Divorce is a complicated process, emotionally, legally, and financially. Even when amicable, a dissolution of marriage demands a sophisticated separation of assets and requires an understanding of the short-term and long-term impacts. Splitting assets in an Arizona divorce means more than determining how to divide equity in a house. In addition to your liquid assets or real estate interests, you’ll also need to negotiate the division of your retirement benefits during a divorce.
Community Property in Arizona
Arizona is a community property state, meaning most assets owned at the time of the divorce will be divided equally among the two parties seeking dissolution of their marriage. Pursuant to ARS § 25-211, property acquired during the marriage will be considered community property, subject to a 50/50 split. Notably, assets acquired through gift or inheritance may be excepted from this rule in some circumstances.
Classifying retirement accounts for division during a divorce presents an interesting issue. At first glance, it might appear that retirement accounts fall outside the scope of Arizona community property laws. After all, if you get divorced before you start drawing on retirement, you’re seemingly receiving the benefit after your marriage has ended. While there is some logic to that rationale, the Arizona Supreme Court has generally classified retirement benefits as community property.
Classifying Retirement Benefits During Divorce
With its 1977 Van Loan v. Van Loan decision, the Arizona Supreme Court concluded that the issue of classifying retirement accounts as community or separate property boiled down to determining if the property was an expectancy interest or a property interest. The difference between these two types of interests is rooted in the beneficiary’s contractual right to receive the interest. For example, an inheritance would be considered an expectancy interest because the beneficiary may expect it, but they have no contractual right to it.
In Van Loan, the Arizona Supreme Court ultimately held that a retirement plan is a property interest and is therefore subject to community property laws that require an equal split during a divorce.
There is some limitation to a divorcing spouse’s claim to the other’s pension, however, and the distribution is limited to the amount of pension earned during the marriage. Retirement benefits accrued or vested outside of the marriage are likely safe from the community property laws, but to calculate how much of your retirement will be impacted by your divorce, you need to value the benefits properly.
Determining the Value of Your Retirement Benefits During Divorce
Subsequent to its Van Loan decision, the court tackled the issue of valuing Arizona retirement plans in a divorce. In its 1981 Johnson v. Johnson decision, the Arizona Supreme Court provided two methods for valuing a retirement plan for purposes of divorce in Arizona:
- You can divide the retirement account.
- You can keep the retirement benefit by offsetting the interest with an award of other community property.
While there are two primary methods of splitting your community property retirement accounts, there are numerous considerations in valuing the accounts. Ultimately, Arizona law seeks to distribute assets equally, and in doing so, the court will consider debt obligations, reductions in taxes, and other implications of dividing the assets.
In some cases, it makes sense to split the retirement account as equitably as possible. This can be accomplished by creating a separate retirement account to roll your former spouse’s interest into. On the other hand, offsetting the retirement interest may be a better option if your retirement plan hasn’t yet vested.
Defined Contribution Retirement Plans vs. Defined Benefit Retirement Plans
Understanding your retirement plan will inform the best valuation method of benefit division during your divorce. Some plans offer an accurate reflection of your account value, while other plans are contingent upon rights that won’t vest for years to come.
Defined contribution retirement plans are those you steadily contribute to throughout your working life. These plans are generally more easily valued because the account balances reflect what each account is worth in real-time. Defined contribution retirement plans commonly include:
- Roth IRA
- 401(k)
- 403(b)
- Employee stock ownership
- Profit-sharing
In contrast, a defined benefit retirement plan is an employer-funded retirement option, like a pension, that provides a specific benefit payout once the employee achieves a set number of years with the employer.
You may also need to consider whether your retirement plan is attached to military service. Generally, military retirement plans are subject to community property laws, but there can be exceptions for Combat-Related Special Compensation.
It’s important to understand the difference between these retirement plans if you’re going through a divorce to best strategize and negotiate their division.
Protecting Retirement Accounts from Divorce in Arizona
Losing significant retirement savings in a divorce is frustrating but not uncommon due to Arizona’s community property laws. Prenuptial or postnuptial agreements can be an excellent way to iron out the division of your assets before any issue that might lead to divorce. With a pre or postnuptial agreement, you and your partner can decide to exclude retirement assets from your community property before trouble arises. While these marital agreements have been historically taboo, they should be viewed as beneficial to both parties.
If you’re already to the point of dissolution, then your next best step in ensuring you aren’t taken advantage of is to make sure you have a concrete understanding of your retirement plan rules. Knowing how and when your retirement plans pay out to you or your former spouse will help you make the most informed decisions in splitting the assets.
Hiring an Experienced Arizona Divorce Attorney
The divorce process is messy, even in the best circumstances. Going through a divorce without an experienced attorney can have negative consequences that last the rest of your life, especially where retirement plans are concerned. If you’re going through a divorce, contact us today. Our experienced team of dedicated Arizona divorce attorneys will guide you through this difficult time.
Amy Dohrendorf is a partner with Stewart Law Group, an Arizona law firm with offices in Chandler, Phoenix, Scottsdale and Peoria. Stewart Law Group has helped many clients navigate the legal complexities of divorce, child custody, spousal support, property division, parental visitation, and child relocation disputes.
