Dividing Retirement Assets: Who's Loss; Who's Gain?

In mid 2008, many divorce attorneys faced the problem of apportioning sudden significant losses in the stock and real estate markets.  Those cases depended on valuing IRAs and 401(k) plans to neutralize the risk for both parties.

The economy fell too fast and too far, however, for many sagging marriages.  During the first two quarters of 2008, many divorce litigants locked-in on values established over appreciable time.  Unless their divorce attorneys had the qualified domestic relations order (QDRO) ready at the trial date (a rare bit of forethought), significant value was lost each day of the delay.  In some cases, more than six-figures.

One such case decided during that era by Oakland County Family Court Judge Elizabeth Pezzetti, Skinner v Skinner, was upheld earlier this month in an opinion by the Michigan Court of Appeals.

Skinner is a guide for divorcing partners relative to what constitutes premarital or "separate" retirement property and defines "passsive income" relative to retirement assets.  The case also illustrates the consequences of stipulating to division dates for retirement assets, then suffering a long delay prior to full-resolution of the divorce litigation.

In Skinner, Husband stipulated to a date for purposes of valuation of the couple's retirement assets, including the pre-marital portion of his 401(k).  A two or three day trial and other dispositive court hearings were then spread over the next 3-months, during which time investment portfolios tanked, eroding nearly half the accrued value in retirement assets, across the board.

The issues in the case were: how to classify the significant interest income generated from Husband's pre-marital, and thus separate, retirement asset; and what date to use for division of the parties' IRA.

Coming into the marriage, Husband had invested approximately $15,000 in his Ford Motor Company 401(k) plan.  Over the course of the couple's 23-year marriage, more than $150,000 in marital earning contributions were made to the Ford plan.

As of the (pre-Great Recession) trial date, the value of the parties' other significant retirement asset, an IRA, was nearly $500,000.  By the time the judgment of divorce entered in mid-November, the IRA was only worth $330,000, and the Great Recession was upon us.

At trial, Husband presented a mathematically sound formula to calculate the interest generated from his pre-marital investment; these calculations were uncontested.  In her opinion dividing the marital estate, however, Judge Pezzetti ruled that 100% of the appreciation on the retirement plan was part of the marital estate.

The court of appeals affirmed Pezzetti's decision, including such gains as a component of the marital estate when a spouse, in this case the Wife, assists in the growth of the separate asset.  In the Skinner case, this assistance took the form of Wife's role as homemaker for the parents' four children.

Husband in Skinner took a double hit due to the losses incurred from the stipulated valuation date and the delay in getting the divorce judgment entered.  He cried "unfair" to the appellate court, to no avail.

In many of these cases, investor(s) nearing traditional retirement age were caught napping; some had a significant portion of their life-savings  invested in stock-based retirement assets rather than a more liquid, diversified portfolio.  Once the Great Recession took hold of the economy, divorce attorneys whose clients had already agreed to valuation dates for retirement assets lost significant value each and every day until their final judgment was entered.

Even when (painfully) aware of the issue, attorneys simply could not complete these divorces fast enough.  One of the parties, like in Skinner, usually came up short, suffering a complete loss of retirement value.

Once an agreement is reached, or when a divorce trial begins, it is crucial for the attorneys to work diligently in order to complete the often painful and emotional process of ending a long-term marriage.  Skinner tells us that no good can come from a delay.

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Posted in: 401(k),divorce,Great Recession,IRA,Judge Elizabeth Pezzetti,Michigan Court of Appeals,Oakland County Family Court,property settlement,retirement assets,Skinner

Family Court's Custody Rulings Must Cite Findings

Last Thursday, the Michigan Court of Appeals reversed a custody ruling of the Eaton County Family Court.  The tortured case, Wilbur v Carter, arose from a paternity suit, not a divorce.

The couple in this case conducted a protracted custody battle over their now 11-year old child.  The case features just about every tool available to the family court judge: supervised parenting time; temporary orders; in camera interviews with the child (twice) and evidentiary hearings.

The family court made a series of custody rulings in Father's favor over the years, keeping Mother's custody hopes alive by scheduling review hearings.  Father had been awarded sole legal custody and the stated purpose of the review hearings were to determine whether joint legal custody could be reinstituted.

Although the unpublished decision does not contain the underlying facts, the family court judge apparently did not approve of Mother's life style, removing her as a joint legal custodian of her child, and ordering supervised parenting time with Mother.

Over the past seven years, the parents kept filing motions for custody.  The lower court flip-flopped on the issue, alternating between temporary orders of sole legal custody to Father; then switching back to joint custody.  What troubled the Court of Appeals was that none of the requirements contained in the Child Custody Act were followed.

Before a family court judge changes custody, it must first determine whether an "established custodial environment" exists with either, or both, parents.  This term is defined in the custody act to mean:

if over an appreciable time the child naturally looks to the custodian in that environment for guidance, discipline, the necessities of life, and parental comfort. The age of the child, the physical environment, and the inclination of the custodian and the child as to permanency of the relationship shall also be considered.

The Eaton County Family Court neglected to make this determination in the case.  This is important because a court's determination of an established custodial environment determines the burden of proof which the moving parent must satisfy before a change in custody can be made.

In addition, the Court of Appeals was also disturbed because the lower court failed to make any determination that a "change of circumstances" or "just cause" existed to justify the requested custody modification.  Finally, it also reversed the family court because it made no findings of fact based on the 11 statutory custody factors set forth in the custody act.

Often, family courts feel constrained by their crowded dockets and the sometimes "informal" nature of the family court.  Attorneys foster this environment by allowing decisions on custody matters without the requisite findings by the court.

This case stands for the proposition that a family court cannot properly change custody without first: determining whether an established custodial environment exists; then determining whether the requisite "change of circumstances" exists; and finally making a factual determination after an evidentiary hearing as to all 11-factors.

The case calls for good lawyering in each and every custody battle, regardless of the court's resources or the resources of the parties.

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Posted in: child custody,Child Custody Act,court of appeals,Eaton County Circuit Court,family court,family law,John Wilber,Skye Carter

Women To Constitute A Third of the SCOTUS Bench

For the first time in our nation's history, three women will be sitting together on the bench of the United States Supreme Court.  By the time you read this post, President Obama will have conducted his 7:15 am press conference on Monday, May 10, to officially announce that his Solicitor General, Elena Kagan, will be nominated to replace retiring Justice John Paul Stevens.

The nomination requires approval of the Senate, expected later this summer.

Ms. Kagan is used to being first when it comes to the law.  She was the first female dean of the Harvard Law School, where she graduated magna cum laude back in 1986.  During her tenure, however, Kagan sued to prohibit the U.S. Army from recruiting students from the law school to fill the Judge Advocate General Corps.

She also served as an Associate White House Counsel under President Clinton.  She was the first woman to serve in the post of Solicitor General of the United States; the federal government's litigator. In that capacity, she managed the government's SCOTUS docket.

Her judicial experience, however, is limited to a clerkship at the Court of Appeals for the D.C. Circuit, followed by a clerkship with Justice Thurgood Marshall.  Most of her legal career has been spent in private practice and academia.

Kagan was a tenured law professor at the University of Chicago in the mid-1990s and undoubtedly wound-up among President Obama's professional contacts from that era.

Since she has never been a judge, Dean Kagan does not have a long list of decisions for the Senate's Judiciary Committee to pour over.  All the more reason Senate Democrats will be pushing to approve her nomination prior to the summer recess. 

In an era where women now make up a majority of all college graduates and law students, it only seems natural that they should occupy a third of the seats on our nation's high court.  Never much of a "good old boys" club, the Court has always been a vital mix of contemporary politics and long-term principles.

This Blog wonders how Kagan will be voting on the issue of same-sex marriage, likely to come up during her first year on the bench.  Until now, she has, by virtue of her brief tenure as Solicitor General, defended the constitutionality of California's referendum outlawing gay marriage in the Perry v Schwarzenneger case.

She really had no choice but to join that momentous fight on the side of upholding the California ban on gay marriage.  California's Attorney General, Jerry Brown, declined to defend the law, saying it was unconstitutional.  Governor Schwarzenneger likewise declined to wade directly into the legal fray, saying he approved of the litigation as it raised important constitutional legal issues that called for judicial resolution at the national level.

Update:  The official blog of the State Bar of Michigan has posted links to all the numerous blogs covering this nomination.

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Posted in: Helena Kagan,Judge Advocate General,Justice John Paul Stevens,President Clinton,President Obama,SCOTUS,Thurgood Marshall,U. S. Supreme Court