The KISS Principle Makes YOU Stupid...

            Let’s stay you’re comfortable settling (rather, you think) your case with a clean split – you keep your retirement, your spouse keeps his, and you don’t have to get tied up in those mysterious orders s lawyers call QDROs that take several months to process. KISS, keep it simple, stupid, you think. You find out later – even a day later – that he has twice as much set aside for retirement as you.

            So, if you settled your case without finding out how much of your spouse’s retirement you walked away from, can you get out of it later?

            Probably not.

            Family courts generally approve negotiated property settlement agreements, even when those are not equitable.[1]  The family court is bound by property settlements reached through negotiation absent fraud, duress, or mutual mistake.[2] In Lentz, for example, the court stated, “we will not rewrite or abrogate an unambiguous agreement negotiated and signed by consenting adults by imposing a ‘reasonable’ or ‘equitable’ inquiry on the enforceability of such agreements.”[3] Rather, in reviewing a property settlement agreement, the family court must consider whether the agreement was entered into and signed freely, voluntarily, and understandingly, not whether the settlement is equitable.[4] This standard applies whether the settlement agreement is in writing or placed orally   on the record in open court.[5]

            Settlement agreements that occur while a case is pending are generally enforced, absent fraud, duress, coercion or an agreement contrary to public policy, meaning not one the family court would not accept but one that shocks the conscience.

            Pursuant to Michigan Court Rule 2.507, settlement agreements are binding and enforceable when they are subscribed in writing by the party (or agent) against whom enforcement is sought or recited in open court, on the record. The court rule broadly states, moreover, that we need only produce “evidence of that agreement” the parties reached. The rule provides, in pertinent part:

MCR 2.507  Conduct of Trials . . .(G) Agreements to Be in Writing. An agreement or consent between the parties or their attorneys respecting the proceedings in an action is not binding unless it was made in open court, or unless evidence of the agreement is in writing, subscribed by the party against whom the agreement is offered or by that party’s attorney.[6]

Importantly, as here, if a party alleges that his or her consent was influenced by severe stress, the settlement will nonetheless be upheld unless the circumstances were so severe that he or she actually lacked legal capacity to contract -- that is, he or she had no reasonable perception of the nature or terms of the agreement.[7] Furthermore, whereas here, the party alleges mistake, the mistake must be mutual.[8] When parties enter into settlement agreements, they give up the right to further investigation on those issues to which they settled, and making a mistake in doing so, nor having a change of heart at having done so, is not a basis to set aside the agreement.[9]

            Unless your spouse committed fraud or you both did not know how much retirement he had set aside, you’re stuck with the settlement you struck.

            The KISS principle – keep it simple, stupid – can really make you stupid if you settle your case without knowing all of the details.

[1]               Buzynski v Buzynski, 369 Mich 129; 119 NW2d 591 (1963).

[2]               Lentz v Lentz, 271 Mich App 465; 721 Nw2e861 (2006).

[3]               Id.

[4]               Id.

[5]               Howard v Howard, 134 Mich App 391; 352 NW2d 280 (1984).

[6]               MCR 2.506(G). This rule is applicable to trials,  hearings and settlements.

[7]               VanWagoner v VanWagoner, 131 Mich App 204; 346 NW2d 77 (1983).

[8]               Villadsen v Villadsen, 123 Mich App 472; 333 NW2d 311 (1983).

[9]               Id.

SLOPPY DRAFTING LEADS TO LIFETIME ELECTIONS - THE HUDSON CASE

Generally, retirement benefits that accrued during the marriage are divided equally between ex-spouses. This includes defined benefit plans, such as pensions, defined contribution plans, such as 401(k)s, and many military non-disability plans.  There are exceptions for short-term marriages and marriages with particularly, and financially-connected, serious circumstances of fault (think: your spouse gambled his life savings away and now wants half of yours).

By Michigan statute, all benefits, cost of living adjustments, survivor benefits, early retirement adjustments and other “bells and whistles” (what we call ancillary and component benefits) are divided in the same portion as the basic benefit awarded. This basic benefit is usually a percentage determined by the years of the marriage against the years of employment, divided by two (or, the coverture facture).  For this reason, many judgments of divorce will simply read that the benefits are divided “including all benefits as set forth in MCL 552.505” (the retirement statute).

BUT this statute does not address how the benefits are divided, only which. If the judgment is silent, each ex-spouse alternate payee in the plan (the non-worker spouse) may make whatever election he or she wants. This is particularly problematic for lifetime elections that limit the participant spouse (or worker-spouse)’s ability to designate beneficiaries or make her own payment elections.

In Hudson v Hudson, _____ Mich App _____, Published Opinion of the Court of Appeals, Docket No. 322257 (Jan 7, 2006), the Court of Appeals held that because the judgment of divorce did not preclude election of a lifetime benefit, the ex-spouse was allowed to elect it.

“The parties were bound by the language of the judgment of divorce, and that the judgment of divorce did not preclude defendant’s election.” The fact that “they may have neglected or chosen not to address” the issue of their rights relative to each other’s pension plans “at the time of the judgment of divorce does not afford a basis for subsequently contesting whether the selection of an option afforded by the EDRO is contrary to the terms of the judgment of divorce. It is not. Nor does it afford a basis for finding on grounds of ‘equity’—as plaintiff argued—‘an implied term of th[e] settlement agreement’ (and therefore of the resulting judgment of divorce).”

For these reasons, it is imperative to be clear in your judgment not only what benefits are to be divided, but how. An attorney well versed in family law is essential here. Find someone who dabbles in family law and uses form judgments, and you will very likely find yourself like the unhappy ex in Hudson.

MAJOR CHANGE for Spousal Social Security Benefits -- and it ain't good for the non-worker spouse

The biggest Social Security changes in 30 years are in effect immediately and directly impact all divorcing people in the U.S. Social Security rules for claiming benefits, especially spousal benefits, have been dramatically changed by the Bipartisan Budget Act of 2015, which was signed November 2, 2015. These changes became effective immediately, and everyone is scrambling to understand them. -

In the past, ex-spouses were able to anticipate making independent decisions regarding when they would file for Social Security benefits. Being divorced, they each had their own individual qualifications to meet for filing a claim: age, marital status, benefit entitlements, etc. If an ex-spouse wanted to file a claim based on a worker’s benefit, the ex-spouse could do so without consideration of the worker’s filing status. That has changed. Under the new rules, a worker must be actively collecting benefits in order for an ex-spouse to be able to collect a spousal benefit based on the worker’s benefit.

This is a significant change. Perhaps it is in the worker’s best interest to delay benefits until age 70 so as to maximize their own benefit. That means the ex-spouse must also wait until the worker collects benefits. However, there is no monetary benefit to the spouse to wait, since their benefit will not increase beyond the worker’s Full Retirement Age (FRA) benefit, which may have been at the worker’s age 66. The spousal (or ex-spousal) benefit is equal to 50% of the worker’s FRA benefit, adjusted for reductions if the ex-spouse is under their own FRA.

Another aspect of the new rules are that an ex-spouse is completely at the mercy of the worker spouse regarding the availability of benefits. The worker spouse can actually block the ex-spouse from receiving much needed benefits by simply not collecting benefits themselves. This is not a favorable situation, given the continued animosities that occur between some ex-spouses

Thus, when negotiating your settlement, always discuss social security benefits, at what age the worker spouse intends to collect, and financial consequences if that worker spouses opts not to or blocks the other, now ex, spouse altogether.

WHY DOES MY ATTORNEY CARE SO MUCH ABOUT MY RETIREMENT?

            Ever wonder why your attorney asks so many questions about your retirement account? It’s not because we secretly envy you for one day having the ability to retire (okay, on a tough day of trial, some of us do). It’s not because we want to find the largest account to liquidate to pay our fees (though some of the shady ones might). It’s not even because we know about and can advise you on all of the nuances of your retirement account (retirement is a specialized area of divorce law, and those who do not deal with it daily probably cannot).

            It’s because there are many things hidden in your retirement account that, if not searched for, are likely to go unnoticed – to your detriment, or, if you play your cards right, to your ex’s. Take these five as examples:

1. IT’S MARITAL PROPERTY – SO GET OVER IT

            If you think your retirement account is yours because you (and possibly your employer) contributed to it with your hard earned money from years of work, well, you’re wrong. In most states, it makes no difference whether the money is yours, your spouse’s or your employer’s. So long as the vested value of the account accrued between the date of your marriage and the date of your separation or your divorce, that money is at least one-half your spouse’s, too.  This means all of the dollars you and your employer put in, plus any appreciate in pre-marriage dollars from your active investments, are your spouse’s, too. Some clients are shocked to find this out, believing, naively, that they worked so that they could one day retire and, therefore, should be able to keep the money they earned to retire. The theory in most states, however, is that he or she worked so that the married coupld could retire, so they should share in that money.

This is a bitter admonition for a client whose spouse has filed for divorce, particularly if that spouse does not have a retirement account of his or her own and child support and alimony and half of all of the property (but not the debt!), too. However, the sooner you accept it, the sooner you can prepare to negotiate the things in your divorce that are worth negotiating. If the law in your state says your spouse is entitled to half, then you do yourself a huge disservice (and probably pay your attorney a lot of money) to argue otherwise, absent a really, really good reason. And those are tough to come by.

That being said, if your spouse has a retirement account, no matter how small, don’t be afraid to ask for your share. If nothing else, you can offset it against her large share of yours.

2. ANCILLARY AND COMPONENT BENEFITS

            When most clients think about their retirement payout, they envision a set dollar figure that they will receive every month when they retire. This is true, usually, but there are a lot of things that make up that dollar figure. Most clients know about the basic benefit – the “set” figure they anticipate receiving. In addition to that basic benefit, your retirement plan may also offer adjustments for the cost of living, survivor benefits, early retirement supplements and subsidies, a lump sum “buy out” amount, and a host of other adjustments to your basic benefit and payments in addition to your basic benefit. We call these the ancillary and component benefits, or “the bells and whistles.” In most states, these too are marital property to be divided between you and your ex.

            Interestingly, while the basic benefit division law is clear (see point 1, and get over it), the law applicable to ancillary and component benefits is not. Here, then, is your first opportunity for negotiating. Always consult an attorney for the laws applicable in your case, but you are likely to find that these benefits are not automatically half each spouse’s or, if they are, only when specifically stated. For example, in some states, an ex-spouse is not entitled to a share of survivor benefits (the benefits paid to your named survivors when you pass away) unless your ex’s entitlement is specifically stated in the divorce decree. The same may apply to early retirement benefits. So, a clause stating your ex is entitled to “one-half of retirement account X” may exclude the “bells and whistles” when you actually retire years later. The result is a larger payout to you because your plan does not have to set aside money for your ex.

3. TAX EFFECTING

            A bank account and a retirement account may have the same balance, but that does not mean they have the same value. In the pursuit of a quick settlement with liquid assets, and hoping to avoid an expert’s fees, some clients will swap a bank account for a retirement account. The problem is, $50,000 in the bank now is not the same as $50,000 in a retirement account now. For one thing, to the extent you can access the retirement account, usually you must pay penalties and taxes for making a withdrawal. For another, there may be hidden costs, such as a loan in repay-status, tied to that account. On the other hand, a future stream of income is usually more value, the present day value, than cash.

It’s worth a meeting with a CPA or other specialist to have those accounts valued. At a minimum, you need to know how much a retirement account you or your spouse intend to liquidate is worth after paying taxes and penalties. (You should also figure out who will be hit with the tax bill and account for that in your divorce settlement). This is called “tax effecting,” meaning that we figure out how much the spouse will have to work with after paying taxes. It’s this figure, not the raw account balance, that we compare to the bank account.

4. LOANS

            So you took out a loan to pay credit card bills, to repair the roof or for a vacation, etc.? Then you’re like most clients. The bad news is (yes, it gets worse), for most retirement accounts loans are not dividable – which means you are left paying back the entire loan after your divorce. The good news is (yes, there’s good news), the loan is also a marital debt that should be divided between the two of you.

Even though you cannot physically divide it in your account, you can account for it by dividing the account net of the loan. Read your settlement or divorce decree carefully to make sure that language is there – otherwise, the plan rules may default to you paying the loan and sharing in the account as if the loan had never been taken.  Do not sign either until the language is there. This is language to negotiate before you settle or to request specifically at your trial. Even if the plan does not have such a default rule, it does not hurt to specify your and your ex’s intent to account for the loan – why leave wiggle room for a different result, i.e. more money for your ex, later?

5. NEW SPOUSES

            In the upheaval of divorce, another marriage may be the last thing on your mind. But there may come a time when a new flame in your life becomes your spouse, and one day the two of you really do retire as a married couple. Do you want your ex meddling in your affairs when that happens? Your ex could, unless you protect your future retirement (with your future spouse) now. Again, always consult with an attorney and review your plan specifics, and make sure you ask: Is the account division as of the date of separation or divorce, or is it “the entire account” (which is a bad idea, because you basically divide all of the money you earn after your divorce)? If your ex is named as a survivor, can you name additional survivors, or does your ex receive the entire survivor benefit (leaving your new spouse empty handed)?  If your ex passes away, does your ex leave any outstanding benefits, and do those revert to you (to pass on to your new spouse)?

            What you do not want to happen, but what often does happen, is to retire only to find out that your retirement money does not match your expectations. So, have this conversation with your attorney early in your case and often – we really do care about your retirement, and for at least these five reasons.

DOES SHE GET HALF MY SOCIAL SECURITY?: DIVORCED SPOUSE SOCIAL SECURITY BENEFITS

THIS LAW IS NO LONGER IN EFFECT AS OF NOVEMBER 2015

As if a trial, losing half of your retirement and a potential liability to support your wife long after your divorce is final were not enough,  you may be worrying about Social Security, too --

Does your wife get half of your Social Security when you retire? After all, she gets half of everything else you earned during your marriage, right? As we’ve explained in other articles, “everything” really does not mean everything (not gifts, inheritances, passive appreciation, etc.), and this is particularly true for Social Security. As a matter of federal law, your wife may receive Social Security based on your earnings, but not half of yours.

Your ex-wife may qualify for divorced spouse benefits. These are Social Security benefits based on the former spouse’s earning record. To qualify, the ex-spouse must have been married to the earning former spouse for at least ten years, must be at least age 62 and must not be entitled to a higher benefit based on his or her own earning record. The ex-spouse must also be unmarried, though there are limited exceptions for ex-spouses whose latter marriage ends by divorce, annulment or death and for ex-spouses who remarry to someone with a disability. Finally, the earning former spouse must be entitled to receive his or her own benefit, and, if he or she has not yet applied for it, the ex-spouse must be divorced for at least two years before divorced spouse benefits are paid.

The divorced spouse benefits your ex-wife receives have no effect on the benefits you receive.

But that is not all. Your ex-wife may also receive individual benefits or a combination of both. If your ex is eligible for benefits based on her own record, she will receive those first. But if she has reached her full retirement age, she can elect to receive the divorced spouse benefits now and delay receiving her own benefits until a later date, which could result in a higher benefit based on her own record due to the effect of a delayed retirement credit.

The maximum amount your ex-wife can receive, based on your earning history, is one-half of the benefit you would receive at full retirement age. These may also be reduced by her age if she is not full retirement age when she receives them. However, if she has the option to delay her own benefits, and the payments do not affect your own, she can hardly complain – she may even be in a better position than you, and that is worth a reminder when you are trying to settle your case or trying to reduce your alimony liability with a judge worried about long-term financial security.

WHAT HAPPENS IF SHE DIES FIRST? AND OTHER QUESTIONS TO ASK

If you and your wife are like most divorcing couples, one or both of you obtained or contributed to a retirement account during your marriage. In all states, retirement accounts are marital property eligible to be divided between the spouses at divorce, and, in most states, the rule requires a fifty-fifty division for the amount that accrued during the marriage – regardless of which spouse actually contribute in work hours and pay to the account. Yes, there are some, limited exceptions to this rule, such as a prenuptial agreement and circumstances of financial or marital fault – but these are rare exceptions. And that’s a hard reality to face for a guy who’s spent several decades working to retire peacefully only to learn that the wife who is divorcing him is taking half of his work efforts with her.

“Fifty-fifty,” however, only begins the inquiry. Whether settling your case or preparing with your attorney and financial advisor for trial, be sure to ask these essential questions:

1. What if I am already in pay status?  If you are already receiving payments from your retirement account, then your and your soon-to-be-ex’s options for dividing the account are limited. Generally, she must receive her share of the payout as you receive yours. In other words, she cannot liquidate her share or wait to her retirement age to begin receiving her share. One or both of you may also be precluded from naming survivors, other than each other, to receive benefits upon each of your deaths.

2. How will pre-marriage amounts be treated? While your during-marriage work efforts are all marital, the amount of your retirement that accrued prior to the date of your marriage is yours, unless the court finds compelling need to invade that share. Be sure to identify the “date of division” as the date of marriage through the date of divorce (or separation, or some other date the divorce judge selects), rather than the date of commencement of the account, to keep that premarital share all yours.

3. What happens with the money I contribute after divorce? Similarly, the amount of your account that accrues after your date of divorce is your separate, non-marital property. Be sure your agreement specifies the end-date for your fifty-fifty division as the same date of divorce, date of separation or other date set by the divorce judge to preserve those later contributions.

4. Can I divide this the way I want? Retirement accounts come in all types of complex set ups, some being tax-deferred, others not, some guaranteeing lifetime benefits, others not, and so forth. Under federal law, plan administrators for many of these plans have exclusive authority to determine what types of divisions are permitted. Also consider timing and the tax consequences for withdrawing funds, rather than transferring them incident to a divorce judgment. For example, some of the Big Three in the automotive industry require specific trusts for survivors or irreversible selections of benefits. Therefore, before finalizing your settlement offer or trial brief, consult with your plan administrator to determine which options are actually available to you and your spouse.

5. What happens if my ex predeceases me? If your retirement plan allows, you and your spouse may agree that each other will be the beneficiary for survivor benefits (rather than a new spouse or someone else). Or, you may decide that your then-ex will not receive any survivor benefits, or will only receive a portion so that you can name someone else (a child or second spouse) as survivor for the rest. Check with your plan for the options available to you.

6. Can we equalize? Some retirement accounts require specified orders, called domestic relations orders, or DROs, to divide. These orders can be expensive to prepare, and some plans require pre-approval, at an additional cost to the spouses, before account division. If you and your wife have multiple retirement accounts, consider having a financial advisor equalize the accounts –that is, determine which ones each of you will keep and how much to divide so that you each have an equal amount of retirement - so as to minimize the number of DROs to purchase and approve.

7. Is a life insurance policy better? Depending on your ages and whether your retirement is already in that pay status, you might find that the premium for a life insurance policy on          your wife is cheaper than the cost to divide your retirement and allocate a survivor benefit to your then ex to receive after your death. Always check with your financial planner to determine the best policy, if any, for your family. And be sure to address the costs for this policy in your divorce judgment.

            Most of all, do not accept “fifty-fifty” and move on. Yes, it is often a bitter pill to swallow, but if you are going to divide your retirement, you must make sure you are dividing it in the most financially effective manner.