A look into the inconsistencies in the decisions of the trial and appellate courts on the value of defined contribution plans in Texas for marital purposes.
By Rick Johnson (Texas)
As we near the dawn of a new millennium, there appears to be a lingering question of how to determine the character of a defined contribution plan. It is still a mystery. However, there is no great mystery in determining the value of a defined contribution plan. Since defined contribution plans are characterized by individual account balances, i.e, what you see, is generally what you get. This is not true in every defined contribution plan, however, the exceptions are rare. However, determining the marital, or community portion of that balance, is somewhat more difficult, thanks in part to a lack of understanding of these plans and the inconsistency in decisions by the trial and appellate courts.
Definition and Division of Defined Contribution Plans
Defined contribution plans can be described as pension plans in which both the participant’s and the sponsor’s contributions to the plan trust are defined at the time the contributions are made. The contributions are then invested in a variety of investment alternatives offered by the plan trustee. Examples of defined contribution plans or similar type of accounts are 401(k) plans, profit-sharing plans, savings and investment plans, Keogh plans (HR-10 plans), money purchase pension plans, thrift plans, Simplified Employee Pensions (SEPs) and Individual Retirement Accounts (IRAs) and the federal government’s Thrift Savings Plan. Defined contribution plans can be either qualified or non-qualified plans.
When a participant in a defined contribution plan or the owner of an IRA is married and, prior to the date of marriage, has a balance in the plan or account, determining the pre-marital or separate and post-marital or community portions becomes a little complex. Lack of clear guidance from the case law is but one factor. Accounting methodologies and accurate records are among others.
The issue of separate vs. community property has come before several Texas appellate courts. In Iglinsky, Pelzig, and Hatteberg, the appellants complained that the trial courts erred in dividing the defined contribution plans by use of the Berry formula. The Berry formula provides that the proper date for valuing benefits under a defined benefit plan is the date of divorce, not the date of retirement and included a formula that apportioned the benefits based on the term of the marriage and time of employment. Prior to the Berry case, the Taggart case had established an apportionment formula to determine the marital and non-marital portions of a defined benefit plan. That formula utilized the value of a plan’s accrued benefits at the time of retirement. Both the Berry and Taggart cases related to defined benefits plans. Each of the appellate courts in these cases agreed that the formula utilized in the Berry case was not appropriate to apportion the marital and non-marital portions of the plans in question.
In a footnote to the Iglinsky case, the court stated: “We do not disapprove of the trial court’s division of the accumulated funds into separate accounts. On the contrary, where an adequate accounting of contributions is available, this method of division appears to effect an accurate apportionment of benefits. Thus, if the court had determined the community interest in the funds on the basis of contributions of earnings during marriage and then proceeded to divide each fund into two accounts, each party would have received a proper share and would have equally borne the risk of non-maturity.”
This comment appears to stand for the proposition that had the trial court based the apportionment on relative contributions, before and subsequent to the date of marriage, it may have upheld that type of decision. The appellate court in Iglinsky remanded the case back to the trial court for a new trial.
In Hatteberg, the appellant argued “that under Iglinsky, the proper calculation should be to subtract the value of the plan before marriage from the value of the plan upon divorce to find the community interest.” Interestingly, Iglinsky did not support that argument. Once again, the appellate court remanded the case back to the trial court.
In the Baw case, the appellant argued that the trial court erred by not applying the Berry formula. The trial court had characterized the community interest in the Husband’s profit-sharing-retirement-trust plan (a defined contribution plan) by subtracting the plan’s value at the date of marriage from its value at the date of divorce. The court overruled Husband’s point of error and concluded that the trial court had not abused its discretion in characterizing the community interest. The appellate court did not address whether or not the method utilized by the trial court was the only method appropriate, just that it did not abuse its discretion.
In Pelzig the appellate court took the position that the community interest was equal to the increase in the plan account balance between the date of marriage and the date of divorce and that result could be calculated simply by subtracting the balance of the account (in dollars) at the time of divorce from the balance of the account (in dollars) at the date of the marriage, the difference being community property. This decision flies in the face of all of the case law in Texas preceding it. This case stands for the proposition that “value” is the equivalent of property. Although not stating it, this case seems to create a new class of property, that is neither personal property or real property, called value, which could be “acquired” during a marriage.
In the Pelzig opinion the court stated (referring to Hatteberg and Iglinsky) “In both of those cases, the appellate courts simply subtracted the pre-marriage sum from the sum at divorce to determine the portion that was added during marriage and therefore is community property.” In fact, that was not the case. The issue of how to value of the extent of community property was remanded in both of those cases. The decision in Pelzig may have been based on a faulty analysis of Hatteberg and Iglinsky by the appellate court. At the least enough doubt is raised to give pause to the “principals” of Pelzig.
Distinction Between Trusteed Accounts and Non-Trusteed Accounts
It is interesting to note that in each of the cases cited above, the appellate courts did not try to distinguish between trusteed accounts (IRAs, SEPs, and defined contribution plans, etc.) and non-trusteed accounts (bank accounts and brokerage accounts). In each of these cases, the courts had ample opportunity to do so. Apparently, the courts have taken the position that there is no difference. Why then were these cases not decided in a manner consistent with the Texas Constitution, the Texas Family Code and other case law? If a trusteed account is no different than any other account, why were the accepted standards of tracing ignored? It could be that the record in each case did not include sufficient data to allow the appellate court to render decisions. It is odd, however, that the principals of tracing one’s separated property were not raised by the appellate courts in the opinions in these cases.
Assuming that there are no differences between trusteed and non-trusteed accounts, one can develop the argument that the principals of tracing apply, if sufficient data is available, as follows:
1. The Texas Constitution defines separate property as “all property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise or descent, shall be the separate property of that spouse.”
2. The Texas Family Code states “a spouse’s separate property consists of: (1) the property owned or claimed by the spouse before marriage.”
It is generally accepted that one’s interest in a defined contribution plan on the date of marriage is separate property. It is also generally accepted that the inception of title rules do not apply to retirement plans. It, therefore, follows that benefits earned or acquired subsequent to the date of marriage are marital property.
To read Part 2 Click Here
Rick Johnson operates QDRO Services, LLC in The Woodlands, Texas. The company was formed in early 1996 for the purpose of assisting attorneys and their clients with the division of retirement benefits and a QDRO solution when it is necessary.
A fundamental knowledge about property and financial planning strategies is essential for economic stability.