Court of Appeals Case Creates Pension Division Problem

By Attorney Gregg Herman
April 5, 2010

As a male, if I ever get divorced, I want Judge Kenneth Forbeck from Rock County assigned to my case.

As a family law attorney, if I have a case on appeal, I don’t want District IV of the Wisconsin Court of Appeals if there is a pension or tax issue involved.

For years, Wisconsin appellate courts have wrestled with the treatment of defined benefit plans as either income available for support, property to be divided or (shudders) both. Now a new case, Kelly v. Kelly, No 2009AP852 (Wis. Ct. App. March 11, 2010) (recommended for publication), creates substantial confusion.

Gary and Crystal had been married approximately 25 years and had three children. The trial court’s property division resulted in an unequal division in Gary’s favor for the peculiar reason that Gary was keeping the house – peculiar because the children were primarily residing with Crystal. The court awarded Gary his entire monthly pension payments out of which he was ordered to pay Crystal maintenance for three years (in a 25 year marriage!). With respect to child support, the circuit court deducted maintenance from Gary’s income before calculating child support.

Crystal, not surprisingly, appealed.

She contended that the court erroneously exercised its discretion in dividing the marital estate because it did not include Gary’s monthly pension payments as an asset to be divided subject to the rebuttable presumption of a 50/50 division.

The Court of Appeals agreed with Crystal that Steinke v. Steinke, 126 Wis. 2d 372 (1985), was controlling and requires that the pension be included in the property division.

The court also found that it was unreasonable to deviate from the 50/50 presumption of division of property in Gary’s favor simply because he wanted to keep the house, and held that the reversal of the property division order required reversal of the court’s maintenance and child support orders.

QDRO Ignored

The troubling issue in the case, however, relates to the appellate court’s language in reversing the trial court’s order regarding Gary’s monthly pension payments.

The appellate court held that pursuant to Steinke, the court must treat the pension as property and not as income as a source for maintenance, applying the presumption of equal division.

The appellate court also held Steinke controls, rather than a prior Court of Appeals case, Dutchin v. Dutchin, 273 Wis. 2d 495, which affirmed a trial court’s discretion in treating an in-pay status pension as income.

What does it mean to divide the payments applying the presumption of equal division? If the appellate court means that trial courts must divide the payments themselves equally, it raises a number of problems.

Since the payments are taxable, would the payments be divided on a gross or net basis? If gross, then they would have to be in the form of maintenance to be deductible to the employer and taxable to the payee. Since maintenance ends upon the payee’s remarriage, this would hardly be an equitable property division since the payor can remarry and still receive payments.

Moreover, if the payor dies, the payments stop, since the in-pay pension is a single life annuity. However, if the payee dies, the payor would retain 100% of the payments. Again, this is hardly an equitable property division.

While dividing the payments net-of-tax would resolve the remarriage inequity, the differential on death problem would remain.

In any event, the Court of Appeals took pains to hold that the payments are to be divided, presumably equally, totally ignoring – or ignorant – of the tax effect.

The frustrating part of the decision, of course, is that there is a simple solution: a Qualified Domestic Relations Order (QDRO). Amazingly, that acronym appears nowhere in the decision, even though many in-pay status pensions are eligible for a QDRO.

In its decision, the court says that “neither party asked the court to divide this asset based on the present value.”

This would be amazing, except that Crystal’s lawyer assured me that, of course, that is exactly what she requested. Why the trial court did not do so and why the appellate court did not know about this request are mysteries.

When a defined benefit plan is divided equally as property via a QDRO, the effect is not to divide the payments equally, as seemingly required by the court in Kelly. Rather, a QDRO dividing a defined benefit plan equally as property division would result in different payments to each party.

In implementing such a QDRO, the present value would be divided equally and then calculated into two separate single life annuities. Since women live longer than men, if the parties are the same age, the payment to the wife will be less than the payment to the husband. Of course, the actuarial tables may result in quite different payments, depending on the ages of the parties.

The only good news is that, other than government retirement plans (most of which are exempt from QDROs, anyway) defined benefit plans are quite rare these days. That is good news, because the only logical and equitable way for a trial court to implement the Kelly decision would be to ignore it.

This article originally appeared in Wisconsin Law Journal.

Attorney Gregg Herman is a founding partner of Loeb & Herman, LLC in Milwaukee, WI. He practices family law exclusively, and can be reached via e-mail or by calling (414) 272-5632.