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401(k) losses must be shared by divorcees

Fine

We fail to see how “fairness” would be served by shielding Susan from any post-divorce decline in plan value, while imposing the entire loss on Daniel.

Judge David G. Deininger
Wisconsin Court of Appeals

Where a marital settlement agreement unambiguously divides a 401(k) plan by percentage, the parties are proportionally subject to market gains and losses from the date of divorce until withdrawal from the plan, the Wisconsin Court of Appeals held on Sept. 26.

Bear Market

Daniel and Susan Taylor were divorced on Sept. 15, 2000. They entered into a marital settlement agreement on that date which was approved by the court and incorporated into the judgment of divorce.

Under the property division, Daniel’s 401(k) plan, consisting primarily of stocks, was divided between the parties as follows: Daniel received "[s]ixty-five percent (65%) … to be divided by Qualified Domestic Relations Order (QDRO)," and Susan received "[t]hirty five percent (35%)."

Six months after the date of the divorce, Susan’s counsel proposed a draft QDRO, providing in relevant part, "The Plan Administrator … is hereby directed to divide [Daniel’s] benefit … accrued as of September 15, 2000 (‘the valuation date’)."

The draft further provided, "There shall be no adjustment made to such transferred amount for changes in value of assets in [Daniel’s] account under the Plan occurring after the valuation date through the date [Susan’s] account … is actually established."

Daniel objected, noting that the stock market had declined since the date of divorce, causing his 401(k) plan to lose value.

Daniel contended that if Susan were to receive a "transferred amount" that did not reflect a proportionate share of the post-divorce losses, he would be penalized by "absorb[ing] the losses on both my portion of the 401(k) plan and Susan Taylor’s as well," and Susan would receive a much larger share of the assets than the ordered 35%.

Dane County Circuit Court Judge C. William Foust agreed with Daniel, concluding that "[b]y opting to take a percentage of the 401(k) Susan could enjoy the benefits of an increase in the value of the funds. At the same time, though, she had to assume the risk of a decrease in value."

Accordingly, Foust ordered that "Susan is entitled to 35% of the assets in Daniel’s 401(k) on Sept. 15, 2000, plus or minus any change in value attributable to those assets from that date until the creation" of the separate account for her share of the plan.

What the court held

Case: In re the marriage of: Taylor v. Taylor, No. 02-0118.

Issue: If a marital settlement agreement unambiguously divides a 401(k) plan by percentage, how is the asset to be divided when the plan loses value between the date of divorce and the date when the plan can actually be divided.

Holding: The assets are to be divided according to the percentages listed in the agreement; both parties bear proportionate risk of gain or loss during the interim.

Counsel: Gregg A. Auby, Sun Prairie; Michael D. Engleson, Sun Prairie, for appellant; Nancy Wettersten, Madison, for respondent.

Susan appealed, but the court of appeals affirmed in a decision by Judge David G. Deininger.

Unambiguous Agreement

The court found the marital property agreement unambiguously divided the plan by percentage, not by dollar amount, stating,

"The only reasonable interpretation of these provisions is that they grant Daniel a 65% share and Susan a 35% share of the 401(k) plan as of the date of the agreement and divorce."

Schinner v. Schinner

The court then considered application of the case of Schinner v. Schinner, 143 Wis. 2d 81, 420 N.W.2d 381 (Ct.App.1988), in which the court held, "generally the assets of a marriage are to be valued and divided as of the date of the divorce. … Special circumstances can warrant deviation from this rule."

In Schinner, the wife was awarded a fixed dollar amount from a pension fund, and the court affirmed awarding all post-valuation-date earnings of the fund to the husband.

In the case at bar, the court found nothing conflicting with Schinner, however, and concluded the plan was, "divided as of the date of the divorce," although by percentage.

Quoting the trial court, the court concluded, "Had Susan wanted to lock in a certain dollar figure, the parties could have agreed to that in their Marital Settlement Agreement. … Daniel’s 401(k) was invested in a number of different funds. It is the nature of such investments that their value fluctuates. By opting to take a percentage of the 401(k), Susan could enjoy the benefits of an increase in the value of the funds. At the same time, though, she had to assume the risk of decrease in value."

Adding to the trial court’s conclusion, the court wrote, "although time may have proven Susan’s acceptance of a percentage share of Daniel’s 401(k) plan as an unfortunate choice, neither we nor the trial court are in a position to rewrite the agreement or the divorce judgment incorporating it in order to eliminate Susan’s loss. Quite simply, in agreeing to accept a percentage share of a variable asset, Susan agreed to assume a proportionate share of any subsequent gains or losses until such time as she liquidates the asset."

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Case Analysis

Finally, the court rejected Susan’s argument that sharing the losses was contrary to fairness, policy, and judicial efficiency.

Noting that, in dollar terms, Daniel actually lost more than Susan, the court said, "We fail to see how ‘fairness’ would be served by shielding Susan from any post-divorce decline in plan value, while imposing the entire loss on Daniel."

The court added that many types of assets may fluctuate in value, and that judicial efficiency would not be served by permitting parties who suffer loss from such fluctuation to seek judicial reallocation of the loss. The court warned, "If a party desires the comfort and security of a fixed dollar sum from a divorce property division, that is what he or she should bargain for – or ask the court to order, as did the wife in Schinner."

Click here for Case Analysis.

David Ziemer can be reached by email.

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