Retroactivity in Same-Sex Divorce: Unanswered Questions

By Dan Serra on July 11, 2016

When the Supreme Court ruled that same-sex marriages must be recognized in every state, another door opened for LGBT couples – the ability to legally divorce. But one thing not solved by Obergefell v. Hodges was how to treat assets that were held and transactions that occurred before the June 26, 2015, ruling. This presents a challenge for divorce professionals creating a financial settlement. In splitting up assets, what exactly can be included and when can they be included or excluded?

Hopefully in time the lawmakers will answer this question. Until then, same-sex divorce cases unable to make a determination could experience lengthy debate and litigation before a divorce is final.

Probate Court Judge Randy Rogers in Butler County, Delaware, summed it up well in an interview with the Delaware News-Journal: “The majority of the Supreme Court created a great deal of uncertainty with respect to property and property rights. It will take years, and the judges expect a lot of litigation relative to those things because what had been firmly established in terms of property rights had the rug pulled out from under it the way they made that decision, which is why I believe the dissents were so strong by Chief Justice Roberts and the others. It had a lot more to do than with marriage rights.”

CDFA professionals must monitor changes in their state’s legal rulings and procedures on how and whether retroactive assets and transactions will be considered. Some employers and states are already making their own decisions. For example, employer benefits are being extended retroactively to allow spousal rights for retirement and health benefits. Defined benefit plans are allowing participants to go back and access qualified joint and survivor annuity benefits, and defined contribution plans are accepting QDROs from divorced same-sex couples.

States including Colorado and Kansas have said a union begins once a couple begins cohabitation that passes as common-law marriage. This is likely to translate into assets and transactions at that time to be considered in divorce. However, other states including Louisiana and California say community property starts only at an official marriage, regardless of how long the couple lived together. Montana’s Teacher Retirement System updated its rules to state, “Unless further legal authority requires a different application, TRS will apply the holding in Obergefell prospectively only.” Therefore, it will only consider marriages beyond June 26, 2015. Will that be precedence for retroactivity in Montana?

The Internal Revenue Service clarified in Notice 2014-19 that, effective June 26, 2013, retirement plans must be administered in a manner that reflects the Windsor ruling, which established federal recognition. However, the agency does not require plans to retroactively recognize same-sex spouses prior to that date. Does that mean retirement plan assets before June 26, 2013, are not part of a divorce settlement even if the couple was legally married but lived in a non-recognition state? Additionally, the Social Security Administration is likely to retroactively pay benefits to same-sex spouses, but as of this writing has not released how that will be determined. Normally a federal agency’s decision holds higher precedence than an employer or state ruling when it comes to creating a universal standard.

This hodgepodge of when to consider marital assets and benefits as retroactive is keeping couples, attorneys, courts, and divorce analysts in a state of ambivalence.

In the end, since each state has its own divorce laws, it is likely each state will determine its own state divorce standards to offer guidelines for retroactivity. Perspectives considered could include how long the couple has been married, how much they have contributed to the marriage financially and non-financially, and how property has been separated or comingled. However, this could create its own quandary, as each spouse may not agree on dates and timelines of financial contributions. In addition, it creates a longer discussion in divorce negotiations, which for the couple can lead to a higher cost for divorce.

Another aspect of retroactivity in division of assets is valuation. Some states consider the value of educational degrees, professional licenses, businesses, etc. as marital property. If one spouse of a same-sex couple married in a recognition state but while living in a non-recognition state obtained a degree in 2011, and a divorce occurs in 2016, after Obergefell, can the value of that degree be considered retroactively in a divorce settlement?

For retirement plans, retroactive determination also throws a wrench in calculating the coverture fraction, a formula for determining the percentage an ex-spouse receives from a QDRO. This formula is based on the number of years married while on the job. How would this number be determined retroactively in a previously non-recognition state? Would a couple who married in Vermont in 2009 but living in Virginia be considered married for seven years or one year if divorcing in 2016, since Virginia did not recognize the marriage until after Obergefell in 2015?

This same ambiguity could creep up in negotiations over child and spousal support.

While it may be too late for those legally married before 2015 but not recognized, a solution to these discrepancies for new marriages could be the pre- or post-nuptial agreement. By writing in dates, financial and non-financial contributions and asset ownership, if divorce arises later the debate would be limited and the divorce quicker. Also creating less contention is retitling property as separate to avoid being considered marital, especially in a community property state. If this is done after marriage, such as with a post-nuptial agreement, gift tax would be avoided because of the tax exclusion of property transfers between spouses. Agreements are not just for the wealthy!

Divorce professionals have plenty of landmines to watch for surrounding retroactivity. It is the intent of this article to call attention to this potential roadblock in a same-sex divorce and maintain awareness. Obergefell paved the way for same-sex marital rights, but left a pothole in divorce proceedings.

  

Dan Serra is a CDFA and CFP in Bethesda, MD. As an Accredited Domestic Partnership Advisor (ADPA), he specializes in guiding LGBT families with their finances. He also is qualified as a financial mediator and neutral in the collaborative divorce process.