Divorce Myth – Pensions are Separate Property

Protecting a pension is one of the biggest concerns we see. It is an understandable concern. After all, your pension is one of the biggest benefits of being a fireman.

The problem is that Nevada is a community property state. Everything earned during the marriage will be divided evenly between the spouses during a divorce. This includes a 401K, an IRA, deferred comp, and a pension.

How Courts Split Assets

The first thing to know is, Nevada is a community property state. Community property is the property that both spouses acquire during a marriage including physical property, savings, and retirement accounts.

When two parties divorce in a community property state, all property acquired during the marriage is considered owned by both spouses. In a divorce all community property is split evenly. Everything you put into your pension before you got married is yours. Everything after the marriage date belongs to both of you, equally. Anything after the divorce is yours.

It doesn’t matter who financially contributed or whose name is on the account. The idea is that both spouses contribute equally to the upkeep of the marriage. Even if one spouse financially contributes more, or one spouse doesn’t work at all. The law is that both spouses will equally share in the community property

Let us look at a simplified example. You had $5,000 in your IRA before you got married. You contributed $10,000 over the course of your marriage. The $5,000 before the marriage is separate property and not divided in a divorce. The $10,000 contributed during the marriage is community property and will be divided evenly.

Pension Time Rule

Commingling is when separate assets are mixed with community assets. For example, you deposit money earned during the marriage into a savings account you had before the marriage. The money before the marriage is separate property and is yours. But, deciding which dollar is separate property and which dollar is community property can be challenging because the money has been mixed, or commingled. Separating commingled money requires tracing by a forensic accountant.

The same thing can happen with a pension. You may have earned part of your pension before getting married. Now after 10 years of a marriage you need to know how much of your pension is separate property and how much is community property.

The court has a process for deciding how much of the pension is separate property and how much is community property. It is called the Time Rule. The court adds a ratio to your pension based on the total number years married and the number of years you earned a pension. For example, if you were married 8 years and earned your pension over 20 years, then only 8/20 (or 40%) of your pension is community property.

Strategies for Keeping Your Pension

If you have the ability to negotiate or mediate, there are common strategies to negotiating your pension; 1) Each spouse can keep their own retirement accounts, 2) trade a known asset for the unknown pension, 3) offer the “spousal beneficiary” election in return for a greater percentage.

If your both you and your spouse have been earning a pension or adding into a retirement account, you might suggest each keep spouse keeps their own pension, IRA, or 401(k). This option is easier because dividing pensions requires special court documents called a Qualified Domestic Retirement Order. With each spouse keeping their pension a QDRO is not needed.

Look at trading something of equal or less value for your pension. You might offer your spouse 70% of the equity of the home to keep your pension. Or maybe offer your spouse 60% of your deferred comp to keep your pension. Sometimes this makes sense because you are trading a known amount (the equity in the home) for a future unknown amount (a monthly payout from a pension).

At retirement you may elect the spousal beneficiary option. This reduces your monthly pension amount in exchange for the monthly payment continuing to be paid to your spouse after your death. The fireman has the option to elect this or not. Offer to elect the spouse beneficiary in exchange for a greater percentage of the pension. This gives you more of the monthly payment while giving your spouse security of the payment if you were to pass away.