Whenever we first meet with a potential new client that is facing imminent divorce, they often ask about division of property. Many people facing an Oklahoma divorce think of marital assets and ask “Does my spouse get half of everything?” This is an unfortunately common misconception about Oklahoma divorce law and division of property.
The division of property in Oklahoma is far more complicated that each party taking half of the belongs or assets in the divorce. An experienced family law attorney can help explain these issues to you and best practices from years of experience representing clients and seeking to protect their assets; however, this article is intended as a primer on the issues surrounding division of property in divorce in Oklahoma. First, the general laws that govern Oklahoma divorce and division of property in an Oklahoma divorce.
Overview: Oklahoma Divorce Property Laws
Oklahoma is an Equitable Distribution state, meaning marital property must be divided equitably, which does not mean equally. In order to understand what property must be divided, we must first study the types of property under Oklahoma divorce law. There are two general types of property in an Oklahoma divorce: Marital Property, which is divisible and Separate Property, which is not divisible in the divorce and belongs to one party.
Separate Property: property must fall within a specific category in order to qualify as separate property, thereby not affording your spouse a marital interest in the property, i.e. marital property is the presumed status of property. In order to qualify as separate property, one of the following criteria must exist:
- Property owned by the spouse prior to marriage;
- Gifts to one spouse, not both spouses;
- Legal settlements obtained on behalf of only one spouse; and
- Inheritance granted to only one spouse.
Marital Property: property that is not protected by meeting one of the separate property criteria above is marital property and both spouses are entitled to a marital share. Any asset, real property, or other type of property obtained during marriage is community property and subject to division in a divorce. This Oklahoma division of property theory trumps title or who “owns” the property according to anyone.
Marital property may include cars, houses, bank accounts, retirement accounts, 401K, IRAs, and many other forms of assets, property and accounts.
Oklahoma Equitable Distribution
Oklahoma is in the large majority of states that are characterized as an Equitable Distribution state. As stated above, marital property alone must be divided in a divorce. Marital property must be divided “equitably” during or at the conclusion of a divorce in Oklahoma. Marital property can be divided by a settlement agreement, at mediation, or at trial by the court. When the court determines division of property in divorce the division is typically not equal, rather it is equitable.
There are multiple factors that go into an equitable distribution analysis. In an Oklahoma divorce decided by the parties, equitable is whatever the parties say it is equitable. Only in cases, in which the parties cannot decide on a fair distribution of marital or separate property, will the Court determine division of property.
In litigated property division during an Oklahoma divorce, the Court will determine whether or not specific items of property are marital property or separate property, the value of marital assets, the parties’ contributions to the assets in the marriage, sacrifices made during the marriage by one party to support the other party in their professional or other endeavors, involvement in raising the children, if any, marital efforts that contributed to the increase in value of an otherwise item of separate property, and other variables to either point towards marital efforts increasing the value of an asset or not playing a role in the value of the asset.
Courts will determine a monetary value for every marital asset, going back to the date of separation or when the Petitioner filed the petition for divorce and distribute all assets deemed marital assets based on the established value. In the instance where a spouse has established a business that is profitable, that spouse may keep the business, which would be offset by the other spouse being granted other property to offset the value of the business determined by the court.
Process for Division of Financial Marital Property
Separating houses, vehicles, and material objects can be simply, if the parties are able to agree on what is most important to each; however, financial assets are usually more complicated to divide. Extended assets, such as investment portfolios, retirement accounts, 401k, IRAs, and other investment accounts are more complicated to define value for purposes of equitable division of these assets. Assets which are not yet realized, such as an IRA or retirement accounts that have not matured, creates substantial complications for determining value. The remainder of this article will explain the process for division of financial marital property and important issues to keep in mind.
Division of Retirement
It is crucial to your financial well-being when faced with divorce to protect your interests in the retirement accounts at issue. Retirement accounts are often the most valuable asset in a divorce, especially, if a party has saved money and added to retirement on a regular basis. In many instances the value of one party’s retirement account is worth much more than the principal in the marital home. Therefore, it is important to remember this asset and take proper steps to protect it during the property division aspect of your divorce.
Many of our family law clients ask how to protect large financial assets that are currently inaccessible without large tax penalties for early withdrawal. Yes, those are legitimate concerns in division of financial assets in divorce. Withdrawing or dividing financial accounts prior to maturation can cost you substantial tax penalties, including capital gains tax, fines, and other negative tax implications.
We do everything in our power to protect our client’s retirement accounts in the divorce process. However, in some instances retirement accounts must be divided; when that outcome is unavoidable, our Fierce Advocates use Qualified Domestic Relations Orders to protect your interest when retirement accounts must be divided in divorce.
What is a QDRO?
A Qualified Domestic Relations Order (“QDRO”), pronounced “Quad Row”, is a very valuable legal tool to protect your retirement interests beyond divorce without the tax and other negative implications of withdrawing funds from a retirement account. The QDRO only exists to protect your interested in retirement through divorce.
Investors, retirement account managers, and other institutions use QDROs to arrange for future distribution of your retirement account. QDROs allow for division of an existing retirement account by transfer into a separate account without the negative tax implications. Additionally, a QDRO can mandate an employer deposit a specific portion of a retirement benefit to a defined account.
A draw back to QDROs is that they only work for IRS tax-qualified plans that are covered by the Employee Retirement Income Security Act. QDROs cannot divide military retirement benefits, government pension plans, IRAs, or SEP accounts. These assets can be protected from negative tax implications by other means; however, a QDRO will not suffice.
Qualified Domestic Relations Order (QDRO) and the IRS
The IRS considers a Qualified Domestic Relations Order (QDRO) to be a judgement, decree or order concerning a retirement plan. Additionally, the IRS requires reporting the benefits received from any QDRO to the IRS as if you are a plan participant as well as receiving a proportionate share of the financial benefit of the account. You are allowed without penalty by the IRS to roll any payment from a QDRO plan into another retirement account, i.e. an individual retirement account or IRA.
Use of a Qualified Domestic Relations Order (“QDRO”) allows you to receive benefits of a retirement plan that you are legally entitled to receive. Simply having a divorce decree that states you are entitled to a portion of a retirement account is insufficient to provide you the funds from a retirement account. You need a QDRO to transfer all or a portion of the benefits from a retirement plan to anyone other than the plan participant. However, QDRO cannot distribute a portion of every retirement account. QDRO is only applicable to qualified retirement plans, covered by the Employee Retirement income Security Act (“ERISA”).
The types of qualified retirement plans under ERISA are defined contribution plans and defined benefit plans. You cannot divide a military retirement, government pension, or an IRA by use of a QDRO. These assets are governed by different laws and regulations. For instance, you do not need a QDRO to divide an IRA or SEP account.
Types of Retirement Accounts to Consider in Divorce
Retirement Accounts come in many forms and different rules apply to the division or early collection of each type of retirement benefit. When facing divorce and division of retirement benefits, it is important to understand the laws and regulations governing the retirement benefits you are entitled to in your divorce.
The majority of retirement benefit accounts fall into one of the following categories:
- Pensions
- Deferred Compensation Accounts
- 401(k) Account
- Individual Retirement Accounts (“IRA”);
- Simplified Employee Pension (“SEP”) Plan; and
- Military Retirement and Government Retirement Accounts
This is not an exhaustive list; however, a large majority of retirement accounts fall under one of these large categories.
Defined Contribution Plan
The most popular or most common defined contribution plan is the 401(k). These plans are rather simple to value as they have a current cash value or balance at any given time. The Court or parties can divide a 401(k) or other defined contribution plan by multiple methods. Many people facing division of retirement in divorce elect to roll defined contribution plan benefits into another retirement account to avoid the tax consequences of early withdrawal. However, you are not required to do so and may withdraw immediately, if you choose.
Most retirement plans are subject to a 10% tax penalty or more for early withdrawal, i.e. prior to the age of 59.5. The benefit of using a QDRO is this tax penalty is usually avoidable as the QDRO is exempt from this penalty. However, any funds you withdraw or receive from the 401(k) are subject to income taxes.
Defined Benefit Plans
Pension plans are the most common type of defined benefit plan. These plans are more difficult to determine current value than defined contribution plans, i.e. 401(k). The reason defined benefit plans are more difficult to determine current value for is the fact the plans guarantee a specific amount of money per month at retirement. Additionally, any growth in value of a defined benefit plan or pension before or after a divorce is not marital property, i.e. not subject to division. Therefore, if you were only married for a portion of the time your pension was growing in value, it is very difficult to determine your spouse’s share of the benefit.
Fortunately, defined benefit plans can be divided by a QDRO, just like a defined contribution plan. Typically, the method of division of a defined benefit plan takes one of the following three forms:
- Cash out: the former spouse receives a lump sum as settlement for the present value of the defined benefit plan;
- Deferred Division: present value is not determined for the defined benefit plan and each spouse receives a defined share or percentage of the plan’s benefits when the plan is paid; or
- Reservation of Jurisdiction: the Court retains jurisdiction or authority to divide the benefits at some later date.
Additionally, it is important to work with the pension plan administrator for each account to establish survivor benefits. You can preserve your rights to your entire pension plan, if your ex-spouse pre-deceases your retirement.
Individual Retirement Account (“IRA”)
The IRA account is rather simple to divide in a divorce. The portion of the account that each spouse will receive is typically rolled into another retirement account without suffering transfer penalties or tax consequences. However, if you or your spouse elect to spend your share of the proceeds of the IRA, that party will be subjected to a tax penalty of 10% and potentially other account penalties for premature withdrawal of the funds.
You can speak to your IRA account coordinator or IRA custodian regarding the specific information or documentation he or she needs to execute a division of the IRA; however, in most cases a divorce decree, which lays out the division of the account is sufficient for the account custodian to divide the account.
Do I Need an Oklahoma Divorce Attorney Experienced in Division of Assets?
Yes, if you are facing divorce in Oklahoma and have retirement accounts, pension plans, 401(k), IRA, military retirement or government retirement accounts at issue, it is very important the divorce attorney you hire is versed in division of retirement in divorce. Your Fierce Advocates at Cannon & Associates have years of experience working with clients and division of retirement. We look forward to using our experience to answer your questions and assist you in your Oklahoma divorce.
Cannon & Associates: Oklahoma Divorce Attorneys
Founder John Cannon has been recognized as a Super Lawyer and our entire team of Fierce Advocates is dedicated to protecting your interests and your retirement. Contact Cannon & Associates to protect your rights and fight for your interested in your retirement assets. Complete the CONTACT FORM ON THIS PAGE NOW or CALL at 405-657-2323 for a free confidential case evaluation.