Pensions & RSUs Create Obligations in Divorce

A recent lawsuit has made many people with pensions and other retirement funds concerned for their financial future. More than 14 years after divorcing, a man is being sued by his ex-wife for greater access to his pension.

According to the defendant, the divorce settlement included a Qualified Domestic Relations Order (QDRO), dividing his pension equally between them. However, the QDRO used the Hunt formula, which meant that the ex-wife’s amount would increase if market conditions improved or decrease otherwise. Now she is suing because the formula has led her to receive significantly less than anticipated.

This brings up an interesting question. After you divorce, are you responsible for maintaining your pension or other accounts covered in a QDRO? How can you protect yourself from QDRO-based lawsuits decades after your divorce is finalized?

Complex assets like retirement or investment portfolios can complicate a divorce. If you’re concerned that these assets may trap you in a job or harm your retirement plans, it can help to understand how they are typically split during the division of assets. Here’s how they are often divided and what it means for you after your split.

How Pensions, Retirement Funds, and RSUs Are Divided in Divorces

Three of the most common assets covered by QDROs are pensions, RSUs, and retirement funds. They are typically split using the following techniques:

Pensions

Pensions are a common retirement benefit that can cause significant complications in a divorce, as the lawsuit above demonstrates. They are tied to the employee who earned them, but the value is still considered joint property. However, with the appropriate handling, it’s possible to divide a pension fairly without the risk of a lawsuit years later.

The most common way to divide one is to determine how much of the pension is marital property, then divide that amount in half. For instance, the US Postal Service (USPS) plan gives eligible employees 1% of their highest year’s salary per year they worked there. They essentially earn 1% of their salary as a pension each year.

To divide that fairly, your attorney would determine how many years of your marriage overlapped with your work at USPS. If five years of marriage coincided with your pension-earning work, you earned 5% of your annual salary for your future pension as marital property. Your spouse would be awarded half that amount each year from once you start to draw from it.

Meanwhile, if you worked at the post office for 20 years, you’d draw 20% of your salary as a pension annually. You’d keep 17.5% of that amount, or 15% plus 2.5%, since 15 years of earnings were not considered marital property, and five were.

The biggest hurdle comes from pensions that are only granted if you work somewhere for a set amount of time. If you don’t work somewhere long enough to be eligible for the pension, neither of you will get any payments after you split.

Restricted Stock Units (RSUs)

RSUs are a little more complicated. Like a pension, an RSU is tied to a specific person. Unlike a pension, they don’t accrue value slowly over time. Instead, their value is based on whether the employee has reached particular milestones.

For instance, many RSUs vest based on how long an employee has been working with a company. Until the RSUs vest, they don’t have tangible value and may be forfeited by the employee should they leave the company.

As such, RSUs can be a complex asset to split. They may have significant value in the future, but none at the time of the divorce. There are two main ways couples can approach RSUs in their split:

• The employee retains full right to the RSUs, and their spouse takes a larger share of other assets or investments of estimated equivalent future value.
• The employee and their spouse split the RSUs, and the spouse acknowledges that those RSUs may cease to have value should the employee leave their position before they have vested.

Either way, the settlement explaining how the RSUs are divided must be written carefully to avoid the possibility of future legal action. Otherwise, either solution can lead to dissatisfaction and a lawsuit decades later.

Retirement Funds

Retirement funds are typically the most straightforward long-term investments to divide. Unlike pensions and RSUs, they are unlikely to be tied to a specific person. That means they can be split down the middle in a California divorce.

This split can lead to one of several outcomes for your spouse. They can choose to roll the retirement funds into their own accounts, open a new account for their share, or withdraw the funds as a lump sum payment. In the third case, they may have significant tax penalties. However, since your divorce will be finalized when this occurs, those tax penalties do not affect you.

What Are Your Responsibilities with These Funds Post-Divorce?

Pensions and RSUs are the two situations where you may have an obligation after divorce. Depending on how your QDRO is written, you may or may not have any responsibilities. It may:

• Include penalties or require you to transfer other assets to your ex-spouse if the RSUs or pensions do not vest for some reason.
• State that should the assets not be realized, your ex-spouse may not take legal action or request additional funds.

These are very different contracts. Work with your attorney to ensure that you understand exactly what your QDRO means and what your responsibilities toward these assets will be.

Ensure Your Pension Is Divided Appropriately

The last thing you want is a poorly worded divorce settlement to upend your life a decade later. It’s better to invest the time and effort during your split to develop a clearly expressed settlement that addresses each asset with no room for doubt.

If you’re considering a divorce but want to protect your pension and retirement funds, reach out to the high-net-worth divorce attorneys at Kaspar & Lugay, LLP. Our expert lawyers have years of experience helping clients like you develop clear, thorough, and legally binding divorce settlements. You can reach out to one of our many Bay Area law offices by calling (858) 295-3146 or reaching out online to schedule your consultation.