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Thursday, September 27, 2012

Time Rule Formula Best for Defined Benefit Plans

In Re Parenting of C.W. and S.W. 2012 MT 212

Pension plans may be valued one of two ways: 
  1) The present value method, or
  2) The time rule method. 
In dealing with a 401k, 403b or IRA or other "defined contribution" account, the trial court can simply allocate to each party a portion of the balance of the account as of the date of trial. The present value of the account can be obtained by simply looking at the account statement.

In dealing with many government pensions, union pensions, and other "defined benefit" plans, it can be difficult to determine the present value of the account unless the participant in the account is retired. There is no account per se in the name of the participant. The benefits are determined according to a formula typically using the years of service, average final compensation, age of the participant and so forth -- which may be a calculation to be made many years into the future. For an employee who is not yet retired, any valuation expert must make a number of assumptions about what the future holds to mathematically determine the present value of the plan.

In this case, Corey Wheeldon, the husband, was a Sheriff's Deputy. He was a participant in a defined benefit plan through the Sheriff's Department. His contributions to the account were vested, but the Sheriff's Department contributions were not vested. Here's the relevant quotation that you may insert in your next brief on this issue:

"The District Court found that part of Corey’s non-vested retirement account through the Sheriff’s Department is marital property. What benefits will come from that pension will be determined by a number of factors that cannot be known. If Corey quits the Sheriff’s Department before he becomes vested, then he will only be entitled to the amount that he personally contributed to the account. If he quits after he is vested but before he is qualified for retirement, then he will be entitled to his contributions and the employer contributions. If he stays with the Sheriff’s Department long enough to retire, then he will receive a monthly benefit payment for the rest of his life. The amount of that monthly benefit would be determined by his length of service, highest average salary for thirty-six consecutive months, and age when he retires. Sections 19-7-101 et seq., MCA. Using the present value method to value Corey’s retirement account would require that assumptions be made about all of these factors. Any assumption that does not prove true may considerably undervalue or overvalue the account. Thus, using the present value method would be pure conjecture and produce uncertain results, at best."  In Re Parenting of C.W. and S.W. 2012 MT 212, Paragraph 22 (emphasis supplied).

This approach is similar to the Supreme Court's approach to putting a value on the inevitable tax liability arising from distributions from a retirement account. The further into the future the taxable event will occur, the more uncertain the valuation of the liability will be, simply because the assumptions a tax expert must make to calculate the liability are conjectural:

"¶ 19 To apply a deduction of a “reasonable” tax rate to retirement accounts that may be liquidated at some time in the future frustrates the goal of achieving a fair and equitable disposition of the marital estate. We conclude that it is unreasonable to consider tax consequences in light of numerous unknown factors such as the value of the account at the time it is eventually liquidated; the tax laws in effect at the time it is eventually liquidated; and when the account will eventually be sold. Otherwise, such valuations are merely conjectural. Therefore, we conclude that the District Court abused its discretion when it deducted twenty-two percent from the value of the seven Smith Barney Accounts." In re Marriage of Haberkern, 2004 MT 29, 319 Mont. 393, 399, 85 P.3d 743, 747 (emphasis supplied).


"¶ 47 A district court must consider the tax implications of its decree if such consequences are concrete and immediate. Haberkern, ¶ 17. The adverse tax consequences to Julie of the ordered distribution of retirement assets are concrete and seem to be immediate. Yet, the findings of fact and conclusions of law entered by the District Court give no indication whether the court considered the tax consequences of this distribution. We remand to the District Court for further consideration of the tax implications, and the manner and timing of the distribution of the retirement account portion of the marital estate." In re Marriage of Thorner, 2008 MT 270, 345 Mont. 194, 207, 190 P.3d 1063, 1071 (emphasis supplied).