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Under Arizona law, the earnings of both spouses during the marriage are community property.
Sometimes a spouse’s earnings will also include their employer’s contribution to a retirement account.
The court must determine the value of the contributions made during the marriage. They are divided as community property.
In Johnson v. Johnson 638 P.2d 705 (Ariz. 1981) the Arizona Supreme Court discussed this issue. It evaluated a proposed method to divide a retirement account.
Facts of the Case
Mrs. Johnson and Mr. Johnson divorced after 15 years of marriage. The husband had worked as an attorney during the marriage. His compensation included contributions to a retirement plan. He acquired vested rights in both a profit-sharing plan and a pension plan.
At the time of divorce, the husband had $17,047 in the profit-sharing plan and $55,380 in the pension trust. These amounts totaled $72,427. Mr. Johnson did not have the right to receive payment from these accounts until he became 65 years old. Because of this, the trial court discounted the value of the funds at 6% interest for 22 years. This is the number of years between the divorce and when Emery reaches age 65.
The main issue in this divorce appeal is determining the proper way to divide out Mrs. Johnson’s interest in Mr. Johnson’s retirement plan.
Dividing Husband’s Retirement Plan: Present Cash Value or Reserved Judgment Method for Awarding Community Interest?
Where one spouse is an employee with a retirement plan, the other has a community interest in that plan. The Arizona Supreme Court noted two methods of determining that interest.
The first is the “present cash value method”. Under this method, the court determines the community interest in the pension and its present cash value. It awards half of that amount to the nonemployee spouse in the form of equivalent property. The employee spouse receives the entire pension.
The second method is the “reserved jurisdiction method”. Under this method, the court figures out how the retirement payments will be divided between the spouses. However, neither spouse gets any payment portion until the employee spouse reaches retirement age.
The present cash value method works better when the anticipated date of retirement is far in the future. Here, Emery will not get retirement for 22 years. The Court found that the present cash value method worked well in this case.
The couple’s marital estate had enough equivalent property to pay Mrs. Johnson’s share without undue hardship to Mr. Johnson.
Discounting Value of Retirement Benefits
The trial court discounted the value of the benefits. It based the discount on the 22 years until the husband was eligible to receive the retirement. The Court reviewed whether this was appropriate.
Pension plans generally fall into two categories, defined contribution, and defined benefit plans. Under a defined contribution plan, the employee or employer contributes a specified amount of money periodically. These funds are invested and the earnings are shared with all plan participants. The total benefits receivable under such a plan depends upon the success of fund investments.
Under a defined benefit plan, the employee knows the benefits in advance. These plans usually involve an investment of a percentage of salary, and no separate account is kept for the employee. In this case, both of Mr. Johnson’s plans are vested, defined contribution plans.
In a vested defined contribution plan, the present value is very close to the amount currently credited to the employee’s account.
Discounting is appropriate if the employee is not vested or if an employee who dies before retirement forfeits the plan. That was not the case with Mr. Johnson’s plans though. Under a defined contribution plan like his, no reason exists to discount the value of the fund.
The Trial Court, therefore, incorrectly discounted the value of the pensions. It gave no consideration to the fact that the fund was earning interest and would continue to earn interest. It should not have discounted the value. The value of a defined contribution plan is the present amount credited to the account.
Reduction for Taxes
Mr. Johnson argues that the Trial Court should have discounted the value of the retirement account because he will have to pay taxes on it. The Court said that the amount of taxes he might owe 20 years from the divorce was too speculative to consider. The Arizona Court of Appeals distinguished this case from its prior ruling in the Baum v. Baum case.
Debts as Community Obligations
The wife next argues that the trial court improperly treated certain debts as community debts.
The husband borrowed money, using his separate assets as security. He used the money from the loans to benefit the community.
The general rule in Arizona is that, if the money benefited the community, these are community debts. However, the wife argues that this presumption arose during the epoch when the law considered the husband the manager of the marital estate. Now that this has changed, she claims, that rule should also change.
The Arizona Supreme Court considered and rejected this position. It found that the presumption of community debt remains in force but now applies to debt incurred by either spouse to benefit the community.
The question really, is: whether or not a spouse who takes out a loan (with the intention of benefiting the community) is separately responsible for the repayment of that loan?
In the present case, Mr. Johnson took out the loans to the benefit of the community; the community benefited and therefore, the debts are obligations of the community.
The Arizona Supreme Court affirmed the trial court decision in part and overturned it in part. It remanded the case to the superior court for further proceedings consistent with the views expressed in this opinion.
If you need information about valuing a pension in a divorce in Arizona, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona divorce attorneys have over 100 years of combined experience successfully representing clients in divorce cases in Arizona.
Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.
Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your Arizona divorce case around today.
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About the Author: Chris Hildebrand has over 26 years of Arizona family law experience and received awards from US News and World Report, Phoenix Magazine, Arizona Foothills Magazine and others. Visit https://www.hildebrandlaw.com.