At Ciyou & Dixon, P.C., we frequently observe two (2) major (assets) in a marriage that have been fertile battleground for litigants: the marital home and pension and retirement plan. In most places around the United States, these are not as valuable as they once were. About everyone knows individual homes to commercial real estate have lost value and are only now stabilizing in terms of price.
For this reason, and because of low down payment requirements, a large number of homes are “underwater.” The fight lines are drawn over who is going to take the home, not who is going to stay in and keep it. This puts even more pressure on the parties to fight for whatever may remain that is akin to cash.
The “biggie” for most people is pension and retirement plans, which are only in one spouses name. For this reason, it is important to understand how a court may apportion these accounts. This is by a qualified domestic relations order, commonly referred to by the acronym of QDRO. In simple terms, a QDRO is a court order that creates or recognizes rights to an alternate payee (i.e., the other spouse).
For example, a 401(K) account is valued for what it is worth (usually made up of stock, bonds, and similar investments) as a certain date. In Indiana, the trial court may use any date between the date of filing of divorce and the final divorce order as the valuation date. So if, to use a nice round number, Mr. Smith’s 401(k) is worth $100,000.00 and the court orders it divided equally, the QDRO would move or apportion $50,000.00 to the other spouse.
There are two (2) problems or issues that may occur with QDROs that all divorce litigants should be aware of to secure their own future after divorce. First, they have to be approved by the plan administrator for the respective pension or retirement account. These are often difficult to get into exactly the right format and take a long time for approval.
This equates to attorneys fees and a remaining issue necessary to closure following the divorce. A question to ask, therefore, is which side is going to see to it the QDRO gets done, approved, and implemented–and pay the legal fees for the QDRO. Without clear answers, the QDRO may not get done and be a serious problem in future years.
A second problem is akin to the marital home that is underwater. What if in between the time the trial court issues its order, say for the $50,000.00 and the time QDRO is drafted, approved and implemented there is volatility in the stock market or the stock upon which the 401(K) is funded becomes worthless?
That was rarely a serious question attorneys and judges faced before the recent financial crisis. Now large companies, some too big to fail, well, have failed and their stock became worthless: Enron, WorldComm, General Motors, to name a few.
In Indiana, in February 2011, the Indiana Court of Appeals issued a decision on the very topic that allows attorney and clients do better apportion of risk with QDROs. In Ehman v. Ehman, the husband’s retirement plan, funded by GM stock, worth roughly $30,000 was awarded to wife. About 5 months after the divorce court ordered this to the wife, and then she submitted a QDRO. By this time, the account had gone down to about $4,000 in value.
The trial court judge ultimately gave her a judgment for the amount ordered in the decree, but the Court of Appeals reversed, holding the $4,000 was the amount subject to apportionment. Also, it noted that had the wife acted more quickly to obtain the awarded fund, it would not have declined so dramatically.
The key points from this case is to act quickly with QDROs, know who (which attorney or outside source) is going to prepare it, and see it through. In addition, this case also notes which party is better positioned to prevent the loss, and in the absence of any other order or agreement, that person is responsible for the loss in value of an account.
At one time, a divorce was somewhat straight forward, but with all of the marvels of our current day, there is a trade off in the ever-increasing complexity in all facets of divorce. A simple lack of attention may have a dramatic impact on the post-divorce bottom line.
The point is painful though it may be, we hope you as a divorce litigant do not lose sight of the fact a divorce is a complex business transaction. It should be treated as such, and it may take the help of several professionals to untangle the complex financial transactions made between two parties over a number of years.
Thus, don’t leave these to chance. Be an informed and engage legal counsel and work with your attorney and the court to minimize the emotional and financial pain of the process, looking forward to a bright post-divorce future. The QDRO is one legal matter that may fall through the cracks if you are not careful because it largely occurs after the divorce is complete.
If this blog has helped make you a little more informed, it has accomplished its goal. Ciyou & Dixon, P.C. advocates practice throughout Indiana.