The Impact of Divorce on Retirement Benefits
One event that has reverberating and long-term effects on an individual’s ability to implement and maintain a viable plan for retirement is divorce. Divorce is one of the single most financially damaging events a person may experience. In order to mitigate the negative consequences, one needs to understand how retirement benefits fit within the division of property generally and the specific rules that govern how Courts may treat these benefits. Dividing retirement benefits is frequently much more complicated than other assets because of the numerous laws and regulations that control when and how they may be transferred and accessed.
Property Division Generally
Illinois, like many other states, follows a standard for dividing property in divorce called equitable division. This standard requires all marital property to be distributed according to what is most fair under the circumstances. Hence, not all divorces will result in an equal split of assets and liabilities.
There are two central issues that frequently dominate arguments about how property should be divided: determining what counts as marital property, and ascertaining the value of the marital property. Generally, any property acquired during a marriage is considered marital, though exceptions do apply. Further, Illinois law outlines a number of factors Courts must consider when deciding the equitable division of property that broadly relate to the:
- Health, age, income and liabilities of each party;
- Length of the marriage;
- Contribution of each spouse in acquiring or enhancing property; and
- Likely tax consequences of the property division, of particular concern with the division of certain retirement benefits.
Dividing Social Security and Pension Benefits
While not an optimal source of retirement income, due to the low monthly payout, many people still need the financial contribution provided by Social Security to feel secure. Spouses are entitled to collect the benefits of a deceased spouse, and this right does not disappear upon divorce — as long as the marriage lasted at least 10 years and other qualifying conditions are satisfied. However, within the context of divorce, spouses need to understand the limitations a Court faces when addressing this benefit, including:
- Federal law prohibits Courts from dividing these benefits, and parties are not even permitted to privately decide to split these benefits as part of a property division agreement;
- Other property cannot be awarded to offset higher benefits owed to one spouse, meaning Social Security benefits cannot be directly considered in property division; and
- Disparities between pension benefits and Social Security cannot be used to equalize property division in divorce; thus, decisions to divide shares of a pension that accrued during the marriage must be made without any regard to the Social Security benefits the other spouse will be entitled to collect.
Qualified Illinois Domestic Relations Order and Retirement Accounts
Fairly dividing other types of retirement accounts, such as 401(k)s and IRAs, is quite tricky because of the fluctuating nature of the value of these accounts, the restrictions on when a person may transfer or make a withdrawal, and the serious tax consequences if improperly distributed. Generally, any accumulation in value and contributions made to these accounts during the marriage are subject to division in divorce.
Further, in order to effectuate a legal transfer of benefits without triggering penalties, a Court order, known as a Qualified Illinois Domestic Relations Order, must be issued. Given how pivotal these issues are to a person’s long-term financial security, an experienced divorce attorney should be consulted about the optimal approach.
Get Legal Advice
Dedicated Inverness family law attorney Nicholas Richardson is highly experienced at handling complex property division matters, and is committed to providing effective and thorough representation to achieve the best possible result. Contact the law firm today for a free initial consultation.