Spousal Maintenance and Retirement: How to Advise Clients in a Post Lee v. Lee World. By: Kim Bonuomo, Jana Aune Deach and Perry Long INTRODUCTION

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1 Spousal Maintenance and Retirement: How to Advise Clients in a Post Lee v. Lee World By: Kim Bonuomo, Jana Aune Deach and Perry Long INTRODUCTION As family law attorneys, clients look to us for advocacy, guidance and answers. We all advocate for our clients. Most of us try to give them guidance in helping them navigate through the troubling waters of the dissolution of a marriage and beyond. But how often can we give them the clear answers they want? Nowhere is our inability to provide black and white answers more apparent than in the area of spousal maintenance. Am I entitled to receive it? Will I have to pay it? How much will it be? For how long will it be? What if the payor dies? What if I can t get a job? What if I lose my job? Will I ever be able to retire? are some of the multiple questions we face from our clients every day. We may have some guidance to offer and perhaps a yes or no to the first couple of questions. But we rarely can give all the assurances a client would like us to provide. As the demographics of our society reflect an aging population approaching the traditional era of retirement, the impact of retirement on the payment of spousal maintenance has become a significant topic for both our clients and those of us who practice in this area. This article will explore the current case law dealing with the impact of retirement on spousal maintenance awards and the questions left unanswered by the current law. We will also discuss how to best represent the interests of our clients in addressing the retirement issue when it comes to the payment or receipt of spousal maintenance. DEFINITION OF SPOUSAL MAINTENANCE What is spousal maintenance and how does one party receive it as part of a divorce? Pursuant to Minnesota Statutes , subd.3.a., Maintenance means an award made in a dissolution or legal separation proceeding of payments from the future income or earnings of one spouse for the support and maintenance of the other. A court may grant an award of spousal maintenance if it finds the spouse seeking maintenance lacks sufficient property or is unable to provide adequate self-support, after considering the standard of living established during the marriage, through appropriate employment. Minn. Stat , subd. 1 (2007). In a dissolution proceeding, the court has significant discretion in determining the amount and duration of spousal maintenance. 1 The court may grant a maintenance order for either spouse if it finds that the spouse seeking maintenance: (a) lacks sufficient property, including marital property apportioned to the spouse, to provide for reasonable needs of the spouse considering the standard of living established during the marriage, especially, but not limited to, a period of training or education, or 1

2 (b) is unable to provide adequate self-support, after considering the standard of living established during the marriage and all relevant circumstances, through appropriate employment, or is the custodian of a child whose condition or circumstances make it appropriate that the custodian not be required to seek employment outside the home. Minn. Stat. Section , subd. 1 (1990) (emphasis added). In determining whether to make an award of spousal maintenance, the court must consider the financial resources of the party seeking maintenance and the party s ability to meet needs independently against the ability of the spouse from whom maintenance is sought to meet needs while meeting those of the spouse seeking maintenance. 2 The courts must balance the financial needs of the spouse seeking maintenance, together with the ability to meet those needs, against the financial condition of the other spouse. 3 When one party is about to retire, how does this affect an initial award or modification of an award of spousal maintenance from the court? HISTORY OF CASE LAW Prior to 2009, there were two seminal cases dealing with spousal maintenance and retirement. First, in Kruschel v. Kruschel, 419 N.W.2d 119 (Minn. Ct. App. 1988), the Court of Appeals held that pension benefits awarded as property in a dissolution cannot be included in the income of a party to determine that party's maintenance obligation. To do so would be to allow the subsequent redistribution of the pension as income after it had been awarded as property. However, to the extent the pension is not awarded as property, it may be considered as income and therefore would be a factor in making a maintenance obligation determination. 4 In Kruschel, upon retirement, an obligor moved to modify the spousal maintenance provision of a dissolution decree entered while he was still employed. The district court denied this motion on the grounds that the obligor failed to demonstrate a change of circumstances rendering the original award unreasonable. On appeal, the Appellate Court stated: In determining the propriety and amount of continued maintenance, the trial court must consider [the maintenance obligee's] total financial resources, including any income from [the obligee's] own marital property award... Conjointly, [the maintenance obligor's] total financial resources must be considered in evaluating his ability to meet [the obligor's] own needs. If the court determines that [the maintenance obligor] has the financial resources to meet his own needs and [the maintenance obligee] does not, it may order continued maintenance out of [the maintenance obligor's] non-pension income. 5 The Court in Kruschel remanded for a recalculation of maintenance that did not include the appellant's pension benefits as income, stating, "however, his property interest in the pension may... be considered in determining the propriety or amount of future maintenance payable from non-pension income." 6 Thus, under Kruschel, pension benefits that were awarded in the dissolution decree as property may be considered in determining whether an obligor can support himself, but spousal maintenance may not be ordered to be paid from such pension benefits. 2

3 Just three years after the Court of Appeals opinion in Kruschel, it addressed the issue of retirement and spousal maintenance in In re the Marriage of Richards, 472 N.W.2d 162 (Minn. Ct. App. 1991). The analysis followed by the Appellate Court in Richards built on the rule developed in Kruschel, holding when the obligor's pension benefits constitute property that is divided in the dissolution agreement rather than income, the obligor ordinarily cannot be ordered to make spousal-maintenance payments from those benefits. In Richards, the husband-obligor was awarded, as marital property, the entire value of his pension earned during marriage. After the parties dissolved their marriage, the value of the obligor's pension benefits increased due to a change in the benefits package provided by obligor s employer. The obligee argued any pension payments received by the obligor in excess of the amount awarded to the obligor as property at divorce were "future income," and therefore available for maintenance payments. 7 The Court of Appeals agreed with the obligee but, relying on Kruschel, held that because the obligor was entitled to $50,556 in pension benefits under the original decree, "until [the obligor] receives this amount, [the obligee] may not claim a share of increased pension income in excess of the original award." 8 The no-apportionment rule of Kruschel and Richards operated to exclude the obligor's pension payments from consideration as a source of income for spousal maintenance until the sum of the payments exceeds the total amount awarded as the obligor s share of the marital property. The Minnesota Supreme Court overturned the no-apportionment rule in Lee v. Lee, 775 N.W.2d 631 (Minn. 2009), holding that the obligor s nonmarital pension benefits can be considered in the payment of spousal maintenance after the obligor s retirement. In Lee, the obligor retired and received monthly pension benefits which were partially earned before the marriage, partially earned during the marriage and partially earned after the divorce. The marital portion of his retirement assets had been divided equally between the parties in the Judgment and Decree of Dissolution. Upon retirement, the obligor moved the Court to modify his spousal maintenance obligation. The trial court reduced the monthly amount of spousal maintenance. In calculating the obligor s monthly income (which included his pension benefits and social security), the trial court subtracted the portion of the obligor s monthly pension payment awarded to him as marital property, but included the nonmarital portion of his pension benefit, both before the marriage and after the divorce. The obligor appealed. The Court of Appeals reversed the trial court and reduced the monthly maintenance obligation to zero. 9 On appeal, the Supreme Court held the nonmarital portions of the obligor s pension benefits were available to pay spousal maintenance because pension benefits not awarded as property are income when received and can be considered for payment of spousal maintenance. Lee overturns the prior rule of Kruschel and Richards that required the obligor to receive the full value of the marital property award before the pension benefit could be considered as income. The Lee Court held each pension benefit payment should be apportioned between marital and nonmarital from the start of the payments. Interestingly, the Supreme Court raises several questions in its own majority opinion as to the treatment of retirement assets and calculating spousal maintenance. Footnote 8 states: 3

4 We note that [the obligor] never attempted in the lower courts to quantify how much of each pension payment might be considered to be a return of principal representing the property he acquired before (or after) marriage. We cannot say whether a different result would obtain on a different record. What we decide today is that based on the record before us, and the plain language of the statutes, pension benefits earned before marriage and not previously awarded as marital property are considered income when received. The Lee Court appears to be inviting practitioners to make an argument as to principal versus income on the nonmarital portion of retirement benefits. Justice Dietzen, in his concurrence, takes this argument even further to specifically question whether it matters if the retirement benefit is a defined benefit plan or a defined contribution plan as it pertains to how income is calculated and determined for the purpose of spousal maintenance. 10 With the new approach set forth in Lee, how do practitioners need to approach the issue of retirement and spousal maintenance to guide clients? UNANSWERED QUESTIONS A. Does It Matter If We Are Dealing With A Defined Benefit Plan Or A Defined Contribution Plan? To understand how retirement benefits intersect with spousal maintenance, we first need to understand what retirement assets and benefits exist and how they operate. 1. Characteristics of a Defined Benefit Plan (DBP): A retirement vehicle in which the employer promises a specified monthly benefit on retirement that is predetermined by a formula (known in advance) based on employee s earnings history, tenure of service and age, rather than depending on investment returns. Contributions are actuarially determined taking into consideration the employee s life expectancy and normal retirement age, possible changes to interest rates, annual retirement benefit amount, and the potential for employee turnover. The employer is committed to paying the retiree the defined benefit for the rest of the retiree s life. The liability of the DBP lies with the employer who bears the investment risk. If employee leaves the company before retirement, the benefits earned so far are frozen and held in a trust for the employee until retirement age. These monies are pooled together and professionally managed to increase efficiency and remove financial risk for the participant. Employees will need to decide what type of income they would like to receive at retirement time. Do they want the income to pay for their life only or a joint payout option that would pay to a spouse if the employee would die first? Some plans may allow employees the option of rolling 4

5 over a lump sum value of their defined benefit plan, which is determined by an actuary. Once an election is made, it cannot be changed. Examples of a DBP include traditional pension plans (TRA, PERA), multiemployer plans, pension equity plans (PEP). 2. Characteristics of a Defined Contribution Plan (DCP): Individual accounts are set up for participants. Benefits are based on amounts credited to these accounts plus any investment earnings on the money in the account. Benefits are based solely on the amount contributed to the participant s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant s account. Only the contributions are guaranteed, not the future benefits. In fact, future benefits fluctuate on the basis of investment earnings. Investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. DCP s are generally portable. If you leave the employer, you can rollover your defined contribution plan to another defined contribution plan (e.g. 401k) or to an IRA. Examples of a DCP include: 401(k) Plans 403(b) Plans IRA SEP IRA Roth IRA Employee Stock Ownership Plan (ESOP) Profit Sharing Plans A Defined Benefit Plan guarantees a periodic payment to the employee upon retirement. That payment is an income stream, which can be allocated as a pre-marital benefit, marital benefit or post-dissolution benefit. But, (as noted by the concurrence of Justice Dietzen in Lee), it is unclear what part of any distributions and withdrawals from a Defined Contribution Plan would be categorized as the income stream on which to base spousal maintenance regardless of how the plan was divided in the division of marital assets. How would the distributions be allocated? Are they income or principal? B. Is There A Way To Quantify And Distinguish A Return Of Principal On Nonmarital Property From Income Of Nonmarital Property With A Defined Benefit Payment? As stated above, Footnote 8 of the Lee majority opinion raises its own unanswered question as to how much of each pension payment might be considered income and how much might be considered a return of principal representing the property he or she acquired before or 5

6 after the marriage. Is there some way to quantify the payments from a DBP as a return of principal as distinct from income? It is an asset, but the design of the DBP by its very nature is to produce a stream of future payments as defined by the criteria of the plan. Practically speaking, how do you determine return of principal versus income? More important, perhaps, is the question: can you determine return of principal versus income? In a DBP, monies are pooled together and professionally managed to increase efficiency and remove financial risk for the participant who is the employer. On a regular basis the pool is reviewed and perhaps reallocated for the benefit of the employer to meet the commitments made by the employer to groups of employees. Thus, there is no process to determine what portion of a DBP payment to an individual recipient is return of principal versus income. Consistent with the Lee Court, the marital portion of the payment can be carved out and excluded as income available for spousal maintenance payments, but the nonmarital portion of the benefit payment would be income to the recipient, and available to pay spousal maintenance. C. Would Your Answer Be Different If Dealing With a DCP? The Lee majority suggested there might be a way to exclude some portion of a periodic pension payment from the obligor s income sources by presenting evidence that part is a return of principal versus income. As we have discussed above, such an allocation with a DBP is not possible due to the very nature of a DBP. How would you apply this to a Defined Contribution Plan which has some marital component previously distributed at the time of the dissolution and some nonmarital component acquired either prior to the marriage or post-dissolution? If we follow the rule of Lee, do we first have to determine what portion of the Defined Contribution Plan balance on retirement is from the marital portion of the asset which was distributed at the time of the dissolution? The first question to ask is whether income is earned in a retirement asset? In White v. White, 521. N.W.2d 874 (Minn. Ct. App. 1994), the Court of Appeals held that growth on a nonmarital interest, whether appreciation or interest, remained nonmarital. It makes sense that dividends or interest paid within a defined contribution plan on nonmarital property would still be nonmarital. The funds are not accessible to the account holder. But, the Supreme Court in Baker v. Baker, 753 N.W.2d 644 (Minn. 2008) remanded to the Court of Appeals Ms. Baker s claim that Dr. Baker failed to distinguish between the increase in his nonmarital retirement property due to appreciation versus the increase due to income in tracing the growth on the nonmarital portion of the retirement assets suggesting a different treatment. The unpublished opinion of the Court of Appeals in Baker v. Baker, (No. A Dec. 9, 2008) (unpublished) remanded the issue to the trial court. This issue was never squarely addressed because the parties settled but the dicta from the Supreme Court left that question dangling as to whether income versus appreciation on nonmarital property would be treated differently in classifying the property. Why would the same question about how to treat the dividends and interest earned on the marital portion of retirement asset at the time of retirement and ensuing motion to modify spousal maintenance not apply? If income is not earned in a retirement asset, whether marital or nonmarital, due to its inaccessibility, is the entire balance of the DCP on retirement, not already distributed in the 6

7 dissolution, available as a source of income for paying spousal maintenance? If income is earned in a retirement asset, do we gain anything by tracing the various components between active appreciation, passive appreciation, and income? Moreover, is it important to prove what is return of principal versus income at the time of retirement? Reading the appellate opinions leads a realistic practitioner to evaluate the difficulty of performing the tasks suggested. Although Baker was dealing with the issue of classifying growth on a nonmarital asset as marital vs. nonmarital, this seems to be the same sort of analysis suggested by the Lee Court in footnote 8 of the majority opinion with respect to spousal maintenance at the time of retirement. D. How Do You Determine The Future Income or Earnings From a Defined Contribution Plan For Purposes Of Ability To Pay Spousal Maintenance After Retirement? Because there is no fixed payment with a DCP, are we able to distinguish between income generated on the asset versus return of the principal on the asset? How do market changes impact this analysis? Do individual investor characteristics matter? Moreover, is there any predictability to relay to clients? Depending on the investment tool used, this can be a complex determination, but doable. For example, when looking at a non-qualified Immediate Annuity, insurance companies will provide an exclusion ratio that shows what amount of the monthly payments are a return OF premium and what amounts are return ON premium. In other words, it separates the interest earned from the return of principal on the monthly payments. This is the same analysis which would need to be applied to a Qualified account. But can we? Won t investments and investment strategy change over time? Who determines the analysis and what is a return of principal versus a return on principal? Because the investment risks and rewards are assumed by each employee in a DCP and not the sponsor/employer of a DBP, how the account is invested and how those investments perform will dictate what the Rate of Return on the account will be. A person s risk tolerance, time horizon, goals, age, and possibly health will dictate how it is invested and the resulting Rate of Return. If all funds are placed into one high risk investment the end result might be huge losses to asset value (e.g. 2008). Another concern is whether the obligor is a spendthrift and will reduce the value of the asset by dipping into the principal. Spending down assets will reduce the principal and potential income. Whether a Court will take into consideration these factors as applied to the individual investor in determining the proper future income or earnings for the calculation of a spousal maintenance obligation after retirement may depend on the degree of advocacy and expert testimony offered. Alternatively, the Court may apply a standard rate of investment return found to be acceptable in calculating the amount of income available to pay spousal maintenance, if any, during retirement. E. Should The Portion Of The Pension Payment From a DBP Received By The Obligee As The Share Of Marital Property Also Be Deducted From Income For Purposes Of 7

8 Determining The Obligee s Need? Similarly, Should An Obligee s Income From The Marital Share Of A DCP Received At Dissolution Be Considered? This issue was not raised in Lee. But if the division of the marital share of the pension was property, which would be excluded from the obligor s income for purposes of determining spousal maintenance, should the obligee be required to deplete his/her share of the property received for monthly expenses when the Court could not make him/her deplete any other asset received for purposes of supporting oneself? If it is excluded from the obligee s income, as well as the obligor s income, are we not back to the same place we were at the beginning? While not accessible before certain age limits are met usually, a DCP retirement asset typically looks like an investment account. Income earned on an investment account is usually included as a source of income for spousal maintenance, whether it is a nonmarital or a marital asset. Why wouldn t the income from a DCP be treated the same way for both parties at the time of retirement? Or would Lee extend to exclude income or earnings of a marital investment/cash asset for purposes of spousal maintenance? F. What Advice Do We Give Our Clients In A Post-Lee World? The authors are very aware they have raised more questions than they have answered. Lee provided clear guidance on the apportionment of nonmarital versus the marital portion of a pension payment. It also leaves unanswered many questions on how to further define and refine what is nonmarital and what is marital in a retirement asset and what is income from a retirement asset in order to provide guidance to clients going through dissolution. Much of what is at issue would seem to require complex analysis resulting in significant costs and effort. Our intent is to raise the family law practitioner s awareness of issues to consideration as we represent more and more baby boomers approaching retirement age. The ability to retire and what retirement will look like a burning issue for them. We have to be prepared to analyze and provide guidance in this area. Thought should be given to the pros and cons of addressing the payment of spousal maintenance at retirement during settlement negotiations of the dissolution case. Consider the following: Can/should you define what the sources of income for retirement will be or will not be in the dissolution process? Can/should you negotiate an unequal division of property in exchange for a termination or modification of spousal maintenance upon retirement? If not addressed, what are the risks and uncertainties for the obligor client and the obligee client? What is certainty worth? What if the laws of spousal maintenance were to change and retirement is a terminating event? The following are some factors to consider in this analysis: 8

9 Age of both parties; Mental or physical health problems of the obligor or obligee; Insurability of obligor; Ability of obligor or obligee to replace assets, e.g. CEO high income; The risk of the obligor s income source/business, e.g. Business failure; The risk tolerance of the obligor and obligee, e.g. Mismanage assets, market; Possibility of future income, e.g. future bonuses, patent; Life expectancy of obligor and obligee; Economical uncertainty, e.g. how at risk is the obligor s job; Market corrections and the ability of the obligor to generate enough income from assets to pay maintenance, (how long will Bear market continue); Drug or alcohol addictions; Age of children; Spending habits of both parties. Understanding your client s comfort level with the risks and potential rewards of future spousal maintenance as part of retirement is the best guidance in addressing the questions raised in Lee. The only true certainty is this issue will become more prevalent in our practices as our client population heads toward retirement. 1 Erlandson v. Erlandson, 318 N.W.2d 36, 38 (Minn. 1982). 2 Maurer v. Maurer, 607 N.W.2d 176, 182 (Minn. Ct. App. 2000) citing Minn. Stat , subd Fink v. Fink, 366 N.W.2d 340, 342 (Minn. Ct. App. 1985); Riley v. Riley, 385 N.W.2d 883, 886 (Minn. Ct. App. 1986); see also Ryan v. Ryan, 383 N.W.2d at 373 (finding the essential consideration when awarding maintenance is the financial need of the spouse requesting maintenance, the ability of the spouse to meet that need, balanced against the financial condition of the other spouse). 4 Kruschel v. Kruschel, 419 N.W.2d 119, 122 (Minn. Ct. App. 1988). 5 Id. at Id. 7 In re the Marriage of Richards, 472 N.W.2d 162, 165 (Minn. Ct. App. 1991). 8 Id. 9 Lee v. Lee, N.W.2d 51, 57 (Minn. Ct. App. 2008). 10 Id. at