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Tanghe v. Tanghe (06/24/2005) sp-5910
Tanghe v. Tanghe (06/24/2005) sp-5910
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
GARY G. TANGHE, )
) Supreme Court No. S-11222
Appellant, )
) Superior Court No.
v. ) 3AN-02-12051 CI
)
JACKIE D. TANGHE, ) O P I N I O N
)
Appellee. ) [No. 5910 - June 24, 2005]
)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Mark Rindner, Judge.
Appearances: Bruce A. Bookman, Bookman &
Helm, Anchorage, for Appellant. Karla F.
Huntington, Anchorage, for Appellee.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
MATTHEWS, Justice.
The main issue in this case is whether the marital and
separate property components of a 401(k) plan should be
determined by using a coverture fraction or by tracing the
earnings of the separate property component. We conclude that
the latter method should be used because it is accurate and the
former is not. A second issue is whether survivor benefits
payable under a qualified domestic relations order (QDRO) must be
capitalized based on the longer life expectancy of the non-
employee spouse. We conclude that they need not be capitalized
because doing so places an unfair risk on the non-employee spouse
and is inconsistent with the wait and see approach underlying the
use of QDROs.
Gary and Jackie Tanghe were married on April 4, 1992,
and they separated on September 13, 2002. During the period of
coverture they were both employed by CSX. After they separated
Gary took early retirement. At the time of trial Jackie was
forty-seven years old and was earning a salary of approximately
$90,000. Gary was ten years older and despite taking early
retirement was still employed and earning a salary of some
$100,000.
Gary challenges a number of aspects of the superior
courts property division.1 We determine most of them summarily.
But the two issues noted above require discussion. We turn first
to the question of capitalization of survivor benefits.
Capitalization of Survivor Benefits
Gary and Jackie both have defined benefit pension
accounts through CSX. Because the parties were still married
when Gary retired from CSX, Gary was required either to obtain
Jackies consent to a waiver of benefits or to designate Jackie as
his surviving spouse to receive at least fifty percent of what
Gary would receive at his death. Gary elected the fifty percent
survivor option for Jackie and Jackie agreed to elect a fifty
percent survivor option for Gary when she retired. Both pensions
were divided by the trial court into marital and separate
portions and, under court-ordered QDROs, the marital portions
will be equally divided as they are paid. This arrangement is
not contested.
Gary argues that according to actuarial tables Jackie
will live 12.4 years longer than he. If reality matches the
tables Jackie will receive half of Garys pension, some $1,409 per
month, after he dies. She would also receive during that period
half of the marital value of her own pension representing the
amounts that were previously being paid to Gary. According to an
expert witness, when capitalized, Jackies survivorship interest
in Garys pension is worth about $52,000 and her reversionary
interest in her own pension after the projected date of Garys
death is worth about $13,000. Gary argues that the court should
have assigned values for these interests to Jackies side of the
ledger.
The trial court rejected Garys argument, finding the
eventuality of Ms. Tanghe receiving the benefit too speculative
to include in the marital estate.
Gary relies on the cases of Zito v. Zito2 and Broadribb
v. Broadribb3 for the proposition that spouses are presumptively
entitled to survivor benefits because they are an intrinsic part
of the retirement benefits earned during the marriage. 4 That
proposition is not in doubt. But the question presented is
whether it is error to decline to value contingent survivorship
benefits that are included in a QDRO. As to this question
Broadribb offers no guidance. The survivor benefit there was not
contingent. It was the equivalent of a vested life insurance
policy5 and it relieved the husband from the need to buy other
insurance on his life. Zito is more relevant, but it does not
help Gary. There we held that a QDRO dividing the marital share
of the husbands retirement benefits should also have included
survivorship benefits in case the husband died before the wife.6
This is consistent with what was done in the present case. But
we did not suggest that the value of the benefits in Zito should
have been capitalized and credited to the wifes account in
addition to being included in the QDRO.
The income streams in the present case will have value
for Jackie only if Gary dies before she does. This type of
survivor benefit resembles a nonvested pension because one party
bears all the risk that the benefit may never be realized. In
Laing v. Laing, we rejected the capitalization method for
nonvested pensions.7 Since the non-employee spouse receives his
or her share in a lump sum at the time of divorce, the method
unfairly places all risk of possible forfeiture on the employee
spouse.8 Similarly, in the present case, the capitalization
method would place the risk of not outliving Gary, or not
outliving him by 12.4 years, on Jackie.
Garys argument that the survivorship benefits be
capitalized is inconsistent with the QDRO method of distribution
adopted by the court. The QDRO method does not require the
valuation of funds being distributed. Unlike the capitalization
method advocated by Gary, which requires the use of discount
rates and mortality tables, the QDRO method simply links
distributions to events as they occur.
Gary is correct in suggesting that what may at first
glance appear to be an equal division of pension benefits under a
QDRO might actually be unequal because of the differences in life
expectancy of the parties. That seemed to be the case in
Nicholson v. Wolfe,9 where the older husband argued that his
share of the wifes pension should be capitalized and paid to him
in a lump sum rather than in a QDRO because he would probably not
live long enough to receive much in the way of benefits from the
QDRO. We upheld the QDRO method of distribution in that case.10
Among our reasons was the fact that the risk of not benefitting
from his wifes pension was the same risk that the husband had
faced during the marriage, given the parties age differences.11
This risk was not increased by the QDRO.
Here, as in Nicholson, the use of QDROs did not alter
the parties pre-divorce chances of benefitting from their spouses
pensions. That may not be a complete answer to Garys argument
that he has gotten the short end of the division of the parties
pensions. But it is good enough, in our view, when combined with
the convenience of the QDRO method and the potentially unfair
risk that capitalization would impose on Jackie, to lead us to
conclude that the court did not abuse its discretion in declining
to capitalize the survivor benefits that Jackie may receive under
the QDRO.
Determination of the Marital Portion of 401(k) Plans
Both Gary and Jackie contributed to 401(k) plans
through CSX before and during the marriage. At the time of trial
the balance in Garys account was $648,473 and the balance in
Jackies account was $302,548. Gary began contributing to his
plan in February of 1982 and Jackie started her plan a month
later.
Early statements for Jackies 401(k) plan were missing.
The earliest documents available were issued one and one-half
years into their marriage. Gary had written down information
from the missing statements in order to calculate the growth of
each investment over time. He testified that he returned the
originals to Jackies son, but Jackie claimed she could not find
them. While the originals were missing at the time of trial,
Garys written record of them was available. The trial court
found that Gary had a total of 256 months in his plan, Jackie had
254 months in hers, and that both parties had 125.5 months of
marital participation. The court prorated the funds according to
the resulting coverture fractions. Thus, 49% of Garys plan and
49.4% of Jackies were found to be marital property. Applying
these percentages to the current balance of each plan, the court
determined $317,751 of Garys plan to be marital and $149,450 of
Jackies.
Gary takes issue with the courts method. He notes that
at the beginning of the marriage he had $212,886 in his 401(k)
account. This was separate property, and the earnings on this
amount during the marriage were also separate property. He
contends that the court should have traced the earnings on the
separate property in the account through the years of the
marriage. When this is done, the separate funds and their
earnings can be subtracted from the total amount in the account
in order to yield the portion of the account that is marital
property. The court recognized that applying this method would
result in Garys 401(k) having a marital portion worth $174,195,
in contrast to the $317,751 allocated by the court when using a
straight time proration.
We agree with Gary that in a defined contribution plan,
as distinct from a defined benefits plan, proration by funds is
the accurate method for distinguishing marital from separate
property. Calculating the marital portion of a 401(k) plan
through the use of a coverture fraction assumes equal periodic
contributions and an equal periodic rate of return. Neither
assumption is likely to be accurate. Further, even if these
assumptions were accurate, the time proration method would still
yield distorted results because it ignores compounding. These
are flaws that can result in errors of considerable magnitude.
To use this case as an example, the time proration method
overstates the marital portion of Garys account by $143,556.
The leading text on property divisions recognizes that
the appropriate method for the valuation of the marital portion
of non-defined benefit plans is the proration by funds method:
Proration by funds is always the
preferred method for allocating retirement
benefits, as proration by time (the basis for
the coverture fraction) assumes that the same
contributions are made in each and every year
of employment an assumption which is untrue
in the great majority of cases. Proration by
time is used for defined benefit plans only
because the complex nature of such plans
makes proration by funds impossible to
implement.[12]
The few cases that have ruled on this subject are generally in
accord.13
The trial court did not directly disagree with Garys
argument as to how the marital portion of his 401(k) plan should
be determined. Instead, the court focused on the fact that the
original statements for Jackies plan were missing for the first
one and a half years of their marriage. According to the court,
the absence of these statements made accurate use of the
proration by funds method as to Jackies plan impossible. The
court concluded that this justified using a time proration method
as to both plans.
We do not agree that the absence of a year and a halfs
information concerning Jackies plan would justify using a method
that yields a manifestly inaccurate result as to Garys plan.
There is no indication that Gary should be charged with
responsibility for the lack of information concerning Jackies
plan.
Further, the difficulties in using a proration by funds
method for Jackies plan seem overstated. Garys written records
of the missing statements were not challenged as to accuracy.
His records show that the allocations that Jackie made among the
seven investment vehicles14 available under the plan for the years
in question, 1992 and 1993, were the same as those she made for
1994, the first year for which original records are available.
Further, according to Garys records Jackies rate of return for
each year was favorable from the standpoint of increasing the
separate property component of her plan. In 1992 her rate of
return is shown to be about 9%, whereas his was about 8%, and in
1993 her rate of return was about 11%, approximately the same
rate that he achieved during that year. Thus there seems to be
nothing inherently unreliable about Garys records.15
We conclude that the court erred in dividing the
separate from the marital components of Garys 401(k) plan. We
recognize that there may be instances in which so little
information is available about the parties contributions to their
401(k) plans that application of the coverture fraction is
warranted,16 but this is not such a case. On remand the
components of the plan should be divided using a funds proration
method. With respect to Jackies plan we believe that the court
should also use a funds proration method in order to divide its
separate and marital components. In accomplishing this the court
may use Garys records if it finds them credible, or it may use
other evidence including reasonable extrapolations from known
facts. The superior court should choose the same starting date
for each party, even if the court is working with Garys actual
records and extrapolating from Jackies later records.
Other Issues
Gary raises a number of other issues. We conclude that
none of them requires reversal and determine each of them
summarily. They are briefly discussed in the margin.17
For the above reasons the judgment in this case is
affirmed except as to the allocation of the marital and separate
property components of the parties 401(k) plans. With respect to
Garys 401(k) plan the allocation is reversed and with respect to
Jackies plan the allocation is vacated. This case is remanded
for further proceedings consistent with this opinion.
AFFIRMED in part, REVERSED and VACATED in part, and
REMANDED for further proceedings.
_______________________________
1 The standards under which we review the arguments
presented are as follows:
The trial court has broad discretion in
fashioning a property division in a divorce
action. This court reviews the trial courts
determination of what property is available
for distribution under an abuse of discretion
standard. If in the course of determining
what property is available the trial court
makes any legal determinations, such
determinations are reviewable under the
independent judgment standard. All questions
of law are reviewed de novo with this court
adopting the rule of law that is most
persuasive in light of precedent, reason and
policy. However, the trial courts findings
that the parties intended to treat property
as marital are disturbed only if clearly
erroneous. The valuation of available
property is a factual determination that
should be reversed only if clearly erroneous.
The equitable allocation of property is
reviewable under an abuse of discretion
standard and will not be reversed unless it
is clearly unjust.
Cox v. Cox, 882 P.2d 909, 913-14 (Alaska 1994) (citations
omitted).
2 969 P.2d 1144, 1147 (Alaska 1998).
3 956 P.2d 1222, 1227 (Alaska 1998).
4 Zito, 969 P.2d at 1147 (quoting Wahl v. Wahl, 945 P.2d
1229, 1231 (Alaska 1997)).
5 Broadribb, 956 P.2d at 1227.
6 Zito, 969 P.2d at 1147-48.
7 741 P.2d 649, 657 (Alaska 1987).
8 Id.
9 974 P.2d 417 (Alaska 1999).
10 Id. at 426.
11 Id.
12 See Brett R. Turner, Equitable Distribution of Property
6.10, at 523 (2d ed. Supp. 2004).
13 See In re Marriage of Hester, 856 P.2d 1048, 1049 (Or.
App. 1993) (When the value of a particular plan is determined by
the amount of employee contributions, application of [a coverture
fraction] could result in a division of property that is
demonstrably inequitable.); Paulone v. Paulone, 649 A.2d 691, 693-
94 (Pa. Super. 1994) (rejecting the use of the coverture fraction
and adopting an accrued benefits test for the distribution of a
defined contribution plan); Smith v. Smith, 22 S.W.3d 140, 148-49
(Tex. App. 2000) (finding that it was incorrect to apply a
coverture fraction to a defined contribution account); Mann v.
Mann, 470 S.E.2d 605, 607 n.6 (Va. App. 1996) (Applying [a
coverture] fraction to a defined contribution plan could lead to
incongruous results, and such an approach is not generally
used.); Bettinger v. Bettinger, 396 S.E.2d 709, 718 (W. Va. 1990)
(rejecting the use of a discounted present value calculation for
division of a defined contribution plan because no consideration
was given to the fact that the fund was earning interest)
(quotation marks omitted).
14 The investment vehicles available consisted of five
widely available mutual funds, a guaranteed interest fund, and
CSX stock. Their rates of return for the years in question are
known.
15 Further, Gary would have had no reason to suspect that
the information he copied down would not be independently
verifiable from original statements retained by Jackie or the
plan administrator.
16 See Taylor v. Taylor, 12 S.W.3d 340, 346 (Mo. App.
2000) (applying coverture fraction where no records were
presented from partys 401(k) plan).
17 Reimbursement of the Marital Estate for Taxes Paid on
Garys Separate Property. We reject Garys claim that the trial
court erred in requiring him to reimburse the marital estate for
some $5,650 in taxes that the marital estate paid on his separate
property. Although the court should have made findings on this
subject, no remand for findings is necessary because Gary agreed
in principle at trial with the proposition that the parties
should reimburse the marital estate for marital funds spent on
separate assets.
Failing To Credit the Cost of Post-Separation
Improvements Made to the Marital Home from Garys Separate
Property. Gary claims that he paid $24,449 in post-separation
marital expenses, including some $7,109 used in replacing the
deck on the marital home. To pay for these and other expenses he
withdrew some $15,000 in marital funds, leaving a balance of
$9,449 of separate income that he spent for post-separation
expenses. The trial court found that the money he used to
rebuild the deck came from the $15,000 withdrawal. This finding
is not clearly erroneous. In order to make an effective claim
for reimbursement Gary would have to demonstrate a right to
reimbursement for all of the claimed post-separation
expenditures, rather than just those concerning the deck. He has
not attempted this.
Transmutation of the Kenai Cabin. Given the very
substantial marital funds and marital efforts that were used to
maintain and improve this property, the trial court did not err
in concluding that the cabin was properly considered to be
marital in character.
Finding that a Fifty/Fifty Division of Property was
Appropriate. The record shows that the court considered the
factors relevant to the question as to how the marital property
should be divided and did not consider any improper factors. The
courts conclusion that an equal division of marital property was
appropriate was not an abuse of discretion.
