There are three methods of dividing defined pension plans during a divorce.
1. Present value (cash-out) method. The non-employee spouse receives a lump-sum settlement from the pension or receives a like-for-like marital asset of equal value.
2. Deferred division (future share method). No present value is determined. Instead, each spouse gets a share of the benefits if and when they’re distributed.
3. Reserved jurisdiction. The court retains the authority to distribute the pension plan at a later date.
Why use the present-value method?
Many couples prefer using option #1. That’s because the present-value method allows couples to do a like-for-like exchange and entirely cash out from the other party’s assets. These methods mean that separating couples would then be free and clear to live life on their own terms.
On the other hand, using Deferred Division or Reserved Jurisdiction can mean uncertainty for both parties. The employed spouse still owes the non-employed spouse money in the future, while the non-employed spouse is obligated to whenever the working spouse decides to retire and start taking benefits.
How to get started?
Couples must first correctly value all assets to perform a like-for-like exchange. If one party has a defined benefit plan, that involves calculating the value of the future benefits.
Because these benefits can be worth hundreds of thousands of dollars, it’s crucial to get the valuations right.