Recent Recalculation of Retirement: Employment Benefits as Separate Property – Tennessee Bar Association

January 1, 2016

Posted by in In the News.


In the last legislative session, the Tennessee General Assembly modified the existing statute regarding the definition of marital property, specifically as it relates to various types of retirement accounts and stock options. The legislature adopted a position that altered how the distribution of such assets would be conducted, primarily focusing on assets that were possessed by one spouse prior to the marriage and the increase in value of that asset over the life of the marriage. The amendment to this code section went into effect on July 1, 2015.

Tenn. Code Ann. section 36-4-121(b)(1)(B)(ii) defines the term “marital property” to include “the value of vested and unvested pension benefits, vested and unvested stock option rights, retirement and other fringe benefit rights accrued as a result of employment during the marriage.”[1] While this definition makes clear that certain types of accounts and stock options, whether exercised or not at the time of the termination of the marriage, are assets of the married couple, it does not address the issue of employee pension plans and the like that were founded by a spouse prior to entering the marriage. Further, that definition does not provide guidance for an attorney when trying to divide a retirement account that was founded prior to the marriage and has increased significantly in value over the course of the marriage.

Tenn. Code Ann. section 36-4-121(b)(1)(B)(iii) speaks to this exact issue, stating that the value of accounts of this nature that were “accrued as a result of employment prior to the marriage, together with the appreciation in value, shall be ‘separate property’” for the purposes of the division of assets between the parties.[2] This subsection then goes on to say that any form of “reasonable accounting methods” may be used to determine the value of the account that is attributable to the increase in value of the pre-marital portion of the account.[3] In order to make the determination of the value as separate, pre-marital property feasible, the legislature has further provided that the commonly used “concepts of commingling and transmutation shall not apply” in these circumstances and assets that are both marital and pre-marital may exist in a common account without making them all marital property.[4] This method of determining the value of the pre-marital property in such accounts is a departure from previous practice and warrants a closer examination so practitioners can become adequately familiar with the difference under the modified law.

This modification to the subsection does not deal with contributions to a pension plan during a marriage or the increased value of that contributed amount over time. Those have been and remain marital property that is subject to division.[5] However, previous interpretations of the marital property statute, particularly as it references retirement benefits, considered the entire increased value of the retirement account, including increase in value of the portion that was contributed prior to the marriage, to be martial property that was subject to division.[6] The Tennessee Supreme Court, through this line of cases, interpreted the existing language of Tenn. Code Ann. § 36-4-121(b)(1)(B) to mean that all increase in value of the retirement account was subject to division regardless of the date when any particular portion was contributed. Only the exact portion of the account that was contributed prior to the marriage was to be considered separate property. The modification of this subsection changes that prior interpretation of “marital property.” In the recent Supreme Court case of Snodgrass v. Snodgrass, the court reviewed cases throughout the years that touched on this topic as well as making an explicit determination regarding the issue of whether increase in value to a pension or IRA account was marital property despite the fact that it was funded with pre-marital assets. The Tenn. Code Ann. provided, then and now, that included in the definition of marital property is “the value of vested and unvested pension benefits, vested and unvested stock option rights, retirement, and other fringe benefit rights accrued as a result of employment during the marriage.”[7] In its ruling in Snodgrass, the Supreme Court determined that because of the above clause defining the “value” of such accounts as marital property, that phrase included the increase in value of the account even if it was funded by pre-marital funds and ended their inquiry into the issue.[8] The modification to the existing definition of marital property appears to be a legislative response to the court’s ruling in Snodgrass by specifically excluding the appreciation from the definition of marital property.

The modification to this statute seems logical since an increase to the value of pre-marital property has been and is considered to be wholly owned by a single spouse absent some form of substantial contribution to the pre-marital property by the non-owner spouse that converts the property from pre-marital and separate to marital and joint.[9] That being said, how will this new modification be implemented in an effective and cost efficient manner? The statute provides that a spouse must show proof to a trial court of the increased value of the pre-marital portion of the account in question through “any reasonable method of accounting” that a party chooses to use and feels is adequate, but the burden is on the spouse making the assertion.[10] Determining the amount that a certain portion of a retirement or pension account has increased over, perhaps, a very lengthy period of time may require a very detailed analysis from an accountant or other financial planner who can separate the portion of an account that was pre-marital and accurately attribute the appropriate amount of gain or loss to that specific portion only. Depending on the time and difficulty involved with such a process, it might be that only very large amounts of money in a pension, or other designated property mentioned in the statute, that are pre-marital property would legitimate an expenditure by a client to determine the portion of accrued value to the overall account that is attached to that pre-marital portion. Given the cost of implementing “reasonable accounting methods” called for by the statute, it might be a case of diminishing returns to pay for this analysis absent a large sum of money to make it worth the client’s expenditure of resources to make an accurate determination. Nonetheless, family law practitioners should be aware of the change in the law and be able to advise their clients accordingly, particularly with the wide variety of pension and retirement accounts in today’s work environment. Knowing that, because of the changes in Tenn. Code Ann. § 36-4-121(b)(1)(B)(iii), your client is potentially entitled to an increase in the value of his/her pre-marital contribution to a retirement account, or to stock options, is certainly required information.

Notes

[1] Tenn. Code Ann. § 36-4-121(b)(1)(B)(ii).
[2] Tenn. Code Ann. § 36-4-121(b)(1)(B)(iii).
[3] Id.
[4] Id.
[5] Cohen v. Cohen, 937 S.W. 2d 823, 827 (Tenn. 1996); Tenn. Code Ann. 36-4-121(b)(1)(B)(ii).
[6] Umstot v. Umstot, 968 S.W. 2d 819, 822 (Tenn. 1997); Cohen at 830.
[7] Tenn. Code Ann. § 36-4-121(b)(1)(B)(ii).
[8] Snodgrass v. Snodgrass, 295 S.W. 3d 240, 254-255 (Tenn. 2009).
[9] Tenn. Code Ann. § 36-4-121(b)(2)(C); Harrison v. Harrison, 912 S.W. 2d 124, 126-127 (Tenn. 1995).
[10] Tenn. Code Ann. § 36-4-121(b)(1)(B)(iii).


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