Appreciation of Premarital Retirement Accounts Separate Property Again Thanks to Tennessee Divorce Law Change
New Tennessee divorce law changes retirement and fringe benefit division. The appreciation of pre-marital retirement assets are separate property again for divorces filed after July 1, 2015. IRA and 401(k) balances at date of marriage and appreciation of those amounts to be separate property in divorce law again after change by Supreme Court of Tennessee.
New TN Divorce Law: Appreciation of Separate Property Retirement Assets Stays Separate Property
New Tennessee divorce legislation means substantial change in how certain retirement assets and fringe benefits are divided in divorce. State of Tennessee Public Chapter No. 202 addresses the division in divorce of premarital employment fringe benefits, vested or unvested. This singular piece of legislation has a big impact on Tennessee divorce law.
The new law amends T.C.A. § 36-4-121(b)(1)(B) and essentially overturns the Supreme Court of Tennessee’s opinion in Snodgrass v. Snodgrass, 295 S.W.3d 240 (Tenn. 2009), regarding the premarital portion of a 401(k) plan in Tennessee property division. (In Snodgrass, the Supreme Court held that the increased value of the spouses’ respective retirement accounts, which accrued during the marriage, were marital property even though both of the spouse’s accounts were funded, at least in part, before they married.) Public Chapter No. 202 represents a significant change in how the accrued value of pensions, retirement plans, and fringe benefits from employment are categorized for purposes of property division in divorce.
Because marital property is divided in Tennessee divorce, the first question to be answered is “What is marital property?” Under the new law, separate property includes any “account balance, accrued benefit, or other value of vested and unvested pension benefits, … stock options rights, retirement, and other fringe benefits” that accrued before the marriage as separate property along with any “appreciation of value” on that benefit. There is one exception, though. If each spouse substantially contributed to the retirement or fringe benefit’s preservation and appreciation during the marriage, then the appreciation value is a marital asset subject to division in divorce. The pendulum swings from separate property to marital property.
Reasonable Accounting Method for Postmarital Appreciation Value
As of July 1, 2015, when the new law goes into effect, judges should “utilize any reasonable method of accounting to attribute postmarital appreciation to the value of premarital benefits.” Despite additional contributions to the plan during the marriage, the separate portion of the retirement plan must be traced, along with any associated appreciation. Importantly, the court should not consider “commingling and transmutation” as morphing separate fringe benefits into marital assets in the court’s accounting process. That, too, is a departure from the Snodgrass opinion.
Withdrawals from Retirement Accounts During the Marriage
Contributions made to retirement accounts and fringe benefits acquired during the marriage are still marital assets and subject to division in Tennessee divorce, just as before. Furthermore, if the participant spouse withdraws funds from the retirement plan or pension and uses the money to acquire some other separate asset, then that withdrawal should be deemed as coming from the separate portion of the account, as much as that is possible. (If withdrawals exceed the separate portion of the account, then presumably the participant-spouse’s portion of the marital property will need to cover the difference, unless an agreement is reached providing otherwise.)
Similarly, if the participant-spouse withdraws money from the retirement plan or pension to acquire a marital asset, such as a new home, then the withdrawal is deemed to have come from the marital portion of the account, maxing out at the total marital portion. In either instance, this requires tracing the present asset to the pension, retirement, or fringe benefit that was the source.
Importantly, Governor Haslam also signed into law Public Chapter No. 200 (Tennessee compromise and settlement of child support arrearages now possible) and Public Chapter No. 440 (police, firefighter, and teacher pensions are divided in Tennessee divorce), both effective July 1, 2015.
For more information about “Appreciation of Separate Property” possibly becoming marital property, see:
- Appreciation of Real Estate: What Is “Substantial Contribution” in Tennessee Divorce Law?
- Appreciation of Investment Property: What Is Substantial Contribution in Tennessee Divorce Law?
- Forensic Accountants’ Full Employment Act: Appreciation of Separate Property
