Premartial Assets: Is What’s Mine Actually Mine? Part 1 – The 401KMarch 22, 2012 | by Cimmerian Morgan
During divorce, one of the most frequent questions asked is about assets which were owned prior to the marriage. Over the next few blogs, we consider different types of assets which you may have owned before the marriage and what happens to those assets when you get divorced.
Let’s begin by correcting the common misconception that all assets held at the time of divorce are subject to equitable distribution. Some assets, depending on certain factors such as how or when they were acquired, are “exempt” from equitable distribution.
If I get divorced, what will happen to the 401k plan that I owned prior to my marriage?
This question is asked very frequently by individuals considering a divorce. Like many legal questions, its answer depends on a number of considerations. It’s not possible in a short blog to address all the various aspects of the law concerning equitable distribution of premarital retirement assets, but it is possible to offer a few generalizations as a primer.
Perhaps the simplest scenario is when a party to a divorce action individually owned an asset prior to marriage and then continued to own that asset in his or her name alone throughout the marriage without “actively” causing the asset to increase or decrease in value. For example, a husband individually owned a 401k plan prior to the marriage, and then maintained that 401k plan in his name alone without making any contributions to the 401k plan during the marriage. If that husband were to get divorced, his 401k plan would be “exempt” from equitable distribution, meaning that his wife would not have any marital interest in the 401k plan and would not be awarded any portion of it upon divorce.
However, if the facts in the example were to be modified ever so slightly, a very different result might occur. For example, if the Husband made contributions to his already exisiting 401k plan during the marriage from his earnings, then a portion of the 401k plan would become “marital” and subject to equitable distribution. The premarital contributions and any passive appreciation or depreciation on those contributions would continue to be exempt, but the wife would now have an interest in the contributions that were made to the 401k plan during the marriage, as well as any gains or losses on those marital contributions.
A frequent follow-up question asked by individuals concerned about their premarital retirement assets is, “What if I rolled over my premarital 401k plan into an IRA during my marriage.” As long as you have not contributed to that retirement account during the marriage the same rules apply, regardless of whether the funds were rolled over into an IRA. However, again, if contributions were made to the IRA during the marriage from earnings or marital assets, then a portion of the IRA would become marital and subject to equitable distribution. If the other spouse’s name was added to the IRA during the marriage, then the asset could be deemed by a court to have been “commingled,” meaning that some portion of the asset would be subject to equitable distribution
In sum, 401k plans owned prior to the marriage may be exempt from equitable distribution, but the fact that they were owned prior to the marriage is only the beginning of the discussion, not the determining factor. The assistance of a skilled matrimonial attorney is essential in evaluating the relevant facts and applying them to the law in this area in order to maximize the protection of the premarital 401k plan.
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