Splitting RRSPs – just one piece of the larger divorce puzzle
Focusing on age and tax implications, the article looks at how retirement accounts can be split during divorce.
For those divorcing later in life, retirement accounts will be central during divorce
Deciding how to split assets is one of the most important – and often among the most complicated – aspects of many divorces. For people who are divorcing later in life, dividing marital property will be an especially central concern if they are to enjoy a comfortable retirement. In such divorces, as the Financial Post points out, it is necessary for both parties to consider their entire financial portfolio and how it lines up with their retirement goals. Splitting RRSPs and pensions, for example, will be a major topic for many divorcing couples, but how such assets are split will depend on the unique circumstances of each divorce.
Funding the retirement
For people who are planning on retiring within a few years after their divorce, it is important to keep in mind how those remaining years of work will impact the assets they receive in their divorce settlement. If, for example, an RRSP is split 50-50, that could leave one or both former spouses with only half of a significant retirement asset that they were otherwise relying on for their future plans – and with little time left to replenish it. The same, of course, holds true of pensions and other investments that a person may be counting on for his or her retirement.
As the Globe and Mail points out, people going through a divorce need to decide whether they simply want to split all of their assets 50-50 or if they want to negotiate who gets which assets in order to come to a roughly fair settlement. While the former choice may seem the simplest, the latter option may prove more beneficial in some cases. For example, splitting all assets down the middle would require that the family home be sold off and the value be divided between both parties. A popular alternative is for one spouse to keep the house in exchange for the other spouse keeping the RRSPs and pensions. Such an option needs to be carefully considered, however, since in many situations the cost of maintaining a home can make what otherwise looks like a fair settlement overly lopsided in the long term.
Taxes and cash
Among the most important concerns when deciding on who gets an RRSP are taxes. Dividing or transferring an RRSP account will not result in a tax penalty, which can prove highly beneficial to the party that ultimately ends up with the bulk of the couple’s RRSPs. However, it is just as important to keep in mind that money that is withdrawn from an RRSP is taxable. While it is important to plan for the future, making sure that a settlement leaves one with some immediate cash on hand can be just as important.
Understanding how property gets divided during a divorce and what a fair settlement actually looks like is difficult for most people. Having skilled legal advice on hand is often a key factor in ensuring one’s best interests are protected during a divorce. An experienced family lawyer can help those who are preparing for or in the middle of a divorce make sense of what is often an otherwise confusing and overwhelming situation.
Divorce or Separation – Family Property or Excluded Property?
You may wonder what assets you have to divide with your spouse or partner upon separation or divorce.
Any asset whether real estate, a business, a pension, furnishings, tools, investments or cash is or may be family property.
Debt of any kind owed by either spouse is or may be a family debt to be shared.
Assets owned by you at the time cohabitation began or assets acquired during the cohabitation, such as by inheritance for example, is potentially “excluded property”. The increase in value of all property including excluded property is shared equally upon breakdown of the relationship.
To be considered, potentially excluded property must be traceable into present assets.
Experts such as appraisers, business valuers, actuaries and accountants may be required to value property such as the family home, recreational property, the business, and pensions to determine the value of excluded property when the spouses began cohabitation and the present value. Each spouse has a right to 50% of the increase in value during cohabitation.
Often pensions are overlooked and that they may be worth as much as the equity in the family home and certainly more than most people think.
This is the most complicated issue facing family lawyers these days. Cohen Buchan Edwards can assist you to determine what is family property, what is excluded property and how you may share that property.
What happens to your pension on divorce?
There are many kinds of pension plans. Most are subject to division upon marriage breakdown. Marriage includes a common-law relationship of two years or longer.
Federal Government plans include the Old Age Pension Plan (OAP), Canada Pension Plan (CPP).
There may be foreign pension plans, military pensions and disability pension plans. These are not discussed here.
There are federally regulated plans and provincially regulated plans. They are all quite complex and each plan requires precise and specific language to effect a division.
The most common pension plans are employment pension plans and we will spend most of our time discussing these plans.
OAP is not divisible. It is payable to most Canadians at age 65.
CPP is divided according to the Canada Pension Plan upon application by either spouse. An equal division of CPP credits earned during a relationship is mandatory unless both parties elect not to divide the pension, for example if both parties have made maximum contributions during the relationship.
Employment pensions are often the largest or second largest family asset after the family home. The portion of the pension earned during cohabitation is a family asset and your spouse is entitled to one half of that portion. The Family Law Act has specific provisions for division of pensions on marriage breakdown. Different rules apply if the pension has already commenced.
The two most common employment pensions are defined contribution plans and a defined benefit plans.
A defined contribution plan is very similar to an RRSP. It is worth what it says it is worth (in pre-tax dollars) and it can generally be easily divided.
A defined benefit plan is a much more complicated investment. It generally pays out based on your best (usually last ) five years of income and so the amount paid into the plan bears little resemblance to what the plan is actually worth. It is often worth 3 to 5 times more than the contributions made.
The Family Law Act has detailed provisions for how a defined benefit plan should be divided. Defined benefit plans are usually divided “at source”. This means the pension plan is required to create a plan in the name of the spouse who becomes a “limited member”. The credits accumulated during cohabitation are then divided equally. The limited member then has the same elections to make as the prime member upon retirement. The pension may be received on the earliest date that the prime member could retire.
In the alternative and generally only if both parties agree, the plan member can buy out the interest of a spouse. This way, the plan member can keep the pension intact and the spouse can be compensated with other assets if there are sufficient assets to do so. This requires hiring an actuary to value the plan. An actuary is a highly trained and accredited specialist. There are a number of assumptions that must to be made to come up with a range of value for the plan.
Once spouses have agreed on how to divide their pension or pensions, the agreement must be put in writing and be signed. The drafting of a marriage agreement, cohabitation agreement or separation agreement is complex and must be tailored to the individual plan. If the drafting is insufficient, the pension plan will ignore a request for division.
Spouses can predetermine what will be done with pensions in a cohabitation agreement or marriage agreement (they amount to the same thing). The agreement would specify what happens with child and spousal support, land, investments, the pension and any other assets that may exist.
Pensions are valuable assets, much more valuable than most people realize. Be sure to incorporate this asset into your thinking.
Garth Edwards is a partner with Cohen Buchan Edwards and has practised family law for 33 years. Garth may be contacted at firstname.lastname@example.org or 604.273.6411.
What are Excluded Assets?
The division of family property in British Columbia changed in 2013 with the enactment of the Family Law Act.
The scheme of our new act is that all property that an individual brings into a marriage (which includes a common-law marriage of at least two years) is “excluded property”. The increase in value of all assets during cohabitation including excluded assets is shared equally unless a court orders an unequal division of family assets under section 95 of the Family Law Act. An unequal division is extremely rare and is only done where a court decides that it would be “significantly unfair” to divide assets equally.
The value of the excluded property when it was brought into the relationship would normally be paid back to the individual who brought it into the relationship “off the top” at its original value upon breakdown of the relationship. In theory, if you sold a home for $100,000 10 or 15 or 40 years ago and invested that as a down payment in a new family home then you would receive $100,000 upon division of assets today.
Excluded property would include assets that either spouse had when they began cohabitation or assets that they brought in during the relationship by way of inheritance or windfall. It may include a home, an investment, an RRSP or contribution to a pension.
The scheme is not as easy as it might sound. You have to prove that you brought in the asset and trace it to an existing asset. Proving that an asset existed 15 or 20 or 40 years ago can be very difficult as documents may no longer exist. For example, obtaining bank documents or RRSP statements may be impossible unless someone has retained the paperwork. Valuing the asset 15 or 20 or 40 years ago can be just as difficult. For example, you may be required to obtain a historical appraisal of real estate. Tracing the asset means that you have to show that it was used to acquire an asset such as a home or an investment, or paid down a debt on an asset such as the mortgage on a home. You have to show that that asset still exists in some form today.
If the excluded asset was used to pay down credit cards or go on a holiday it is lost. You cannot seek compensation for your contribution unless it still exists.
Determining potentially excluded assets is one of our biggest headaches in family law today. The law is changing almost daily as a result of how judges are interpreting the Family Law Act. If an excluded asset was put in the name of the contributors spouse alone, the exclusion may be lost. If an excluded asset is put into joint names it may or may not be lost depending on how the courts rule in the future.
It is safest to retain assets that you bring into a relationship in your name alone in order to ensure that the exclusion is not lost. This is difficult to do in any relationship and may be totally impractical. To clarify what you as spouses want you should have this discussion now and create a marriage agreement or a cohabitation agreement while you are still on good terms. This is good practice and good planning just as doing your will and saving for your retirement is.
Garth Edwards is a partner with Cohen Buchan Edwards and has practised family law for 33 years. Garth may be contacted at email@example.com or 604.273.6411.
Settling Disputes Through Alternative Dispute Resolution Methods
Not all legal disputes need to be resolved in court. Most family law cases settle using out-of-court alternatives. These out-court-alternatives, or alternative dispute resolution methods, include mediation, arbitration, and the collaborative process. It is not always possible to avoid court, but alternative dispute resolution methods are far more beneficial to resolve legal problems that come up when a relationship ends, especially if children are involved.
TYPES OF ALTERNATIVE DISPUTE RESOLUTION METHODS
Mediation is a type of negotiation that is assisted by a neutral, third party called a mediator. Although a mediator does not have decision-making power, he or she can assist the parties with identifying the issues between them, and help negotiate and reach a resolution. Parties can attend the mediation alone, or with a lawyer.
Parties who cannot agree on some or all of the issues in their family law dispute can attend arbitration. Often, each of the parties will bring their own lawyer to the arbitration. An arbitrator is an independent third party who acts like a judge. He or she will listen to both parties, and then make a decision that is legally binding and enforceable in court.
- Collaborative Process
In the collaborative process, the parties and their lawyers work together, and utilize other professionals, such as divorce coaches, to create solutions that work for both parties. The collaborative process requires the parties to agree not to go to court, to have open and honest communication, and to work as a team to resolve their dispute.
BENEFITS OF USING ALTERNATIVE DISPUTE RESOLUTION METHODS
- Non-adversarial and flexible
When parties mediate or engage in the collaborative process, they are in control. They are directly involved in the process, and work together to come up with creative solutions to resolve their disputes.
- Less expensive and time-consuming
The cost of litigation is high and unnecessarily drains family resources, particularly because the process takes a lot of time. Alternative dispute resolution is often cheaper, and less time-consuming and stressful than going to court.
- Private and confidential
As alternative dispute resolution occurs outside of the court, it avoids publicity of personal information. The only people in attendance are the parties, their lawyers, and/or the mediator or arbitrator. Negotiations are private, and cannot be introduced as evidence if the parties proceed to court.
- Preserves important relationships
Since alternative dispute resolution methods encourage team work, it encourages the parties to maintain a mutual respect and helps maintain relationships in the future. When children are involved, it encourages positive co-parenting.
If you have questions about alternative dispute resolution, or are looking for a mediator or collaborative process lawyer contact Cohen Buchan Edwards LLP at 604.273.6411 and speak with one of our family lawyers.
It’s Not Always Equal in the End
The end of a marriage or a long-term relationship can be a difficult time for all individuals involved. Eventually, the parties must deal with dividing the assets they own, whether held jointly or in their individual names. The Family Law Act states that family property will be divided equally, unless the parties have a written agreement stating otherwise. However, this is not always the case. Family property may be divided unequally if it is “significantly unfair” to divide it equally between the parties.
The courts will not easily grant an order for unequal division of family property, and the test to obtain such an award is strict. However, under the right circumstances, a party may be successful. The court will consider a number of factors, such as:
- how long the parties were in a relationship or were married;
- whether the parties made any agreements;
- how much each party contributed to the other’s career;
- how much debt the parties incurred during their relationship or marriage;
- any misconduct by one of the parties to substantially reduce the value of family property after separation.
Recent cases provide lawyers with some guidance in advising their clients regarding unequal division of family property:
- In Nanara v Nanara, 2017 BCSC 1447, the Claimant was successful in receiving 60% of the family property. Justice Abrioux concluded it would be significantly unfair to divide the family property equally because the Claimant made significant financial and non-financial contributions to the family property during and after the relationship, and was solely responsible for all family expenses. Also, the Respondent lack of disclosure of the value of his pensions and other assets was a relevant factor.
- In H.H. v C.L.M., 2017 BCSC 1299, the Respondent was successful in her claim for unequal division of the increase in the value of the property she owned. Madam Justice Young based her decision on factors including the significant difference in the parties’ financial contribution to the household, the Claimant’s unequal contribution to the renovation and restoration of the property, and the misconduct of the Claimant, including the taking of unauthorized loans and the hiding of income.
- In Bamford v Mulyati, 2017 BCSC 945, Madam Justice Morellato apportioned 80% of the parties’ family property to the Claimant and 20% to the Respondent. Factors considered included the length of the parties’ relationship; the Respondent’s lack of financial contribution to, and maintenance, of the family property during the marriage and after separation; the Claimant was in his 80s and retired for 20 years; the Respondent fled to Jakarta, did not disclose her income or value of her assets; and the Respondent failed to respond to the court proceedings.
Property division is complex, often involves assets that are substantial in value, and is decided on a case-by-case basis. It is important for recently separated individuals to obtain legal advice before making any decisions to divide family property to ensure there is a fair division of family property.
If you have questions about family property and asset division, contact Cohen Buchan Edwards LLP at 604.273.6411 and speak with one of our family lawyers.