Johnson v. Johnson, 15298-PR

Citation638 P.2d 705,131 Ariz. 38
Decision Date14 December 1981
Docket NumberNo. 15298-PR,15298-PR
PartiesJulia Barrett JOHNSON, Appellant, v. Emery Peter JOHNSON, Appellee.
CourtSupreme Court of Arizona

Slutes, Browning, Zlaket & Sakrison, P. C. by James M. Sakrison, Tucson, for appellant.

J. Emery Barker, Tucson, for appellee.

HOLOHAN, Vice Chief Justice.

Appellant, Julia Johnson, filed an appeal from the judgment of the superior court in a dissolution proceeding. The court of appeals modified the judgment. Johnson v. Johnson, 130 Ariz. ---, 638 P.2d 714 (2 CA-CIV 3613, filed December 17, 1980). Both appellant and appellee, Emery Johnson, filed petitions for review. We granted review. The opinion of the court of appeals is vacated.

The principal issue in this case is the proper method to be used in determining the wife's interest in the husband's retirement plan. During the 15-year marriage of the parties, the husband accumulated vested rights in both a profit sharing plan and a pension plan through his employment with a Tucson law firm. At the time of trial, there was $17,047.14 in the profit sharing plan and $55,380.77 in the pension trust, for a total of $72,427.91. The distribution of the funds under both plans lies within the discretion of an administrative committee. Although the committee has discretion to order early distribution of these funds, in the normal course of events the funds would not become available to the husband until he reaches retirement age, at least fifteen years from now 1. Because the husband had no right to immediate payment, the trial court discounted the value of the funds at 6% interest for 22 years (the amount of time between the date of the divorce decree and the date when the husband would reach age 65).

VALUATION OF THE WIFE'S COMMUNITY INTEREST IN THE RETIREMENT PLANS

The pension and profit sharing accounts in this case constitute an appreciable portion of the marital estate. Indeed, it is now commonly recognized that pension rights are one of the most valuable of marital assets upon divorce. In re Marriage of Brown, 15 Cal.3d 838, 847, 544 P.2d 561, 566, 126 Cal.Rptr. 633, 638, 94 A.L.R.3d at 164, 171 (1976); see also DiFranza and Parkyn, Dividing Pensions on Marital Dissolution, 55 Calif. S.B.J. 464 (1980) (hereinafter cited as DiFranza) and Hardie, Pay Now or Later: Alternatives in the Disposition of Retirement Benefits on Divorce, 53 Calif. S.B.J. 106 (1978) (hereinafter cited as Hardie). These pension rights are generally viewed as a form of deferred compensation for services rendered by employees. Brown, supra, 15 Cal.3d at 845, 544 P.2d at 565, 126 Cal.Rptr. at 637, 94 A.L.R.3d at 169; Van Loan v. Van Loan, 116 Ariz. 272, 273, 569 P.2d 214, 215 (1977). As such, it is well settled in Arizona and elsewhere that pension rights, whether vested 2 or non-vested 3, are community property insofar as the rights were acquired during marriage, and are subject to equitable division upon divorce. See generally, Annot., 94 A.L.R.3d 176 (1979). As we have previously stated:

"(A)n employee, and thereby the community, does indeed acquire a property right in unvested pension benefits.... Thus, to the extent that such a property right is earned through community effort, it is properly divisible by the court upon dissolution of the marriage."

Van Loan, supra, 116 Ariz. at 274, 569 P.2d at 216. Accord, Bloomer v. Bloomer, 84 Wis.2d 124, 267 N.W.2d 235 (1978); Brown, supra; Cearley v. Cearley, 544 S.W.2d 661 (Tex.1976); Ramsey v. Ramsey, 96 Idaho 672, 535 P.2d 53 (1975); DeRevere v. DeRevere, 5 Wash.App. 741, 491 P.2d 249 (1971); LeClert v. LeClert, 80 N.M. 235, 453 P.2d 755 (1969). The difficulty in the present case arises in attempting to determine the exact dollar amount of the wife's community interest in the husband's pension.

A non-employee spouse may be awarded his or her community interest in the employee spouse's pension benefits under either of two methods. The first has been called the "present cash value method," in which the court determines the community interest in the pension 4, figures the present cash value of that interest, and awards half of that amount to the non-employee spouse in a lump sum, usually in the form of equivalent property; the employee thus receives the entire pension right free of community ties. Under the "reserved jurisdiction method," the court determines the formula for division at the time of the decree but delays the actual division until payments are received 5, retaining jurisdiction to award the appropriate percentage of each pension payment if, as, and when, it is paid out. DiFranza, supra ; Hardie, supra.

The present cash value method provides a number of advantages over the reserved jurisdiction method 6, especially when the anticipated date of retirement is far in the future. The former spouses are spared further entanglement because the litigation is completed, and the problems of continued court supervision and enforcement of the employee's duty to pay the ex-spouse's share are avoided. It is our view that the present cash value method is preferred if the pension rights can be valued accurately and if the marital estate includes sufficient equivalent property to satisfy the claim of the non-employee spouse without undue hardship to the employee spouse. DiFranza, supra ; Hardie, supra.

In this case the present cash value method is clearly preferable in that the reserved jurisdiction method would require continued court supervision for at least 15 years. Moreover, the Johnsons' marital estate has sufficient other property available to make a current equitable division of all community property including the wife's interest in the pension fund.

The accuracy of any attempt to value a retirement plan is heavily dependent upon the type of plan which confronts the court. The two major kinds of pension plans are "defined contribution" and "defined benefit" plans. See DiFranza, supra ; Hardie, supra ; Luther, Luther, and Urie, Equal Treatment for the Community Property Rights of Nonemployee Spouses, 8 Community Prop. J. 91, 93 (1981); Projector, Valuation of Retirement Benefits in Marriage Dissolutions, 50 L.A.B.Bull. 229, 230-31 (1975) (hereinafter cited as Projector). Under a defined contribution plan, a specified amount of money is periodically contributed to a fund by the employer, the employee, or both. This fund is invested and the earnings are divided proportionally among all plan participants. At any moment in time, there is a specific amount of money assigned to the account of each participant. These plans are thus analogous to a savings account. The total amount of benefits receivable under such a plan depends upon the success of fund investments. By contrast, under a defined benefit plan, the benefits are specified in advance, usually as a percentage of salary and related to years of service, and no account is kept for the employee. Both the pension and profit sharing programs in the present case are in the nature of defined contribution plans, as shown by the specific amounts that are credited to the husband's account.

With either type of plan, its present cash value must be determined before a present lump-sum satisfaction of the parties' interests can be made. Various actuarial calculations are used to discount the present value of the retirement plan to reflect contingencies affecting the eventual payout, including discounts for mortality 7, interest 8, probability of vesting 9, and probability of continued employment 10. However, not all of these calculations are applicable to every retirement plan Valuation depends in part on the type of plan involved. In a defined contribution plan, employing individual accounts to which contributions are credited, the best estimate of present value is the amount currently credited to the employee's account. An adjustment, however, must be made if the account figure is not vested or if it is not payable when the employee dies prior to reaching retirement age. If those factors are present, then the account balance must be discounted for the probability of vesting and for the probability of survival to retirement.

Bonavich, Allocation of Private Pension Benefits as Property in Illinois Divorce Proceedings, 29 DePaul L.Rev. 1, 28 (1979) (footnotes omitted). See also DiFranza, supra, at 465-67; Hardie, supra, at 107-08; Projector, supra, at 237.

In the present case the employee's rights in the plans are vested and are not subject to forfeiture if death occurs prior to retirement. Therefore, the discounts for mortality and probability of vesting are inapplicable here. Under a defined contribution plan, the probability of continued employment discount does not significantly alter the present cash value of the plan. The interest discount is also inapplicable because a defined contribution plan is presently earning interest for the employee. Projector, supra at 237. The trial court incorrectly discounted the value of the fund because no consideration was given to the fact that the fund was earning interest and would continue to earn interest. There was no need to discount the value of the account because the value of a defined contribution plan, such as that of appellee, is the present amount credited to the account. See Bloomer v. Bloomer, 84 Wis.2d 124, 267 N.W.2d 235 (1978); Everson v. Everson, 24 Ariz.App. 239, 537 P.2d 624 (1975); Berry v. Board of Retirement, 23 Cal.App.3d 757, 100 Cal.Rptr. 549 (1972); Laffitte v. Laffitte, 232 So.2d 92 (La.App.1970).

FAILURE TO CONSIDER TAX AND INFLATIONARY CONSEQUENCES IN VALUING THE HUSBAND'S INTEREST

The appellee argues that the current value of the retirement account fails to take into consideration the effects of inflation and taxes on the value of his interest in the pension plans, thus reaching an artificially high valuation of that interest. He contends that if the pension account were "sold" now to a financing institution, the discount rate would be at least...

To continue reading

Request your trial
113 cases
  • Bender v. Bender
    • United States
    • Supreme Court of Connecticut
    • December 18, 2001
    ...N.J. Super. 478. If there are sufficient other assets, however, several courts have favored this approach. See, e.g., Johnson v. Johnson, 131 Ariz. 38, 42, 638 P.2d 705, modified and affirmed, 131 Ariz. 47, 638 P.2d 714 (1981); Taylor v. Taylor, 329 N.W.2d 795, 798-99 (Minn. 1983); Kuchta v......
  • Wilkinson v. Wilkinson
    • United States
    • Alabama Court of Civil Appeals
    • April 16, 2004
    ...the value of a defined contribution plan because the value is the present amount credited to that account. See, e.g., Johnson v. Johnson, 131 Ariz. 38, 638 P.2d 705 (1981); Gray v. Gray, 352 Ark. 443, 101 S.W.3d 816 (2003); In re Marriage of Nordahl, 834 P.2d 838 (Colo.Ct.App.1992); Krafick......
  • Marriage of Hunt, In re
    • United States
    • Supreme Court of Colorado
    • December 18, 1995
    ...paid out' " in order to equally apportion the risk of forfeiture upon both parties. Gallo, 752 P.2d at 55 (quoting Johnson v. Johnson, 131 Ariz. 38, 638 P.2d 705, 708 (1981)). IV. A. We agree with the rationale employed by those jurisdictions which reject the "bright line" rule and approve ......
  • Marriage of Gallo, In re, 86SC128
    • United States
    • Supreme Court of Colorado
    • February 8, 1988
    ...of the pension interest to the military spouse. Hunt, 78 Ill.App.3d at 663, 34 Ill.Dec. at 63, 397 N.E.2d at 519; Johnson v. Johnson, 131 Ariz. 38, 42, 638 P.2d 705, 708 (1981). The present cash value method may be preferred if the employee-spouse's pension rights can be valued accurately, ......
  • Request a trial to view additional results
2 books & journal articles
  • How Community Property Jurisdictions Can Avoid Being Lost in Cyberspace
    • United States
    • Louisiana Law Review No. 72-1, October 2011
    • October 1, 2011
    ...specifically determined. In such a case, the court should consider the effects of taxation on the valuation.” (quoting Johnson v. Johnson, 638 P.2d 705, 710 (Ariz. 1981))). 115. See Richardson, supra note 3 , at 734–37; Bryan Maudlin, Comment, Identifying, Valuing, and Dividing Professional......
  • Preliminary Issues
    • United States
    • James Publishing Practical Law Books Divorce Taxation Content
    • April 30, 2022
    ...v. Leftwich , 442 A.2d 139 (D.C. App., 1982). 2 Jones v. Commissioner , 327 F.2D 98 (4th Cir. 1964). 3 See, e.g., Johnson v. Johnson , 638 P.2d 705 (Ariz. 1981); In re Marriage of Fonstein , 552 P.2d 1169 (Cal. 1976); Levan v. Levan , 545 So. 2d 892 (Fla. App. 1989); In re Marriage of Emken......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT