Family law is not typically at the top of the list of issues concerning municipalities. Rarely—if ever—are divorce, custody, or child support mentioned when considering a text amendment to a zoning ordinance! Nevertheless, certain matters within the arena of family law might crop up within your municipality from time to time, particularly concerning current or former municipal employees who participate in a retirement or pension plan and may be going through a divorce.
When it comes to dividing marital assets in a divorce, Michigan is an “equitable distribution” state. Section 19 of the Revised Statues of 1846 concerning divorce states:
Upon the annulment of a marriage, a divorce from the bonds of matrimony or a judgment of separate maintenance, the court may make a further judgment for restoring to either party the whole, or such parts as it shall deem just and reasonable, of the real and personal estate that shall have come to either party by reason of the marriage, or for awarding to either party the value thereof, to be paid by either party in money. [MCL 552.19.]
In a nutshell, Michigan law allows each party to keep his or her separate property and mandates a fair and equitable, but not necessarily equal, division of marital property. In contrast, “community property” states, such as California, divide marital assets on a 50-50 basis.
In addition to providing for equitable distribution of assets, Michigan is a “no fault” divorce state. This means a judgment for divorce will be entered without regard to the reason for the marriage breakdown; in fact, the only grounds for divorce that a plaintiff is allowed to allege in the complaint for divorce is that “there has been a breakdown of the marriage relationship to the extent that the objects of matrimony have been destroyed and there remains no reasonable likelihood that the marriage can be preserved.” MCL 552.6.
While courts may not take fault into consideration for purposes of deciding whether a judgment of divorce should be granted, fault may be considered in making a fair and equitable distribution of marital property. In addition, the court takes into account several other factors such as the length of the parties’ marriage; each party’s age, health, and earning ability; the needs and circumstances of the parties; the contribution of the parties to the marital estate; general principles of equity; and any other factors that might be relevant in a particular case. Sparks v Sparks, 440 Mich 141, 159-160; 485 NW2d 893 (1992).
What does this mean for retirement benefits? As part of the divorce process, the parties exchange information concerning their assets, including their respective pension and retirement plan statements. Generally, retirement benefits that a person earned before the marriage are treated as his or her separate property, and benefits earned during the marriage are treated as marital property. A value for the retirement accounts must be determined. This requires choosing a valuation date; it might be the date the divorce action was filed, the date of the parties’ separation, or some other date. It is important to know the value of retirement accounts at issue in the divorce; if settlement is being discussed, knowing the value determines whether the settlement is fair, and if the divorce proceeds to a trial, the value will need to be proven in court. The parties may agree on the value, but if they cannot, the court will ultimately make that determination. One or more financial experts might be necessary to assist in this valuation process, particularly if only a portion of the retirement account was earned during the marriage.
Depending on the particular facts of a case, divorcing couples are usually entitled to an equitable share of the other spouse’s retirement that was earned during the marriage. However, a divorced spouse has no right to the immediate distribution of his or her share of an ex-spouse’s retirement account awarded in a divorce. Depending on age, whether the participant is vested or unvested, and other factors, it could be years or even decades after a divorce before an individual actually begins to receive distributions from his or her ex-spouse’s retirement plan pursuant to a judgment of divorce. Further, each party will not necessarily receive distributions in the same manner. For example, the retired ex-spouse might receive an annuity while the other ex-spouse receives a lump sum. For that reason, parties may agree (or the court may order) to an offset of property from the rest of the marital estate. Essentially, that means a party receives the value of what he or she would have received from the ex-spouse’s retirement benefit in the form of other property such as cash, stock, or personal property. The ex-spouse gets less of that marital property, but in turn, gets to keep all of his or her retirement benefits.
If the parties do not agree on an offset, or the marital estate is insufficient to make an offset possible, distribution of the retirement account will have to come at a later time. Procedurally, this is put into place through entry of a separate order after a judgment of divorce is entered. An order called a Qualified Domestic Relations Order (QDRO) or an Eligible Domestic Relations Order (EDRO) will have to be approved by the retirement plan and by the court. QDROs and EDROs are governed by federal and state law. The main difference between the two is that QDROs apply to private sector retirement plans, while EDROs apply to state pensions and retirement plans. For example, distributions to a former spouse from the Michigan Municipal Employees’ Retirement System would require an EDRO. Specific federal statutes apply for dividing federal pensions and military benefits as well.
Even if a divorce is otherwise amicable, an individual going through a divorce should consult with an attorney to discuss his or her options pertaining to pension and retirement benefits. Consult with an attorney early in the divorce process to make an effective and well-informed plan concerning the disposition of retirement benefits.