Divorce Retirement Plans and Wills
My Spouse and I Are Divorcing. Am I Entitled to Share in My Spouse's Pension?
Yes, if the pension was earned in whole or in part during your marriage, you'll generally be eligible to share a portion of it. A lot depends on the state in which you and your spouse live. Many states do consider that the pension belongs to the participant and his/her spouse jointly. A state court will decide whether or not an ex-spouse or child is to share in the participant's pension. ERISA will uphold the court's decision. A lawyer who practices in the divorce field should be able to assist you to understand and protect your rights.
Why Must Some Retirement Plans Be Divided in a Special Manner?
Federal law governs most retirement plans. Most retirement plans receive special tax treatment, allowing contributions to the plan to go in before taxes are paid, and further allowing the income on the money in the plan to accumulate without current tax. Upon divorce, a special order, called a "Qualified Domestic Relations Order" (QDRO) must be issued by the court and served upon the plan's trustee. The QDRO defines how much of each payment is to go to each spouse.
Do I Get a Portion of My Spouse's Stock Options in a Divorce?
Yes, if a spouse earned stock options during the marriage, most courts will award at least a portion of the options, or the value of the options, to the other spouse in the event of a divorce.
Stock options are frequently granted as a form of compensation -- or in lieu of additional compensation -- by many businesses. Particularly in highly entrepreneurial firms, the potential riches that stock options can sometimes provide are the most important part of an overall pay package. It is estimated that at least 10 million American employees held stock options in 2000, up 10 fold from the number holding options in 1992.
As courts are still playing "catch-up" and figuring out how to deal with stock options in a divorce, in many states there are no set laws or clear "rules of thumb" for judges and courts to apply, as options are in many ways different from other forms of property. For example, most stock options cannot be exercised immediately on issue. They typically "vest" over a period of 3 to 5 years, or longer, and continued employment with the same company is nearly always a condition for vesting. How does that play in a divorce?
Assume the wife was granted options for 1,000 shares of her employer's stock, vesting over 5 years, on January 1st and while the value of the options went way up, the couple separated on December 31st of the same year. In order for the options to be exercised in full she would have to work at the same firm for 4 more years, and the firm, knowing that she held valuable options, might pay her below market rates. In that case would it be appropriate to award options for 500 shares to her husband (a full 50-50 split), or only options for 100 shares (50% of the 200 shares that vested during the marriage) something in between? These are issues courts have to grapple with.
What is the Effect of a Divorce on a Will?
It depends on your state’s law. In some states, a divorce decree automatically revokes your entire Will and in others, it revokes only those provisions that made gifts to the former spouse, not the Will itself. Either way, any property arrangements in a Will (or other document, such as a life insurance policy, bank account) should always be reexamined
when you contemplate a divorce. Frequently, these matters may be required to be addressed as part of any divorce agreement or court decree.