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TX divorce lawyerA high asset divorce will involve a variety of complicated financial issues, and complex property litigation may be needed to determine how assets and debts will be divided between the parties. While spouses will often focus on issues related to physical property, real estate, investments, valuables, and financial accounts, they will also want to address their retirement benefits. In addition to dividing the balances of retirement accounts such as 401(k)s or IRAs, spouses will also want to understand their rights regarding pension benefits earned by either spouse during their marriage.

Dividing Pension Benefits Between Divorcing Spouses

Pensions are different from other types of retirement assets since their actual value will usually not be known at the time of a couple’s divorce. Pensions are known as “defined benefit plans,” and the benefits that a person will receive are based on factors such as the number of years a person worked in a position that earned pension benefits and the salary they received at the time of retirement. The amount that a person paid into a pension fund will usually not be directly related to the amount of benefits they receive, so the current balance of a pension account will not be relevant during a couple’s divorce.

Depending on the decisions made during a divorce case, one spouse may receive a percentage of the other spouse’s pension benefits. However, only the marital portion of pension benefits may be divided between spouses, and this portion is determined by dividing the number of years a person worked in a position where they earned pension benefits while they were married by the total number of years they worked. That is, if a person worked for a total of 40 years, and they were married for 10 of those years, the marital portion of their pension benefits would be 25%.

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TX divorce lawyerWhile most wealthy couples in Texas will have more than one retirement account that will be subject to division in a divorce, it is important to understand how the court is likely to treat your 401(k) accounts, and how those accounts can be divided without incurring substantial penalties. You should learn more about the classification of 401(k) accounts in a community property state like Texas, and whether there are options for preventing the distribution of your 401(k) accounts in your divorce case. When you have questions or need assistance, you should reach out to a Texas high asset divorce lawyer for help. In the meantime, the following includes information about 401(k) classification in Texas and details about distribution.

Community Property and Your 401(k) Account

As you likely know, 401(k) plans are a particular kind of defined-contribution retirement account, and employers offer them to their employees. The term 401(k) refers to the Internal Revenue Code section that governs these plans. With a 401(k) account, employees make automatic contributions from their paychecks, which are then matched by an employer (the percentage of the match depends on the employer). In traditional 401(k) plans, funds are not taxed until they are withdrawn, although withdrawals from Roth 401(k) accounts are not taxed since those are funded with “after-tax” contributions.

For most married couples in Austin, at least a portion of their 401(k) accounts will be classified as “community property.” According to the Texas Family Code, there is a presumption that assets acquired after the date of marriage are community property unless one of the spouses can prove by clear and convincing evidence that the asset is separate property. Then, community property will be divided in a manner that is “just and right” based on the circumstances of the parties. To be clear, any contributions to a 401(k) account during the marriage will most likely be classified as community property.

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TX divorce lawyerWhen you are planning for a high asset divorce in Austin, Texas and know that your retirement accounts will be classified as community property and subject to division under Texas law, you will need to have a plan in place to divide those retirement benefits. For wealthy couples anticipating a high asset divorce, the amount of money in retirement accounts can be substantial. Using a Qualified Domestic Relations Order (QDRO) to transfer retirement benefits as part of your divorce could end up saving tens of thousands of dollars (or even more depending upon the amount of money in your retirement accounts and the amount that needs to be distributed to your spouse).

We want to tell you more about QDROs and how they work, and to provide you with examples that demonstrate the importance of having a QDRO in a high net worth divorce. An Austin high asset divorce lawyer is here to assist you.

What Is a Qualified Domestic Relations Order in a High Asset Divorce?

What is a QDRO? The Employees Retirement System of Texas (ERS) explains that a QDRO is a legal order subsequent to a divorce or legal separation that splits and changes ownership of a retirement plan to give the divorced spouse his or her share of the assets. In order to qualify for a QDRO, the ERS’ General Counsel must receive a certified copy of the divorce decree, and the ERS’ General Counsel must review and approve the QDRO.

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TX high asset divorceIn a high asset divorce, one of the most critical issues is the division of retirement accounts. When one spouse earns a pension during the course of a marriage, it is considered community property. This means any such pension is subject to division as part of the overall divorce proceedings.

Austin Court: Divorce Invalidated Previous Designation of Ex-Spouse as TRS Pension Beneficiary

Pension plans require a covered employee to designate a “beneficiary,” who will receive any remaining pension benefits upon the employee's death. Typically when an employee gets divorced, the court will issue Qualified Domestic Relations Orders (QDROs), which instructs the pension plan administrator on how to divide any accounts or benefits. A QDRO also serves to override any prior beneficiary designation that conflicts with its terms.

Even without a QDRO, however, the divorce itself may automatically revoke a prior designation of a now-former spouse as beneficiary. A recent decision from a state appeals court in Austin, Jones v. Teacher Retirement System, provides a helpful illustration of this rule. In this case, a former employee of Texas Tech passed away in 2015. He had a pension with the Texas Retirement System (TRS).

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TX divorce lawyerWhile many divorcing couples go into the divorce process with the expectation that they may disagree on certain issues, such as who will retain the family home, many fail to remember that they will also need to determine how any retirement assets like 401(k) accounts will be divided. However, it’s important to take these types of unique assets into account when distributing assets, as they can play a crucial role in helping individuals become financially secure after their marriages are dissolved. For help understanding the complexities of dividing retirement accounts during your own divorce, please contact one of our dedicated Round Rock high asset divorce attorneys today.

Does the Account Qualify as Community Property?

How a 401(k) account is divided upon a couple’s divorce depends in large part on whether the funds in the account are characterized as community property or separate property. In most cases, 401(k) plans do not simply fall into one category or the other, as it is common for 401(k) plans to contain both types of property. This is because even if a 401(k) plan was started by one of the parties before a marriage took place, which would technically make it separate property, the interest in the plan that accrued during the course of the marriage will still qualify as community property, making it equitably divisible under Texas law.

Dividing the Account

Spouses who believe that they have a claim to the interest on a retirement plan will need to determine the amount of their share, which will be equal to the value of the plan at the time of the marriage (when it was considered separate property) minus the value of the plan at the time of divorce.

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