American Journal of Family Law - Fall 2009
by Mark Altschuler
In valuing marital property for purpose of property distribution in most jurisdictions, the definition of marital property is what is acquired during the marriage, from the date of the marriage to the time the marriage ended. In addition, passive increase in value from the time the marriage ended until the date of trial is usually included in terms of defining marital property. Examples of marital property that follow this definition are bank accounts, real estate, defined contribution plans such as 401 (k)'s, IRA's, and other tangible assets, in that the rights to property classified this way ends when the marriage ends.
In some states, defined benefit pensions are allocated in the same way, using the benefit accrued as of the date the marriage ended (cut-off date). This is called the "bright line" approach.
However, the marital portion of a defined benefit pension plan, many jurisdictions, is determined by use of a time based coverture fraction. Under this definition, the marital portion of the pension does not end at the cut-off date (the date the marriage ended), but continues until the date of trial, multiplied by the coverture fraction. Thus, rather than using the benefit accrued as of the cut-off date ("bright line" method), states using the coverture approach separate out the marital portion with the coverture fraction. The numerator of the coverture fraction is pension plan service during the marriage, and the denominator is total service until the allocation date, which is typically a date close to the trial date, for purpose of present value calculation. In this case, the benefit accrued as of trial date is used, multiplied by the coverture fraction as of the trial date.
In the case of deferred distribution (QDRO) using coverture, the denominator is total service as of date of retirement, and the benefit is the future benefit at retirement, multiplied by the coverture fraction. Thus, as opposed to the "bright line" approach, the marital portion continues to grow, since the benefit typically increases faster than the coverture fraction decreases. This approach is often called the "marital foundation theory," because there would be no additional accrual after the cut-off date without the service during the marriage. To quote one source.1 "In other words, the post-divorce increases 'are built upon a foundation of prior marital efforts."
Another rationale for the coverture approach is the fact that using a benefit frozen as of the cut-off date means that the value of the benefit is eroded by inflation, if there is a long time between divorce and retirement. Since the benefit increases with length of service and salary increase, an argument can be made that a component of the salary increase is merely due to inflation, and thus freezing the marital portion of the benefit as of the cut-off date is unfair to the non-employee spouse. An extreme case of this argument was the Moore2 case in New Jersey. For terms of present value calculation, either the cut-off date benefit (bright line) or trial date benefit times coverture is used. In Moore, the benefit was adjusted to include pre-retirement cost of living increases until retirement. Moore was then overturned in New Jersey by the Hayden3 case, because of the double speculation of assuming future service until retirement, and assuming a portion of future salary increase due to inflation only.
Some State Examples
Some of the states using a bright line approach are Virginia,4Texas,5 North Carolina6 and Florida.7 Some of the states using coverture are Pennsylvania,8 New York,9 Ohio,10 and California.11 In fact, Pennsylvania recently switched from the bright line approach to the coverture approach.
Actually, Pennsy lvania was not exactly a bright line state under the Berringion12 case. Under Berringion, the marital portion was defined with coverture, but using salary as of the cut-off date (date of separation in Pennsylvania). Therefore, unless there was a post-separation enhancement to the pension, the benefit under the Berrington formula was the same as the benefit accrued as of the date of separation. However, Berringion allowed passive post separation enhancements "not due to the efforts or contributions of the employee spouse" to be classified as martial property. Since the issue of whether or not post separation enhancements were passive is subject to dispute, several cases were litigated to the appel late court level, and so Berringion was replaced by a coverture approach under Pennsylvania statutory law." Ironically, Pennsylvania was a coverture state under the Holland13 case until it was superseded by Berringion in 1992, which was in turn superseded in 2005 by statutory law8 using coverture.
California was one of the earliest coverture states. In the Adams14 case in 1976, the court determined that the cut-off date was separation, not divorce, and the marital portion was determined by use of the coverture fraction, defined by "years of service during the marriage compared to the total years of service," because the "non-employee spouse was entitled to have the community interest valued as of the date of ... retirement, rather than as of separation."
In New York, the Majuaskas coverture formula is very similar, except that the cut-off date is the date of filing, not date of separation. The cut-off date may be the date of complaint (New Jersey), the date of separation (Virginia, North Carolina, California, Maryland), the date of filing (New York), or the date of divorce (Washington D.C., Massachusetts, Texas); but the important distinction is use of coverture verses the "bright line" approach. For example, both Virginia and California use the date of separation as the cut-off date, but Virginia is a bright line state and California is a coverture state.
The coverture fraction is used to determine the marital portion when the allocation date is after the date the marriage ended. This was the stated intent of the court in the Adams and Majauskas decision. Suppose there is pre-marital service as well as post-marital? Clearly, in a coverture state, it is consistent to segregate the pre-marital portion by use of the coverture fraction as well, since the fraction is marital service divided by total service. What if there is pre-marital service in a bright line state? Theoretically, in a bright line state, the use of trac- ing is possible, where the benefit acquired during the marriage is marital property, as is the case of the tangible assets discussed above. If tracing is to be used, the marital portion is the benefit as of cut-off date minus the benefit accrued as of date of marriage. However, few states use the tracing method. Both Virginia and North Carolina expressly use the coverture fraction regarding pre-marital service, where the numerator is marital service, and the denominator is service until the cut-off date (the date of separation in both states), multiplied by the benefit accrued as of separation.
The Code of North Carolina, § 50-20.1, states that "the award shall be determined using the proportion of time the marriage existed up to the date of separation of the parties, simultaneously with employment which earned the ... pension, to the total amount of time of employment. The award shall be based on the ... accrued benefit. .. calculated as of the date of separation." The marital portion is based upon the benefit accrued as of separation (the cut-off date in North Carolina), and the ratio refers to the coverture fraction as of date of separation. Thus, for purpose of present value calculation in North Carolina, both the bright line method and use of coverture for pre-marital service are specified under statutory law.
In Virginia, the bright line method is specified by statutory law in the Code of Virginia, § 20-107.3(G). The use of coverture for pre-marital service is covered by case law under the Primm16 case.
If coverture is only used for pre-marital service, the state is classified as a bright line state, since the marital portion of the benefit is frozen at cut-off. If the case or statutory law is silent regarding pre-marital service in a bright line state, an argument may be made for using the tracing method.
Some states use the bright line method for present value calculations, and coverture for deferred distributions. The rationale for this is that there are typically only a few years from the cut-off date until trial date, and so it is proper to use the benefit accrued as of cut-off for present value calculations. However, in deferred distribution (QDRO), there is typically a long time period between the cut-off date and date of retirement, and due to inflation issue discussed previously, it is unfair to the non-employee spouse to have the benefit frozen as of the cut-off date. States following this approach are New Jersey and North Carolina. In New Jersey, the Hayden case indicates the use of the benefit accrued as of date of complaint (the cut-off date in New Jersey) for purpose of present value calculation, while the Marxl6 and Risoldi17 cases indicate the use of coverture along with the future benefit in deferred distribution. In North Carolina, both § 50-20.1 of the North Carolina Code and the Bishop18 case indicate use of the benefit accrued as of separation (cut-off in North Carolina) for purpose of present value calculation, while under the North Carolina Seifert19 case, coverture is used for deferred distributions, based upon the future benefit at retirement. Thus, both New Jersey and North Carolina are bright line states for present value calculations, but use coverture (along with the future benefit at retirement) for purpose of deferred distribution. Maryland is also a hybrid state, using the bright line method for present value calculation20 and coverture for deferred distribution.21
As discussed previously, the marital portion under coverture continues to grow, because the benefit increases faster than the coverture fraction decreases. This is because the coverture fraction decreases due to length of plan service only, while the benefit increases with both length of plan service and salary increase. The following chart, Exhibit I, shows how the marital portion continues to grow under coverture. For the sake of Simplicity, zero pre-marital service is assumed. Thus, the coverture fraction as of cut-off is one. With three years from cut-off to trial, the coverture fraction as of trial date is 25/28, or .8929. The coverture fraction at retirement is 25/37, or .6757. The marital portion is the product of the benefit times the coverture fraction. Since the benefit increases faster than the coverture fraction decreases, the marital portion grows over time, in a coverture state.
Exhibit 2Pension Valuation Report Bright-Line Jurisdiction
Pension Valuation Report
Insufficient Cash or Assets
Suppose a pension valuation is performed, but there is insufficient cash or assets for an immediate offset buyout? In such a situation, many attorneys will "QDRO" the pension using the pension valuation result. This is acceptable in a bright line state, but harmful to the non-employee spouse in a coverture or mixed state such as New Jersey or North Carolina. In a bright line state, the marital portion is fixed, so using a fixed dollar amount in a settlement agreement for QDRO purposes will not adversely affect the non-employee spouse. For example, suppose in Exhibit 2, the non-employee spouse is owed $100,000 after all assets are offset, but there is insufficient cash for a buyout. If the settlement agreement awards non-employee spouse (Husband in this case) $100,000 under a QDRO, this means he will receive $100,000/$208,684, or 47.92 percent of the accrued benefit as of June 30, 2005.
However, using the same method in a coverture or mixed state (New Jersey or North Carolina) will adversely impact husband as set forth in Exhibit 3. Awarding husband (non-employee spouse) $100,000 means awarding $100,000/$224,128, or 44.62 percent times 89.28 percent (coverture fraction at trial date) times the benefit accrued as of June 30, 2008 (trial date). Thus, the husband is getting a fixed benefit under a QDRO. But in a coverture or mixed state, he is entitled to much more, since the marital portion is based on the coverture fraction at retirement. Therefore, the settlement agreement should not fix the award at $100,000. The non-employee spouse is not owed $100,000, but a percentage. That percentage is 44.62 percent times the coverture portion of the benefit at retirement. Therefore, the settlement agreement should not use fixed dollar language, but award the husband 44.62 percent of the marital property component, under the QDRO. In a coverture or mixed state, this language automatically means 44.62 percent times the coverture fraction at retirement, times the benefit at retirement. From the chart in Exhibit I, it can be seen that this portion is significantly higher than the 44.62 percent times the marital portion as of trial date.
State by State Listing
The table below classifies states by bright line v. coverture. States such as New Jersey and North Carolina that are bright line for present value calculation and coverture for deferred distribution (QDRO) are so noted, and other fine points are discussed after the table.22
Illinois has conflicting cases, although the majority supports the coverture approach. While this may seem to be very unusual, Pennsylvania had conflicting cases in the early 90's. Holland is a coverture case, while Berrington is bright line. Both cases were at the same Superior Court level, and in conflict, until Berrington superseded Holland, as a Pennsylvania Supreme Court decision. Berringion, in turn, was superseded by the Act 175 coverture formula, effectively turning the law back to Holland.
Berrington is not exactly a bright line decision. It uses the coverture formula, but freezes the salary as of the cut-off date. If there are no post-marital enhancements to the pension formula, this effectively becomes a bright line formula. This is the situation today with Kentucky. The Armstrong case uses a coverture approach, but freezes salary as of the cut-off date.
Louisiana uses coverture, but excludes post marital merit increases due to the efforts of the employee spouse. Of course, such an approach leads to litigation. In fact, the numerous cases in Pennsylvania that followed Berringion, as to whether post-marital enhancements were passive or not, lead to Berringion being overturned by Act 175. In the Louisiana Rioera-Sanios case23 (862 So. 2d 480, 486, La. Ct. App. 3rd Cir. 2003), husband proved post-marital increases were due to his efforts.
Massachusetts may be unique in leaving the use of bright line vs. coverture up to the trial court. In Mississippi, the Prescott decision gave a very thorough analysis of the bright line theory vs. coverture approach, but gave no ruling and remanded back to trial court.
In summary, counsel needs to know if her or his state is a bright line, coverture, or hybrid state, for purpose of valuation or QDRO. If the state is hybrid or coverture, counsel for the non- employee spouse may consider a deferred distribution scheme as optimum strategy, especially if the pension is a non-Erisa teachers', government, or military plan that is very unlikely to be frozen or ter- minated. If valuation and imme- diate offset leads to fixed dollar amount owed non-employee spouse, counsel for the non- employee should use a ratio in a property settlement agreement in coverture or hybrid states, rather than the fixed dollar amount itself.
Notes1. Turner, Brett, Equitable Distribution of Property, 3d ed. (West Group 2005). 2. Moore v. Moore 114 N.J. 147, 553 A.2d 20 (1989). 3. Hayden v. Hayden, 284 N.J. Super. 418,665 A.2d 772 (1995). 4. Code of Virginia - Domestic Rela tions § 20-107.3. 5. Grier v. Grier, 731 S.W.2nd 931 (Tex. 1987). 6. Section 50-20.1 of the North Carolina Code. 7. Boyett v. Boyett, 703 So. 2nd 451 (Fla. 1997). 8. Act 175 (effective January 28, 2005). 9. Majuaskas v. Majuaskas, 61 N.Y.2d 481,474 N.Y.S.2d 699 (1984). 10. Hoyt v. Hoyt, 53 Ohio St.3d 177, 559 N.E.2d 1292 (1990). 11. Adams v. Adams, 64 C.A.3d 181, 134 Ca!. Rptr. 298 (1976). 12. Berringion v. Berringion, 584 Pa. 393,633 A.2d 589 (1993). 13. Holland v. Holland, 403 Pa. Super 116,588 A.2d 58 (1991). 14. Marriage of Adams, 64 C.A.3d 181, 134 Ca!. Rptr. 298 (1976). 15. Primm v. Primm, 12 Va. App. 1036, 407 S.E.2d 45 (1991). 16. Marx v. Marx, 265 N.J. Super 418, 627 A.2d 891 (1993). 17. Risoldi v. Risoldi, 320 N.J. Super 524,727 A.2d 1038 (1999). 18. Bishop v. Bishop, 113 N.C. App. 725,440 S.E.2d 591 (1994). 19. Seifert v. Siefert, 319 N,C. 367,354 S.E. 2d 506 (1987). 20. Quinn v. Quinn, 83 Md. App. 460, 575 A. 2d 746 (1990). 21. Bangs Bangs, 59 Md. App. 350, 475 A.2d 1214 (1984). 22. This chart is based on the Section 6:26 of Equitable Distribution of Property, Note 1, cited earlier, plus the research of the author. In Equitable Distributions of Property, as well as other discussions of this issue, coverture is also called the marital foundation theory, and bright line is referred to as the accrued benefit theory. 23. Rivera-Santos v. Rivera-Santos, 862 So.2d 480 (La. Ct. App. 2003).