Caveat:
Prior to dealing with the subject matter of this
article we think it useful to alert the practitioner to
the significance of assigning to a non-lawyer the
preparation of a Domestic Relations Order or related
legal documents. It is emphasized that our Domestic
Relations Orders are attorney prepared. Consider the
practitioner's exposure when he or she retains a
non-lawyer to prepare a legal document (QDRO). We carry
malpractice insurance, clearly the non-lawyer (a/k/a "QDRO
Specialist") does not. It is constructive for the
practitioner to realize the significance of assigning to
a non lawyer the preparation of a Domestic Relations
Order or related legal documents. The preparation of a
Domestic Relations Order constitutes the preparation of
a legal instrument. Should you delegate a legal function
to a non lawyer it is suggested that you confirm with
your malpractice carrier that such delegation of duty
does not limit/nullify your policy coverage.
Commentary:
Surprise is the omnipresent foe of the attorney.
Unanticipated events that result in economic damage to
your client must to the extent possible be avoided. The
options available to a retiring Florida Retirement
System employee represent a surprise potential that the
practitioner ignores at his or her peril. At the time of
divorce, especially a divorce involving an individual
many years from retirement, there is a reasonable
probability that minimal attention will be paid to the
retirement options available to him or her at
retirement. This article focuses on one of the options
available to an FRS employee upon attaining normal
retirement age. At that time he or she has the option to
elect to defer retirement and enter the Deferred
Retirement Option Program (DROP). The informed
practitioner will be mindful of this option during
negotiation and drafting of a Domestic Relations Order.
Further, language should appear in the Property
Settlement Agreement/Final Judgment of Dissolution of
Marriage specifically addressing how a DROP election by
the titled-spouse will effect the retirement benefits to
be paid to the respective spouses. Prior to reading this
article the reader is directed to our WEB article
discussing "Boyett" and the allocation of pension
benefits on divorce.
| Suggested Reading: |
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| Ganzel v. Ganzel (11/8/2000), |
25 Fla. L.Weekly D 2617 |
| Swanson v. Swanson (4/23/2004), |
29 Fla. L. Weekly D 865 |
| Self v. Self (6/10/2005), |
30 Fla. L. Weekly D 1467 |
| Russell v. Russell (3/22/2006), |
31 Fla. L. Weekly D 849 |
| Nix v. Nix (5/3/2006), |
2006 Fla. App. LEXIS 6519 |
At the time of divorce attorneys come to an agreement
regarding the division of pension benefits between the
spouses. Our concern is attorney failure to incorporate
into the Property Settlement Agreement/Final Judgment of
Dissolution of Marriage language that makes clear how
all DROP assets are to be distributed when the
titled-spouse defers retirement and elects to
participate in the DROP.
First let us note Ganzel v. Ganzel which provided:
...Once the judgment of dissolution, which incorporated
the settlement agreement, was entered, marital property
rights no longer existed and only individual property
rights remained
Then let us note Swanson which provided:
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Furthermore, as is obvious, 45% of the value
of the former Husband's pension benefits as of
January 17, 1990 belongs to the former Wife.
Therefore, the interest and cost of living
adjustments which were applied to the former
Wife's share, despite being in the former
Husband's DROP account, should also belong to
the former Wife. Moreover, the former Wife
sufficiently established that the DROP account
received a 3% cost-of-living adjustment on the
first day of each July, and it accrued tax
deferred interest "at an effective annual rate
of 6.5 percent compounded monthly, on the prior
month's accumulated ending balance, up to the
month of termination or death." §121.091(13)(c),
Fla. Stat. Therefore, we hold the trial court
erred by not awarding the former Wife interest
and cost of living adjustments which accrued in
the former Husband's DROP account. |
Also note Russell which in additional to being a
reaffirmation of Swanson, made clear: the fact that the
DROP came into existence after entry of the final
dissolution does not present a bar to a Former Spouse's
participation in DROP
Benefits.
Discussion:
In 2006 at age 39 Jim Smith divorces Joan. Jim is an
active participant in the Florida Retirement System. At
the time of divorce it was agreed that Jim's monthly
accrued benefit as of the Date of the Filing of the
Action for Divorce was $1,152.00. It was further agree
that Joan was entitled to half of the marital part of
Jim's monthly accrued benefit ($1,152.00 multiplied by
94.44% = $1,088.00). Thus, Joan's share at retirement is
$544.00. Jim's lawyer inserted this understanding into
the Property Settlement Agreement/Final Judgment of
Dissolution of Marriage. A Domestic Relations Order was
then filed with the FRS giving Joan a monthly benefit of
$544.00 when Jim retires. Thus, at the end of this
action Jim's lawyer assures Jim that that when he
retires his Former Spouse will receive each month from
his pension $544.00, nothing more.
Jim assumes he will retire at age 62. Over the period
from his current age of 39 up to his age 62 (23 years)
he assumes his pension will grow and he will still only
have to "pay" Joan that fixed monthly amount of $544.00.
Jim is satisfied.
WHAT IF:
Time and circumstances impact on people and their
retirement thoughts. What if at age 62 instead of
retiring Jim enters the DROP and continues in the DROP
for five years? Will Joan's monthly benefit remain at
the $544.00 that was agreed to upon divorce and inserted
into the Domestic Relations Order?
Recall, Jim, at the time of divorce was reassured by his
attorney that Joan will get a monthly benefit of $544.00
when Jim retires. "Nothing more"!
What will Joan actually get when Jim actually retires
after five years in the DROP program? The data that
follows is based on 2006 DROP Benefit Statistics of the
FRS.
The spreadsheets that were the basis for this
illustration are not shown for ease of presentation.
Based on annual pay increases of 2.5% Jim's actual
monthly accrued benefit at retirement will be
$3,992.66*. Joan was entitled to $544.00 when Jim
retired. Joan's share when Jim enters the DROP
constitutes 13.62% of Jim's actual benefit upon entering
the DROP. Thus, at the time that Jim actually begins to
receive his pension, Joan, based on the above cited
cases will not receive $544.00 each month. Instead
Joan's monthly benefit will be $630.65. This increase
represents the annual 3% COLA increase in the benefit
from the point of entry into the DROP until Jim's formal
retirement 60 months later (for teachers it can be up to
96 months). For Joan the initial monthly benefit was
$544.00. At a 3% annual COLA increase her final benefit
is $630.65 (sixty months later).
*As stated earlier the mathematics for this illustration
is not shown. The progression for Jim and Joan's benefit
as of the Date of Dissolution to the Date of Jim's
retirement are based on FRS benefit growth data. The
same is true for the cash accumulations discussed
immediately below.
Additionally, based on the FRS's DROP values for 2006
when Jim begins to collect his benefit the total DROP
cash accumulation will be $297,624.00. However, 13.62%
based on the above decisions is Joan's property. Hence
she will receive a lump sum payment in the amount of
$40,551.23.
Can Jim argue that his attorneys failure to properly
craft his settlement and Domestic Relations Order cost
him $40,551.23 plus the present cash value of the
additional monthly benefit paid to Joan over Jim's
lifetime or:
($630.65-$544.00 = $86.65) or $11,506.25.
Jim could argue that a flawed settlement cost him
$52,057.48 ($40,551.23 + $11,506.25) . If Jim presented
this argument to the bar does it rise to be level of a
valid complaint against his attorney?
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