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Three things to know about splitting retirement assets during divorce in Tennessee

Retirement assets pose their own set of problems when it comes to divorce. These assets are particularly difficult for many reasons. For one they are not just a single, easily transferable asset. They are the accumulation of investment strategies that often take decades to develop. To make matters even more difficult people often do not try to get their payouts until well after they finalize the divorce. This can mean those going through a divorce do not even realize there is an issue until years after the divorce.

This piece will delve into steps divorcing couples can take to better ensure they understand the process and mitigate the risk of surprises when they are looking to retire after going through a divorce.

Does it matter where you live?

Yes. Where you live will directly impact the law that applies to the division of assets during divorce. Tennessee state law defines marital property as real and personal property acquired during the marriage. This means it often includes retirement assets as marital property.

But not always.

If a party accrued the asset prior to the marriage, state law considers the asset and the appreciation of the asset separate property. This would mean it is not subject to division during divorce. However, if contributions were made during the marriage the law instructs the court to make a reasonable split and look to various factors to guide this decision such as the length of the marriage and contribution of each party.

How are these assets split?

Those going through divorce can choose how they want to split the retirement asset. This can serve as a valuable tool during negotiations if one party wishes to retain business interests or another high value asset. A party could negotiate a higher share of retirement assets, for example, in exchange for relinquishing claim to the business.

One of the more common options is to use the current value of the retirement asset and take a lump sum payout or take a percentage of the plan at the time of payout.

Do I need to do anything extra to split retirement assets?

Some retirement assets like an IRA are split with the divorce settlement agreement while others require additional court orders to ensure the account administrator honors the agreement. This extra paperwork also serves to better ensure there are not tax penalties when the administrator pays benefits from the account to someone other than the individual named on the account. This additional paperwork, referred to as a qualified domestic relations order (QDRO) is separate from the divorce settlement agreement and is generally necessary to split retirement plans covered by the Employee Retirement Income Security Act (ERISA). Examples include a 401(k) or pension.

It is also important to review the beneficiary designation on retirement accounts. This designation indicates who gets the asset in the event of the original owner’s death. Make sure this designation reflects your wishes. If you do not want your ex to get the asset, update the beneficiary designation accordingly.