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Courts sometimes consider the active and passive appreciation of premarital and marital pension rights in classifying pension benefits. Active appreciation is an increase in the value of an asset as a result of its owner’s action, such as refurbishing a property or, in some cases, the skillful management of investments; passive appreciation is an increase in the value of an asset as a result of changes in the market.
Market forces, particularly passive appreciation, often dramatically increase the value of a defined contribution pension plan, such as a 401(k), where the participant selects a variety of investments in his or her account. Passive appreciation can make the valuation date very critical in the determination of the eventual value and distribution of pension benefits. Conversely, while passive appreciation is an updraft, an unearned increment in the value of an asset, dramatic depreciation also happens. What goes up comes down and hard, as the collapse of the 2008 stock market drove home dramatically for many Baby Boomers nearing retirement.
Depending upon the jurisdiction, the marital estate does not include any portion of the premarital pension rights earned by the worker spouse or the passive appreciation of these rights. Other jurisdictions apportion the premarital and marital portions by comparing the value of the plan at the beginning and the end of the marriage or the length of the premarital participation against the length of the marital participation.
The value of a pension plan can be very difficult to calculate, so the parties in a contested divorce very often hire actuaries to determine present value of these plans. In the valuation of pensions, some jurisdictions make allowances for future taxes that the owner may eventually face. The date chosen to value the pension can have a dramatic impact on the valuation. This is particularly true for a defined contribution pension, which is the sum of invested funds.
In general, five facets of pension rights must be considered in equitable distribution. These are 1) classification, which, in a divorce, a preliminary to distribution of property and in which everything a couple owns and owes is classified into one of two categories -- marital or separate property; 2) valuation, in which a determination of a pension value is made; 3) distribution, in which the court determines the allocation of pension benefits; 4) qualified domestic relations orders (QDROs), by which a court order which makes it happen, and 5) miscellaneous areas of contention, including postdecree increases, Social Security benefits and "double dipping."
Authored By: Theodore K. Long, Jr., President, Pension Appraisers Online, Inc.
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