THE TREATMENT OF MILITARY PENSIONS IN NEW JERSEY: THE APPELLATE DIVISION SPEAKS, IS THE COVERTURE FRACTION STILL VIABLE?

This blog post is written with input from Eliana T. Baer, who, along with Robert A. Epstein, was instrumental to the outcome of the below case. I thank them both for their extensive time and efforts, without which this result would not have been possible. An important reported decision was decided by the Appellate Division concerning the distribution of post marital contribution of pensions and retirement plans. A copy of the case can be found here. While the case itself concerned a former service member's military retirement pay, the matter has wide implications for all retirement plans which are not distributed at the time of divorce. This was a case which I had alluded to in a previous blog which can be found here, and in which we represented Thomas Barr, who had earned credits toward a military retirement during his marriage. In the case of Barr v. Barr, the parties were divorced after the husband, Thomas, had served eleven years of active duty in the Air Force. Thomas was not represented by counsel at the time of the divorce and his wife's attorney prepared a property settlement agreement which provided that "The Wife will receive 50% of Husband's pension benefits attributable to his 11 years in the military service only. Such benefits are to be distributed when Husband commences receiving same." After the parties divorce, Thomas went on to enroll in the reserves and during that time, accumulated enough time to entitle him to military retirement pay. When Thomas began receiving his retired pay, he calculated what he believed he owed his former wife, Judith, and made a deduction for taxes that he had to pay. This went on for a period of time, and the parties had a disagreement and Thomas ceased paying. When Judith made an application for enforcement, Thomas realized that the amount that he had been paying was what he believed to be the incorrect amount, and in his response to her motion, asked that the amount be adjusted. Specifically, he argued, in part, that because the formula used to calculate retired pay benefits considers a military member's rank pay at retirement as well years of service, it was possible to calculate the amount that was attributable to his rank at the time of the parties' divorce, which would give meaning to the agreement of the parties that Judith would only be entitled to the portion attributable to his active duty. A service member receives points for each day of military service: one point for each day of active military service and two points for each day of reservist duty. Additional points accrue based on the completion of certain training, drills and funeral honors duty. The actual member's benefit is the product of the base pay for the rank achieved at retirement and two-and one-half percent of the points representing the years of service credited. Generally, cases teach us that when using the deferred-distribution method, the calculation of a non-employee's interest earned during the marriage employs a "coverture fraction." The coverture fraction represents the number of years during coverture that the employee spouse was a member of the pension plan, divided by the total number of years that the employee spouse was a member of that pension plan. The amount paid to the non-employee spouse is the designated percentage awarded ( most usually 50%) of the coverture fraction times the total retirement benefit. This result is supposed to limit a non-employee spouse's share by the term of the marriage even though the benefit is received upon the employee-spouse's date of retirement. The Courts have noted that even though applying the fraction to the value of the pension at the time of retirement includes, to some degree, post-divorce work efforts, the use of the coverture fraction represents a fair division of the future benefits between the former spouses. This is because the longer the employee spouse works, the larger the denominator [of the coverture fraction], thus reducing the nonemployee spouse's percentage share and assuring the employee spouse the benefits of his or her post-divorce labors. Essentially, the courts believe that increases in pay after divorce are achievable, in part, as a result of the efforts expended during the marriage. This is known as the "marital foundation." In the Barr case, the trial court found that the coverture fraction (modified to utilize the military point system) was appropriate and Mr. Barr was not entitled to parse out the rank he achieved after divorce. He found the agreement of the parties to be unambiguous. Moreover, the trial court found that the conduct of Mr. Barr in providing the larger amount to his ex-wife to be indicative of the parties' intent. The Appellate Division reversed, concluding that first, the agreement of the parties was ambiguous, and The word "only" limiting Judith's interest "attributable to Thomas' 11 years in the military service" — reasonably could mean only that portion of the asset defined by the time of the marriage, eleven years, or only that interest representing defendant's active duty service, also eleven years. Far more importantly, the court found that there are some extraordinary post-judgment pension increases that may be proven to be attributable to post-dissolution efforts of the employee spouse, and not dependent on the prior joint efforts of the parties during the marriage. In such a case, these sums must be excluded from equitable distribution and the application of the coverture fraction may be insufficient to accomplish this purpose. . Notably, in this statement of first impression, the Appellate Division went on to say that We agree with the [husband's] statement that the active duty and reservist components of his earnings are discernable, as one can not only calculate the points earned through the two distinct periods of military service, but also obtain the demarcated salary for each rank held. The Court concluded that in that regard, a plenary hearing was necessary to determine "whether the sums are separate assets generated during the post-judgment pre-retirement efforts of the [husband] and excludable from equitable sharing." For cases in the future, the post divorce efforts of a spouse can be given the attention that many lawyers feel they deserve. To often, lawyers simply state that the coverture fraction will be used, without giving appropriate consideration of what may likely occur post divorce. In preparing settlement agreements, attorneys are advised to pay close attention to these issues. For cases in which a divorce has already occurred, we can expect to see some post judgment litigation in which the post divorce effort of a working spouse will be quantified.

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