts are community property and subject to division unless/until proven otherwise. If the retirement plan benefit was earned during marriage it will be divided.

In order to earn pension benefits a worker must be employed and participating in the plan.

In order to participate in a 401K plan the worker must make contributions to the plan by deferring wages from his or her regular paycheck.

Since both examples would require the participant to earn their benefit in one form or another, either time in the pension plan or contributions to the 401K, these earnings are considered community property or martial assets and will typically be divided 50/50 unless their are other extenuating circumstances or the parties agree otherwise.

Be careful though to make sure you are dividing apples with apples as retirement plans are pre-tax money where as other assets may have already been taxed. The difference in value between $100,000 pre-tax and $100,000 after tax could be $20,000 or even $50,000.

Beware Stock Redemption for Small Business in Divorce

small business, divorce financial analyst

Many of my clients own small businesses which bring a mountain of complications to the financial negotiations of divorce. From cash flow analysis to business valuation to perquisite incomes to ownership interests, the existence of a small business in a family net worth statement brings challenges and opportunities. One of the challenges becomes apparent when a couple wants to negotiate for one party to be awarded a business as part of the divorce settlement.

Here’s an example

Steve and Martha co-own a business we will call Divorce, Inc.. During the marriage Steve ran the business, was the face to all of the sales meetings and was generally known as the business man of the family. Martha had the idea for the business but preferred to stay behind the scenes and manage employees. Steve and Martha have always owned the 100 shares of stock 50/50. During divorce negotiations it became obvious that they were not going to both continue working in the business and so one should by the other’s interest. Since Steve was the face of the business and Martha had already set her heart on doing other things it was decided Steve would buy Martha’s interest in Divorce, Inc. at a total community property value of $2,000,000 after an appraisal was completed. There are a couple of ways to facilitate this transaction. This is where it becomes sticky.


  1. Divorce, Inc. will write Martha a check for $1,000,000 to buy her 50 shares from her.
  2. Martha will be keep other community assets (house, tax affected retirement accounts, brokerage account) worth $2,000,000 to offset the value of Divorce, Inc..
  3. Divorce, Inc. will purchase Martha’s 50 shares of stock over time at set prices based on an agreed upon stock buy-back plan.
  4. Steve will purchase Martha’s 50 shares of stock over time at price and on a timeline delineated in an agreement.
  5. Steve will purchase all of Martha’s 50 shares today by structuring a promissory note to be paid over time.
  6. Structure a buy-out payment over time to be payable as spousal support from Steve to Martha.


The result?

As you can tell you have options if you are negotiating the sale of a business interest pursuant to your divorce. Litigating your divorce removes many of these options as a judge is unlikely to create a situation that requires the couple to remain attached for long periods of time after the divorce. This means options #3 and #4 are thrown out. If there are no significant other assets in the estate option #2 goes away. If there is not a significant cash position on the books of the corporation option #1 goes away leaving only option #5. A court is not really allowed to be creative which rules out most of these on it’s own.

Each of these options also has complicated tax considerations to be incorporated when deciding how to structure a buy-out. Many tax professionals believe the only way to guarantee a clear understanding of how a tax court would rule is to ask for a private ruling. Some believe structuring a transfer of the stock inside of the Section 1041 six year requirement covers you. What is fairly clear is that forcing a Divorce, Inc. to purchase shares from Martha would result in some form of a taxable event so it may be best to consider options involving immediate offset with other assets or structuring a collateralized promissory note. Consult with your Divorce Financial Planning expert and Tax expert before deciding what works best for you before making a decision.



wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.


judge, divorce financial analyst

Clients often complain a judge’s decisions are arbitrary and uninformed. It helps to illustrate exactly what happens to information in the litigation process.


A family court judge has a lot of information thrown at them in very short timelines.


Depending upon your jurisdiction, a judge might have to here every piece of a case from spouses bad-mouthing one another to accusations of infidelity to child custody disputes and forensic accounting to prove lifestyle or separate property claims. It is natural for there to be two sides to each issue as divorce is a dispute after all so the judge must often here the same story twice just told in two different ways.


Judges are tasked with listening, understanding and ultimately rendering decisions. In order to do so they must understand the flow of information and our clients should too.

Where to begin

When it comes to a family’s financial picture it is unlikely that anyone will start a divorce proceeding with an accurate and complete picture of everything. This is why data-gathering is so important to a divorce case. The largest box in the cartoon represents the actual complete financial picture.
An attorney is tasked with gaining an understanding of the family financial picture in order to educate a judge and argue their client’s case in a divorce matter. It will never be 100% complete and 100% accurate because it is not their life. It is rare that an individual has a complete and accurate understanding of their own finances. It would be overly optimistic to assume an attorney can ever understand something more intimately than their clients.
In any contested divorce case their will be two opinions and maybe even two sets of data. In a perfect world you could at least agree upon the data but discovery problems, stonewalling and lack of trust cause problems. So it follows that a judge hears two sides of the same story and given even less time than the attorneys had, must assimilate the knowledge imparted by both lawyers into their own understanding. Given the lack of time and the need for summary data the judge will understand even less.

The result

Ultimately a judge must then make a decision based on the testimony, evidence and legal arguments which will render some of what they learn from the lawyers to be worthless. After three days of trial and various conflicting points of view the judge is left with a microcosm of the original financial picture and they render an opinion which is ultimately turned into an order.
So, next time you are wondering about the value of information in a divorce case, do your best to keep the decisions in the hands of those who know best: the clients.

wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

Annuities and Your Divorce

Following are excerpts from an article ran in the March 19th 2012 issue of Investment News. It underscores one of the many pitfalls of divorcing without the help of a financial expert. Unexpected penalties, fees, taxes and charges can wreak havoc on a post divorce financial plan.

Breaking up is hard to do – especially with annuities

Attorneys often split contracts in divorce settlements, unaware of the potentially costly impact

 By Darla Mercado

When a client came to his office bearing her new divorce decree, adviser Dale Russell became the bearer of bad news. During the divorce proceedings, the couple’s lawyers decided that their chief financial asset, a $500,000 variable annuity inside one of their individual retirement accounts, was to be split among the two. But that Solomon-like decision was made without the attorneys’ awareness of its dire financial consequences.

Splitting the variable annuity meant that Mr. Russell’s client had to pay an 8% surrender charge and a 10% penalty for an early withdrawal from the IRA.

With nearly one in two marriages ending in divorce, financial advisers who deal with divorcing couples often face complex problems connected with untangling annuities that are in the pool of shared assets.

With divorce attorneys typically unaware of the nuances of annuity contracts and the various ways insurers treat contracts in the context of divorce, and with advisers typically out of the loop when settlements are hammered out, the problem lands in the lap of advisers.

“This was essentially the only asset they had, and instead of my client’s getting the $250,000 she expected, she’s getting almost $50,000 less,” he said,

“It’s a big problem, said adviser Lili A. Vasileff, president of Divorce and Money Matters LLC and president of the Association of Divorce Financial Planners Inc. “Most attorneys think these annuities can be divided, and don’t wait for the consequences.”

Couples who work out divorce agreements on their own are even less likely to consider the financial consequences of splitting an annuity, and typically face surrender charges and loss of accrued living or death benefits due to excess withdrawals.

What makes annuities peculiar is the fact that they usually are not liquid in the immediate term, and each contract has its own rules on how it can be divided.

Contract Terms

Contract terms vary wildly among insurers, with some prohibiting partial tax-free exchanges into other annuities, which potentially could be a way to apportion an annuity in a divorce. Exchanges into a new annuity, however, generally involve the beginning of a new surrender period.

Ideally, an adviser would intercede early in the split, analyze the shared pool of assets and communicate with life insurers about the annuities. This would also entail ensuring that if an annuity split involved a partial Section 1035 exchange, the division would be performed without the risk of taxes.

It pays to be attentive to these details, advisers said, as insurers adhere strictly to the terms of the divorce decree.

“If the court says the contract needs to be split a certain way, we have our hands tied,” said Brian L. Kunkel, national director of advanced planning and solutions at Prudential Financial Inc.

“If the client calls us, we can outline the options available to comply with the court agreement and still be as contract-friendly as possible,” he said. “If people just process the agreement, then we merely follow the instructions.”

In most cases, a divorce decree absolves the attorneys involved from responsibility for any financial consequences.


What are Benefits of Divorce Financial Planning?

You will learn about the ramifications of complex subjects such as separate vs. community property, valuing and dividing property, retirement and pensions, spousal and child support, the family residence, tax ramifications and insurance. You will

    • Understand the difference between separate and community property;
    • Understand how personal property, intangible and illiquid assets are valued and divided;
    • Understand Defined Contribution versus Defined Benefit plans versus Deferred Compensation plans and how they are valued and divided;
    • Understand the tax ramifications of Spousal and Child support including recapture and Child Contingency rules;
    • Understand the importance of security for support payments.