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In Memory of 09-11-01
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THE BROWN FORMULA:
The Brown case,
In re the Marriage of Brown, 15 C3d838, 842, 845, 126 CR 633,
634-635, 637, basically deals with the division of marital property. When
attorneys refer to a so-called "Brown Order" they are
usually referring to keeping jurisdiction over the issue of dividing retirement
benefits to some later point in time. Although the case can be applied to almost
any kind of marital property.
For the purposes
of our discussion, I am going to concentrate in the application of the Brown
Formula to pension and employee deferred compensation. You should be aware
that pension, retirement or similar forms of deferred employee compensation are
a form of employee compensation and thus "earnings." These
earnings are characterized according to the employees marital status when the
services were rendered and not when the benefits vest or are actually received.
For that reason they are a community asset subject to division by the court. The
best way to look at this is by looking at when the employment services were
rendered and not when the benefit will actually be received.
Everyone should be
advised that "ANY" deferred compensation which represent
services rendered during the marriage are community property. It is not limited
only to retirement or pensions. I have seen cases where high earner parties
asked their company to let them work and defer the compensation until some later
point after they are divorced. If you do that, you should be aware that you and
the company you work for are conspiring to defraud your ex-spouse. If this is
discovered, you and your employer can be subjected to severe civil penalties and
even criminal sanctions in appropriate cases. For those of you who are employers
and want to help your employee, this is not the way to do it.
In these types of
cases one or both of the parties are working and acquiring deferred compensation
in the form of pensions, retirement accounts, 401K, SEP, and similar retirement
accounts. In most cases the community property portion of the retirement benefit
will only be a portion of the total retirement benefit. There are several dates
that must first be ascertained before making the calculation. The dates are as
follows:
You first look to the date you became married as
it relates to the date you commenced working and acquiring the deferred
compensation. For example if you commenced working on January 1, 1970 and
married on January 1, 1980, any compensation between those dates is separate
property. Deferred compensation after January 1, 1980 is a community asset. The
next date that you look for is the date of separation. If we use January 1, 2000
as our date of separation and the date of the judgment January 2003, we are able
to arrive at the percentage of the total amount of time that is attributable to
the community. The total amount of time that the employee worked to the date of
separation is 30 years. The portion of that time of service that is community is
20 years. The ration is 20/30 of the total amount. Then that amount is divided
in two for purposes of division of the community asset.
The employee ends
up with 100% of the first ten years of benefit, plus one half of the balance up
to the date of separation. In addition, the employee gets 100% of the benefits
earned post-separation. Once you have that ratio the court makes a finding of
that ratio and the determined amount becomes a fixed amount. So when the
employee reaches retirement age, the employer will divide the accrued benefits
by using the aforementioned ratio. In order to be fair any accrued interest from
the date of separation through the date of retirement is awarded in the same
ratio between the parties.
Until the parties
actually retire, the court retains jurisdiction to supervise the ascertainment
of the ratios of separate to community, and resolve any dispute regarding the
division of this asset.
When the parties
decide to divorce, the court obtains broad discretion in the actual division of
the community property interests in a pension plan. The court is
authorized great discretion in deciding how to divide the asset, they
usually will do this in one of two authorized ways.
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Asset distribution and cash-out division: The
Court determines the current value of the community interest and awards it to
one spouse, and awarding offsetting other community property or cash to the
other spouse. Obviously this will only work in a divorce where you have
considerable assets.
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In kind division: In the alternative, the court
may divide the community interest in kind between the spouses, reserving
jurisdiction to supervise future payments to each spouse.
Be advised that
the courts do not favor one method over the other. As long as the end
result is an equal division of the asset between the parties, the law
doesn't provide a preference of one method over the other. That being said you
still need to keep the following thoughts in mind, when faced with this
situation.
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In Kind division eliminates complexity in
determining values: With due deference to the realities of
economic circumstances considerations, it usually makes sense to utilize the in
kind division option. This is particularly true where the pension is not vested.
This method allows you to dispense with problems of complex and expensive
determinations of present value. Given that a QDRO may cost upwards of
$2,500.00 just to prepare the orders, the clients save quite a bit of money with
this method. It also shares the risk of failure to vest equally between
the parties.
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Cash out method avoids enforcement problems: Especially
with short term marriages, this method eliminates the necessity of the court
retaining jurisdiction for years and years.
Obviously if you
are considering dividing your retirement funds, you most likely will need the
services of a competent attorney to assist you in choosing a method that is
right for you. Many attorneys are reluctant to draft QDRO'S and can refer you to
someone who will do that for you. However, the costs will be significant. This
is why the Brown Order is favored amongst many clients and practitioners.
Just remember, spend some time and money and know your rights and your options
before you sign on the dotted line.
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