New York Divorce Lawyers Explain Family and Matrimonial Law

Not your Mother’s SBP

I’ve never been a big fan of the Suvivor’s Benefit Plan (SBP). As you may know, military retired pay ends on the dead of the retiree. Unlike a 401K or IRA, there is no bank account with money in it. Once the retiree dies, the payments from DFAS cease. The spouse or former spouse, gets nothing on the retiree’s death, unless there is SBP.

The SBP is a program created by Congress to provide an annuity for the surviving spouse (and/or children). The program also provides automatic coverage for any servicemember who dies in the line of duty. It is available to all members of the military to include the Coast Guard, the National Health Service and the National Oceanic and Atmospheric Administration. And yes, it covers us second class citizens in the Reserves.

Under the Former Spouses Protection Act, the coverage is automatic. In other words, the spouse has to actively refuse coverage. This provision was placed in the law to protect a spouse who after twenty years of marriage gets dumped by the servicemember upon retirement. A servicemember can opt out. But, the spouse must sign a waiver. This election must be made prior to the first day the member become eligible to receive the retired pay.

A reservist must make an election within 90 days of receiving the 20 year letter: (1) decline to make an election until age 60; (2) elect coverage to begin on the servicemember’s death or upon the date the servicemember would have been eligible to receive the retired pay, whichever is later; or (3) elect coverage to commence upon the servicemember’s death, regardless of the member’s age when death occurs. However, if the election is not made, then the servicemember is automatically enrolled in (3). A reserve servicemember who elects to forgo the SBP in the 90 day period can change his/her mind when he/she is eligible to receive retired pay.

A former spouse can receive SBP. A judge in a divorce can award SBP. The election to the former spouse must be made within one year of the judgment of divorce. Only one spouse or ex-spouse can receive SBP. This is no splitting or allocating. If ex-spouse is getting the SBP, the new spouse is locked out.

SBP used to have a “social security” offset. A spouse would receive 55% of the retiree’s pay until the spouse turned 62. Then the SBP payments would be reduced to 35% of the retired pay. In 2007, the rule changed, as of April 1, 2008 all spouses will received 55% regardless of their age. The social security offset is now gone. From April 1, 2007 to March 31, 2008, spouses over the age of 62 got 50% of the pay. On April 1, 2008, that went up to 55%.

This new law goes a long way to fixing some of the problems inherent with the program.

Tax implications for Military Retired Pay

Before I start, let me state that I am not an accountant or tax attorney. Do not make any decisions regarding taxes based upon this posting. Discuss any tax plans with your accountant.

In a recent decision by the U.S. Tax court, Proctor v. IRS, 129 TC No. 12 the division of military retired pay was treated as alimony not a property distribution. This may also have implications for the New York Police or Fire Department VSF.

Under New York law, any benefit to be paid in the future, but earned during the marriage is subject to equitable distribution. Military retired pay is a perfect example. The right to the pay was earned by 20 years of service. The retiree gets paid after she/he retires and as long as he/she lives. Unlike a 401K, there is no account with money to be drawn upon. New York treats this as property, and is subject to property division.

But, apparently, the tax law treats military retired pay differently. In the Proctor decision, the court stated that under Internal Revenue Code section 71(b) payments to an ex-spouse of her share of military retired pay can be considered alimony, and therefore tax deductible to the retiree. The court stated that “in order to qualify as alimony, payments must meet the requirements of section 71(b)(1) (A) through (D)”.

(b) Alimony or separate maintenance payments defined. For purposes of this section–
(1) In general. The term “alimony or separate maintenance payment” means any payment in cash if–
(A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
(B) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215 [26 USCS § 215],
(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and
(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

The court found that payment order met the requirements of the statute. This is true even if the divorce decree refers to the payments as part of the division of martial property. The court stated the divorce court’s classifications do not matter. “Labels attached to payments mandated by a decree of divorce or marriage settlement are not controlling.” The court went on to say that “while the designation need not mimic the statutory (B) will generally be met if there is no ‘clear, explicit and express direction” in the divorce decree stating that the payment is not to be treated as alimony.” Since the decree in question does not contain such language the requirements of section 71(b)(1)(B) were met.

The key point is that the divorce decree must either be silent as to the designation of the payments, or state that the payments will be treated as alimony. If you already have a decree, please don’t use this decision as license to take the deductions, talk to your accountant and follow his/her advice.

New York Equitable Distribution, The Former Spouses Protection Act and the National Guard

I just settled a strange little divorce in front Judge Kent, in Suffolk County. On it’s face, it was nothing too strange. A forty year marriage, where the only property was a pension and a house. As I explained in other posts, under New York divorce law, a pension is martial property and is divided according the number of years of marriage by number of years in the pension.

The husband in this case had retired as an AGR New York Guardsman. In 1998 when he retired from the National Guard, he took off for Puerto Rico. Eight years later, the wife decided to get a divorce. Under New York divorce law, the military retired pay is marital property, but under Puerto Rican law, it is not. The question facing Judge Kent was: which law to apply.

Under the Former Spouses Protection Act Congress specifically stated that military retired pay is subject to laws of the state where the divorce is ordered. There is one kicker, the military member must either be a resident of the state or consent to the state’s jurisdiction. If he is a resident of Georgia, and the spouse tries to divorce him in Nevada, the court cannot divide his military pay. It can only be divided in Georgia, or if he consents to the Nevada court.

My case was different. The husband was a Guardsman for 20 years. He never left the state of New York and his boss was the TAG. Upon retirement he moved to Puerto Rico. So, does the Former Spouses Protection Act govern? Is it meant to cover a Guardsman who spent his entire military career in New York working for the TAG, and then moves out of state upon retirement? The answer is: I don’t know. At this time, there is no decision by any judge in the United States that I have been able find on this issue. My argument was that the act should not apply. He worked for 20 years for the Governor, not the President. I argued that the Former Spouses Protection Act was not designed to cover a career Guardsman being sued for divorce in the state where served and retired from. Naturally, my opponent argued the other side. Judge Kent was caught in the middle. Fortunately, the judge,who is a gentleman, and famous for cutting to the heart of an issue, managed to get the parties to settle. So, this question is still unanswered.

The lesson here is to be careful. If you are the spouse of guardsman who is retiring and he intends to leave the state, start the divorce now before he establishes residence in another state. If you are the guardsman, after you leave the state, establish residence and then commence the divorce. Here, because the parties let the matter sit for several years, multiple problems occurred. If we had not settled, the husband was facing 10 years of arrears payments to the wife, if we won. If we lost, the wife was potentially facing not getting any money from the pension.