Colorado law allows courts broad flexibility in deciding how to divide a pension at divorce, including determining which of the pension valuation methods to use. But a recent unpublished decision from the Colorado Court of Appeals held that the valuation must be consistent, and the family law judge cannot use one method to determine the marital property interest, and a different valuation method to calculate a spouse’s premarital separate property interest.
In Bates, the husband worked at Raytheon from 1985 until his retirement in 2018, earning a defined benefit pension (i.e. a traditional pension plan which makes monthly payments, as opposed to the more common IRA or 401K plans which have an account with money in it). As the couple was married from 2005 through dissolution of marriage in 2019, using Colorado’s “time rule” formula about 41% of the pension was marital property, and the remainder which the husband earned before marriage was his separate property.
Pension Valuation Methods at Divorce
In its seminal 1985 Hunt decision, the Colorado Supreme Court discussed three approved pension valuation methods for the division of defined benefit retirement plans in a divorce:
- Net Present Value (NPV), by which the pension is divided immediately, together with the rest of the marital estate, based upon calculating its lump sum value using actuarial data, the values of future benefits, and other factors, including the risk the pension would not result in the anticipated payments.
- Deferred Distribution, which is known as a “wait and see” method, by which the court at divorce determines the spouse’s percentage share of the pension, and the payments (“distributions”) are then deferred until each monthly payment is received.
- Reserve Jurisdiction, by which the court waits until the pension is vested and matured to determine the spouse’s share
Hunt, at 530-32.
The court has “substantial leeway in determining which method of distribution best suits the needs and financial circumstances of the parties.” James, at p. 627.
Division of Assets in Bates
Upon retiring from Raytheon in 2018, Husband in Bates began receiving monthly pension payments of $4528. The parties agreed that the net present value of those payments was $1.067m, and his separate property share earned before marriage was $633K. Notably, they did not agree to actually utilize the net present value method for dividing the pension, instead stipulating that the wife would receive one-half of the marital share (i.e. about 20%) of each monthly payment under the deferred distribution method.
The trial court divided each monthly payment using the time-rule formula. But then the judge divided the marital estate disproportionately, giving the wife 67% of the value, based in part upon the fact that the husband had just over $1m set aside to him as his separate property, including $633K net present value of his premarital portion of the Raytheon pension. In other words, the court utilized two different pension valuation methods.
Mixing Deferred Distribution and NPV Pension Valuation Methods
The problem was that by dividing the monthly payments, then treating the husband’s premarital portion of the pension as a lump sum asset, the trial court mixed and matched methods of valuing the pension:
“Thus, the court valued the separate property portion of husband’s pension using the net present value method, while it used the deferred distribution method to divide the marital portion of the pension (and therefore did not assign the marital portion any “value” for purposes of dividing the marital estate). In essence, the court treated a single pension as if it were two separate pensions. In so doing, the court erroneously combined both the deferred distribution and net present value methods.”Bates, at ¶ 18.
While the Supreme Court allows trial courts to determine the method to equitably divide a pension, they cannot alter the “time rule” formula, as that “undermines the integrity of the formula and detracts from its very purpose.” Hunt at p.543. Moreover the family law judge may use one of the approved methods to divide a pension. Grubb, at p.666.
“Once the court used the deferred distribution method to divide the marital share of husband’s pension, it could not later include the net present value of his separate, premarital portion of $633,136 when considering how to equitably divide the marital estate. See Hunt, 909 P.2d at 543. In other words, the court could not consider the net present value of the separate, premarital portion of his pension when it had already applied the deferred distribution method — a hybrid approach is improper.”Bates, at ¶ 19.
The takeaway on pension valuation methods? The trial court may consider the husband’s receipt of his separate property pension each month, Bates, at ¶ 22, but it cannot assign a $633K value using the NPV method while dividing the marital share of the pension using the deferred distribution method.
67% to 33% Division of Marital Estate is “Greatly Disproportionate”
It is always interesting to see how far parties, or even trial judges, can push the division of the marital estate. Colorado law requires a “just” division of the marital estate, not necessarily an equal division. C.R.S. 14-10-113(1). Thus, Colorado is an “equitable distribution” state, not an “equal division.” See our Division of the Marital Estate article in the Colorado Family Law Guide for more details.
The reality in most cases is that equitable means equal, absent unusual circumstances which warrant an unequal division. In this case, the trial court awarded the wife 67% of the marital estate, a share which the appellate court called “greatly disproportionate.” Bates, at ¶ 22.
Since that disproportionate division was based upon the trial court erroneously applying a “hybrid” valuation of the husband’s pension, the Court of Appeals reversed the property division and remanded to the trial court. And use of the term “greatly disproportionate” suggests that, absent compelling reason, the trial court would not be able to divide the marital property in a 2:1 ratio the next time around.
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