Change to Classification of Retirement Accounts during Divorce in Tennessee

Portions of pensions and retirement accounts and their appreciation may now remain separate property during a divorce

During any divorce in Tennessee, many issues must be resolved before the divorce can be finalized. There are questions of child and spousal support and the important issue of child custody. In addition, there is the question of dividing the assets of the couple for the property division portion of the divorce.

Tennessee uses a "fair and equitable" standard to divide these assets and debts. The overall complexity of the property division is related to the complexity of the couple's assets. It is also important to remember that equitable does not mean equal. The court has the discretion to determine what is equitable.

Separate or marital?

One important element of determining an equitable division of assets is identifying assets as marital or separate. The difference is that marital property is subject to division by the court during a divorce, while separate property is not.

Traditionally, items like an inheritance or gifts have been considered separate property, while income earned during the marriage is typically viewed as marital property.

However, a recent law enacted by the Tennessee legislature has changed a court's discretion when it comes to dividing pension and retirement assets. Pensions and retirement accounts that accrued prior to the marriage are not to be treated as marital property.

According to the amended statute, separate property will now include "The account balance, accrued benefit, or other value of vested and unvested pension benefits, vested and unvested stock option rights, retirement, and other fringe benefits accrued as a result of employment prior to the marriage, together with the appreciation of the value."

Portions of pensions and 401ks will remain separate property

This statutory amendment for pensions and investment accounts, like 401ks, also means that any appreciation attributable to the pre-marriage portion of the account during the marriage remains separate property.

This is an alteration from the state of the law prior to this amendment, as a Tennessee Supreme Court decision had found that that appreciation during the marriage became marital property during a divorce. Other requirements now include segregating the appreciation of these accounts so that should the party withdraw a portion to fund a marital asset such as the purchase of the family home, the court must trace the withdrawn funds to the marital portion of the account.

Commingling and transmutation

In some cases, separate property could become marital property by "commingling and transmutation." This could occur if assets from an inheritance were used to fund yearly family vacations during the marriage. The new law expressly prohibits a court from applying this doctrine commingling or transmutation to the appreciation of pension accounts.

This new law will increase the complexity of the accounting during any property division that includes separate pensions and retirement accounts. If both parties have a pension and a 401k that was funded prior to their marriage, the court will have to track the contributions before and after the marriage and separate the appreciation for each account into separate and marital segments.

The law requires that the court use "any reasonable method of accounting to attribute postmarital appreciation," which makes it likely that during a contentious divorce, the definition of "reasonable" could become heavily litigated.

Given the potential complexity of these calculations, if you have pensions and retirement accounts that could be characterized as separate property under the new law, you should speak with an attorney at The Law Office of Robert M. Asbury for assistance with properly dividing these assets.