Pension and QDRO expert Mark Altschuler talks about common mistakes when valuing pensions with Family Lawyer Magazine publisher Dan Couvrette.
Why is immediate offset versus differed distribution a myth?
Many family lawyers think they can do an immediate offset of a pension after they have it valued. Or they say, “We’re not going to value it, we’ll just QDRO it.” A little bit of analysis shows that that can’t really hold up, because if you take the pension by itself and QDRO it 50/50, that means the other assets have to balance exactly – which is very rarely the case unless there are other assets. If we take this pension by itself and split it 50/50 in a QDRO, then the other assets have to balance and usually they don’t. In a typical case involving a house and a pension, the 50/50 QDRO either means selling the house and splitting the proceeds or the wife borrowing money to buyout the husband’s equity.
That’s where the concept of a partial offset would come in, because the pure immediate offset says that we value the pension and there has to be a complete buyout of the pension value. Lawyers often say that if there’s not enough cash on hand to buyout the pension, then they have to do a 50/50 QDRO. However, that usually is not the case unless the other assets balance exactly.
Can you explain more about the partial offset and how it would work?
The way the partial offset would work is if, for instance, the house and the pension are not exactly equal and don’t balance. If the wife keeps the house and it’s not offset by the pension, and she’s still owed some of the pension, then we can determine a percentage by taking what she’s owed and dividing it by the marital value of the pension. That becomes the percentage in the QDRO, which is then not 50%.
She would get the house plus some amount less than 50% of the pension in a QDRO. It could be 12% or 20%. Another way of using the partial offset is if there is a 401(k) and a pension that are not exactly equal. Rather than do two QDROs, which we see all the time, we simply do an offset where the 401(k) doesn’t balance the pension and, for instance, the husband keeps the 401(k) and then gets less than 50% of the pension – so the two assets balance.
How did the Farsace case in New York fail to perform a proper partial offset and what were the ramifications?
Farsace exactly shows the problem of how most family lawyers don’t approach partial offset correctly, because there wasn’t enough money to do a complete offset. The wife was owed about $100,000 dollars of the pension and she was only able to get immediate assets of $50,000. So, she was owed roughly another $50,000.
Since she was owed $50,000 and the marital value of the pension was about $200,000, they simply could have done a QDRO, which would have given her 25% of the marital portion. It’s really simple.
Instead the appellant court said that she was owed $50,000 and they were going to give her that plus 9% interest. Nine percent interest is statutory in New York, but it made no sense in this case because a defined benefit pension doesn’t have a balance. It’s not like a 401(k), so increasing that amount with interest until retirement and then paying it as a lump sum didn’t make sense.
In fact, the husband didn’t have a lump sum then and the wife was paid in installments in the QDRO. She was supposed to be paid in equal installments until that amount was paid out, which shortchanged the wife because she got much less than she would have gotten under a percentage QDRO. Typically, that’s the case where there’s a fixed dollar amount and the alternate payee receives payments until that number is reached. It didn’t make actuarial sense and it shortchanged the wife.
Since she was owed $50,000 and the marital value was $200,000, the court should have given her 25% of the marital portion in a QDRO – which would have been much simpler and would have followed the Majuaskus decision in New York State. What we try to do is determine the percentage based upon this partial offset.
What is wrong with using a present value of a defined benefit plan in a marital settlement agreement?
In a state that uses coverture – which is roughly half the country – the marital portion is the benefit at retirement multiplied by the coverture fraction. The coverture fraction is determined at retirement, so it’s going to be a much larger benefit than the current benefit. If the alternate payee is offered a present value, she might get a certain sum per month until that number’s reached; even if she gets an accrued benefit that has the present value stated, that is going to be less than the coverture formula.
A perfect example of that was the Able case in New Jersey. They valued the pension at $100,000, and there wasn’t enough money for a complete immediate offset. They should have done a partial offset, but instead, they did a 50% QDRO. The mistake was compounded because they specified that she was to get $50,000 dollars – but New Jersey follows the coverture methodology, so by specifying a dollar amount, the husband argued that she wasn’t entitled to 50% of the coverture portion. So there was a dual mistake made in getting the pension present valued: not using that present value because there wasn’t enough for a complete offset, and then stating the present value in a property settlement agreement. In general, putting a present value of a pension in a property settlement agreement is a big mistake. It will shortchange the alternate payee.
Why should a defined contribution plan be valued?
Typically, the defined benefit pensions are valued and real estate is valued. The clients know it has to be valued, because how else would we know what the house is worth? A defined benefit pension is a monthly benefit in the future and we have to have it valued. However, when they see a 401(k), the client gets fixated and thinks that since we have a statement, we don’t have to get it valued.
Again, a moment’s inspection will show that if we value the house today and we’re valuing the defined benefit pension today, then how are we going to value the 401(k) if their cut off date was, say, three or four years ago? Whether it’s the date of separation in Pennsylvania or California, the date of filing in Florida, the date of filing in New York, or the date of complaint in New Jersey – that cut-off date is several years in the past. We’ve seen cases where the cut-off date has been 20 years in the past. We can’t use a 401(k) balance as of three or four years ago because that doesn’t include gains and losses since that date, and the current balance includes post-marital contributions plus gains and losses on those contributions.
If we’re going to value the pension currently and we’re going to value the house currently, we can’t value the 401(k) as of four years ago. It has to be brought forward with gains and losses since that date. Then it can be compared to the house and defined benefit pension and the other assets.
What was the impetus for launching your new website, DivorceTools.com?
Many attorneys really struggle with doing partial offsets. If there are multiple assets, it requires the attorney to create her or his own spreadsheet and put them all in and do the offset – and they usually don’t do it. This is why we don’t see too many partial offsets. Attorneys come to us and want help; they’ve got five or six different pensions and ask us how to do the offset. Or we see cases where the house is split and sold and the pensions divided 50/50 rather than doing partial offset.
What we do at Divorce Tools to make it very easy with no algebraic or spreadsheet skills required is simply input the values of all the assets. It accepts many, many assets: it can take cash, securities, and all kinds of assets, and then it will automatically perform the offset for you and split up the assets to achieve the desired overall split.
Can you do multiple pensions on DivorceTools.com?
One of the reasons why we developed it is to do multiple pensions. Attorneys come to us with five or six pensions and say they don’t want to do six QDROs; they want to do an offset and do a single QDRO. Divorce Tools can do that easily – all the user has to do is input the values and click the button on the pension that’s going to be offset. If you enter all the various values and then right click the biggest asset, it will come up with the division for the QDRO needed to obtain the overall equitable distribution split. You simply input the desired overall split, whether its 50/50 or 60/40, etc. It’s very easy to use.
Can DivorceTools.com be used for simple cases if you have a typical house and pension?
We see many cases where the house has been split and sold and then the pension is 50% QDRO’d, which can be very unfortunate.
For example, you might have a case where their kids are in school and there’s a reason for one of the parties (typically the wife) to keep the house and not sell it, while avoiding the wife having to incur debt to buyout husband’s equity. Without being able to do a partial offset, we see these cases settled in a very disruptive way where the houses are sold and split or the wife incurs debt. Divorce Tools can accommodate real estate and a pension and create a QDRO, which enables one party to keep the house and the pension to be partially offset in a QDRO.
Does DivorceTools.com take the tax consequences into account?
If you look at pension versus cash, the pension is a pre-tax asset and cash is a post-tax asset. Some jurisdictions – New York, for example – are very stringent about taking tax into effect. You have to establish exactly what the participant’s tax rate is before you can discount a pension for taxes. Other states, like Pennsylvania, are more lenient and will leave it up to the discretion of the court to discount the pension for taxes. Since the pension pays in the future, you would need to estimate a potential tax rate; we recommend the parties settle on some reasonable tax factor between 12% and 20%. Our partial offset methodology will enable you to gross-down that pension to compare it to cash.
Can you work with DivorceTools.com if you’re not doing a 50/50 split? For instance, can the program adapt to a 60/40 split as well?
Divorce Tools will allow any overall equitable distribution scheme that the users want. We had a live case where the attorney had a good case for 60/40, because the wife had been a housekeeper and the husband was a high earner with the EPA. Then he was willing to go from 60/40 to 50/50 for $20,000 dollars worth of cash, which was just basically throwing darts at the equitable distribution scheme. It was completely random whereas with Divorce Tools you can quantify all of the assets.
In this case, it turned out that when the wife kept the $20,000 dollars, it didn’t change things much. We were able to give her the $20,000 dollars in the equitable distribution scheme and then account for the QDRO, but still kept the overall split at 60/40. There was a little bit of a difference in how much the pension was QDRO’d and when she still was able to keep the cash. What her attorney was willing to do was give up over $100,000 dollars of the pension under the QDRO in exchange for $20,000 in cash. With Divorce Tools, you don’t have to do that.
Is DivorceTools.com free for family lawyers and divorcing people to use?
There is no charge for it at this point. Just search for Divorce Tools online and it will come up.
An actuary and the president of Pension Analysis Consultants (PAC), Mark Altschuler has performed more than 20,000 pension evaluations. In addition to writing multiple articles for legal publications, he is a noted CLE speaker on pension and QDRO issues. www.pensionanalysis.com
Dan Couvrette is a marketing expert to family lawyers and divorce professionals. The CEO of Divorce Marketing Group, he is the publisher of Family Lawyer Magazine and Divorce Magazine.
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Your comments about QDRO preparation, were interesting. I didn’t realize that it is more beneficial to do an immediate offset than a QDRO. That is great business information to know. Thanks for sharing.