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How Does Divorce Affect Retirement Plans and Pension Benefits?

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What Is Community Property, and Is California a Community Property State?

Community property is defined as property, whether financial or tangible (real estate, jewelry, vehicles, etc.), that a couple acquired during their marriage. That can include not only income earned during the marriage but also things purchased with the income earned during the marriage.

This can be more complicated than it sounds, especially when contrasting it to separate property. The latter is defined as property earned or owned before marriage (or after the couple separates) and could include an inheritance or gift as long as the couple didn’t benefit jointly from the asset. For example, suppose one spouse owned a home before marriage, but the couple lived there while married, and the other spouse contributed to the mortgage or maintenance. In that case, the home may become community property. Note: Debts are also considered property and divided into separate and community.

Some states don’t use community property as a legal guideline during divorce. However, California is a community property state. When a couple divorces here, they’ll be expected to divide their community property (assets and debts) as closely to 50/50 as is reasonably feasible. It’s not always simple to do, so there’s usually some negotiation and compromise involved

Are Retirement Plans and Pension Benefits Considered Community Property?

Many people think that retirement plans and pension benefits wouldn’t be considered community property because they’re specific to each person, and in many cases, the accounts were created before marriage. However, while any payments or benefits accrued in those accounts before the marriage are considered separate property, once married, any payments or benefits become community property.

Once a couple is separated, the benefits become separate property again–but only those accrued after the separation.

Is There Anything I Can Do to Protect My Retirement Plans or Pension Benefits in Case of Divorce?

If the marriage hasn’t occurred, drafting a prenuptial agreement (commonly known as a prenup) is possible. The prenup can specify that retirement plans or pension benefits remain separate property. This is most likely to be successful if the retirement or pension accounts are held in separate accounts with only the primary spouse listed as the owner. If they’re in joint accounts in any way, they will likely become community property.

Setting up enforceable prenups is best done with the assistance of an experienced prenuptial agreement attorney. California has several laws and regulations overseeing prenups, and running afoul of those laws can cause the prenup to be declared invalid. Then, community property laws would come into play. Among some pertinent requirements is that each party must have their own attorney to review and negotiate the prenups. Another important rule is the 7-day rule, which states that one party must present a final version of the prenup to the other party a minimum of seven calendar days before it can be signed and finalized. This can help avoid the appearance of one party coercing the other into signing an unfavorable prenup.

What Happens if We Didn’t Draft a Prenuptial?

It may not be too late to protect retirement plans and pension benefits. While prenups are documents created before the marriage, there’s also a post-marriage counterpart called a postnuptial agreement (postnup). Just as with prenups, California law has requirements for a postnup to be legally enforceable, including that each spouse is required to consult an attorney to ensure their postnup represents their wishes and cooperative negotiation.

Some things to be aware of under California law. Postnups tend to be subjected to more legal scrutiny than prenups, as once married, the couple is in a relationship with fiduciary responsibilities that didn’t exist before they were married.

The courts also have even more concern about the potential for one spouse to coerce another than they do with prenups. When each spouse’s finances are greatly unequal, the potential for the higher-earning spouse to try to force a postnup favorable to them onto the other spouse is thought to be possibly increased. Another situation that may trigger this concern is when one spouse leaves their career to stay home and raise children. Even if they were earning nearly equally to the other spouse, voluntarily giving up their income may make them more susceptible to coercion.

What if We Married in Another State That Doesn’t Recognize Community Property and then Move to California?

That’s what’s known as having quasi-community property. Property acquired while living in a state other than California may not be community property in that state, but once you move to California, local laws apply, and that property will likely be considered community.

What About Gifts or Inheritances to One Spouse?

These can be considered separate property as long as they remain separate property. If placed in a joint financial account or used for joint purposes (for example, to put a down payment on a new home or go on vacation together), they may be considered commingled and become community property.

Prenups and postnups are mechanisms for dealing with this, too. Suppose one spouse knows they have an inheritance coming, or it arrives as a surprise after marriage, as long as they don’t blend it. In that case, they may be able to specify it as separate property in the prenup or postnup.

What Should I Do if My Spouse and I Want to Divorce and I Have Retirement Plans and Pension Benefits?

Call Hepner & Pagan as soon as possible at 408-688-9153 to request an intake appointment.

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