Tax Consequences Issue: Should the court take into consideration future tax consequences when distributing pension benefits?

General Discussion:

The states are mixed with regard to the propriety of reducing the value of a retirement plan to account for taxes that eventually may be owed on income received from the plan. Some courts have taken the view that income taxes should be subtracted when valuing a retirement plan, since the income will definitely be taxed when received. Others have held it improper because future tax rates are unknown and thus speculative.

When a retirement plan is distributed through a qualified domestic relations order (QDRO) which provides each spouse with a share of the plan as it is paid, the future income tax liability does not have to be deducted from the current value of the Plan. When the Plan distributes the benefits to each party, the appropriate deduction will be made from the benefits to account for income tax liability. However, if the court requires the participant to withdraw funds from the account, early withdrawal penalties and income taxes are normally taken into account.

State Case Law

The following is a summary of case laws we have come across in our research of this topic. If nothing is listed under a particular state it is because we have not found any pertinent cases relative to this topic. If you know of a case that relates to this topic, and do not find it listed here, please e-mail us the citation so that we can include it in this section.
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ALABAMA

ALASKA

Dodson v. Dodson, 955 P.2d 902 (Alaska 1998)
Discount the value of defined contribution plan to account for taxes.

Oberhansly v. Oberhansly, 798 P2d 883 (Alaska 1990)
Mann v. Mann, 778 P.2d 590 (Alaska 1989)

If the trial court expressly or effectively requires the participant to withdraw funds from the account, early withdrawal penalties and income taxes must be taken into account.

Barnes v. Barnes, 820 P. 2d 294 (1991)
Do not consider.

Broadribb v. Broadribb, 956 P. 2d 1222 (1998)
Court was not required to consider tax consequences for stock options.

ARIZONA

Johnson v. Johnson, 131 Ariz. 38, 638 P.2d 705 (1981)
Do not Consider in Valuation - too speculative- However if maturity date is close to trial, such consideration is proper..

ARKANSAS

Bagwell v. Bagwell, 668 S.W. 2d 949 (1984)
Where court divides pension by reserved jurisdiction, the tax consequences are much less speculative and may be reasonably calculated.

CALIFORNIA

In re Marriage of Marx, 97 Cal.App.3d 552, 159 Cal.Rptr. 215 (1979)
In re Marriage of Marx, 97 Cal. App. 3d 552, 159 Cal. Rptr. 215 (1979)

It is improper to deduct income taxes when valuing a retirement plan, primarily because future tax rates are unknowable and thus speculative.

COLORADO

In re Marriage of Bayer, 687 P.2d 587 (Colo. Ct. App. 1984)
Early retirement penalties should not be deducted absent evidence that the property distribution necessitates the withdrawal.

In re Howell, 806 P. 2d 1209 (1991)
Too speculative to consider.

CONNECTICUT

DELAWARE

DISTRICT OF COLUMBIA

FLORIDA

King v. King, 719 So. 2d 920 (Fla. Dist. Ct. App. 1998)
An appellate court reversed because the trial court reduced the present value of the husband’s pension by approximately one third in an attempt to compensate for the future taxes which the husband would have to pay on his distributions. The record did not indicate that the parties submitted any evidence with regard to the taxes that the husband may have to pay on the distributions, the court explained.

GEORGIA

HAWAII

IDAHO

ILLINOIS

In re Marriage of Emken, 427 NE. 2d 125 (1981)
Do not consider.

In re Marriage of Olson, 585 N.E. 2d 1082 (1992)
Too speculative to consider.

In re Perino, 224 Ill. App. 3d 605, 167 Ill. Dec. 172, 587 N.E.2d 54 (1992)
Tax consequences that must be considered are those that immediately flow from the court’s decision; remote consequences or the result of voluntary actions should not be considered.

In re Kapusta, 141 Ill. App. 3d 1010, 96 Ill. Dec. 234, 491 N.E.2d 48 (1 Dist. 1986)
The court did not abuse its discretion in refusing to reduce the value of the spouse’s pension by a speculative future tax liability.

INDIANA

Irvine v. Irvine, 685 N.E.2d 67 (Ind. Ct. App. 1997)
The trial court ordered an immediate cash payment of $400,000, yet the assets subject to division included only $150,000 in cash, the court observed. The husband could obtain the cash to fulfill the distribution plan only by liquidating his pension plan, the court noted. Therefore, the tax consequences of early liquidation were not speculative and should have been considered, the court decided.

Qazi v. Qazi, 546 N.E.2d 866, 871 (Ind.Ct.App. 1989)
Court held that where a trial court’s distribution avoids the need to liquidate pension or retirement plans - through a carefully fashioned periodic payment schedule, for example - any potential tax consequences of early liquidation are speculative and should not be considered in making a distribution.

In re Mulvihill, 471 N.E. 2d 10 (1984)
Should be considered.

Knotts v. Knotts, 693 N.E.2d 962 (Ind. Ct. App. 1998)
Capital gains are future tax consequences that cannot be considered.

Wright v. Wright, 471 N.E. 2d 1240 (1984)
Do not consider.

In re Hiser, 692 N.E.2d 925 (Ind. Ct. App. 1998)
Court can/should deduct taxes paid after exercising a stock option when valuing a marital estate.

IOWA

In re Marriage of Hogeland, 448 N.W.2d 678 (Iowa Ct. App. 1989)
The court took the view that income taxes should be subtracted when valuing a retirement plan, since the income will definitely be taxed when received. When a retirement plan participant must liquidate pension assets to pay cash to a spouse, tax consequences of that withdrawal must be factored in.

KANSAS

KENTUCKY

Owens v. Owens, 672 S.W. 2d 67 (1984)
Court erred in not delaying division of pension where current division would result in severe tax consequences to husband.

LOUISIANA

MAINE

MARYLAND

Rosenberg v. Rosenberg, 64 Md.App. 487, 497 A.2d 485 (1985)
Tax on pension plans should not be considered at valuation stage.

Merriken v. Merriken, 590 A.2d 566 (1991)
Must consider if more than merely speculative.

MASSACHUSETTS

Sheskey v. Sheskey, 16 Mass. App. Ct. 159, 450 N.E.2d 187 (1983)
If the trial court expressly or effectively requires the participant to withdraw funds from the account, early withdrawal penalties and income taxes must be taken into account.

Bennett v Bennett (1983) 15 Mass App 999, 448 NE2d 77
Probate judge had no obligation to consider tax effects of his order for division of marital assets, absent request to do so and evidence relevant to issue.

Fechtor v Fechtor (1989) 26 Mass App 859, 534 NE2d 1, review den (1989) 404 Mass 1103, 537 NE2d 157
It is preferable for probate judge making equitable distribution of marital estate to calculate tax impact of liquidating assets, but judge should be furnished evidence of tax consequences by parties.

MICHIGAN

Nalevayko v. Nalevayko, 198 Mich. App 163, 497 N.W2d 533 (1993)
Failure to consider tax consequences of pension award did not amount to abuse o discretion, since property division was equitable regardless of whether the pretax or post-tax value of the pension was used.

Lesko v. Lesko, supra, 457 N.W.2d at 699.
Tax consequences should be taken into consideration when valuing pensions.

Rosenberg v. Rosenberg, 497 A. 2d 485 (1985)
Do not consider in valuation - too speculative.

MINNESOTA

Brockman v. Brockman, 373 N.W.2d 664 (Minn. Ct. App. 1985)
Early retirement penalties should not be deducted absent evidence that the property distribution necessitates the withdrawal.

MISSISSIPPI

MISSOURI

In re Stuart, 805 S.W. 2d 309 (1991)
Should be considered.

MONTANA

In re Gilbert, 628 P. 2d 1088 (1981)
Do not consider in valuation - too speculative.

NEBRASKA

Buche v. Buche, 228 Neb. 624, 423 N.W.2d 488 (1988)
Early retirement penalties should not be deducted absent evidence that the property distribution necessitates the withdrawal.

Buche v. Buche, 228 Neb. 624, 423 N.W.2d 488 (1988)
Income tax that will eventually have to be paid on individual retirement account should be considered in determining account’s present value.

NEVADA

NEW HAMPSHIRE

NEW JERSEY

Orgler v. Orgler, 237 N.J. Super. 342, 568 A.2d 67 (App. Div. 1989)
It is improper to deduct income taxes when valuing a retirement plan, primarily because future tax rates are unknowable and thus speculative.

NEW MEXICO

Mattox v. Mattox, 105 N.M. 479, 734 P.2d 259 (Ct.App. 1987)
Future tax consequences of deferred pension payments are speculative and should be disregarded in calculating present value.

NEW YORK

De La Torre v. De La Torre, 183 A.D.2d 744, 583 N.Y.S.2d 479 (1992)
Distributive award to the wife was excessive inasmuch as the court failed to reduce his pension amount by 34%, which is income tax to be paid up on the early withdrawal.

Majauskas v. Majauskas, 94 A.D.2d 913, 464 N.Y.S.2d 913, affd, 61 N.Y.2d 481, 474 N.Y.S.2d 699 (1983)
Taxes should be subtracted in valuing pensions.

Lauricella v. Lauricella, 532 NYS 2d 907 (1988)
Court did not err in computing pension award to wife without regard to tax consequences since husband failed to present any evidence from which court could have determined amount of taxes.

Povosky v. Povosky, 508 NYS 2d 722 (1986)
Supreme court did not err in computing award of wife’s share of husband’s pension without taking into consideration tax consequences to parties where husband failed to present any evidence from which court could have determined dollar amount of tax consequences.

Tereszkiewicz v. Tereszkiewicz, 128 A.D. 2d 605 (1987)
Husband was entitled to recomputation of wife’s interest in his pension for purposes of equitable distribution where trial court failed to discount its value by amount of his income tax liability thereon.

NORTH CAROLINA

Wlkins v. Wlkins, 111 N.C. App. 541, 432 S.E.2d 891 (1993)
It is improper to deduct income taxes when valuing a retirement plan, primarily because future tax rates are unknowable and thus speculative.

Smith v. Smith, 411 SE. 2d 197 (1991)
Do not consider.

Shaw v. Shaw, 451 S.E.2d 648 (1995)
Courts must consider nonliquid nature and tax consequences of forced distributions from retirement plan for distributive award.

Mishler v. Mishler, 67 S.E.2d 385 (1988)
Employment benefits should be calculated as of date of separation, and the value of the employment benefits should be done at the net value as of date of separation which should include the taxes which would be payable upon receiving the benefits,

NORTH DAKOTA

Kaiser v. Kaiser, 474 N.W. 2d 63 (1991)
Do not consider.

OHIO

Day v. Day, 40 Ohio App. 3d 155, 532 N.E.2d 201 (1988)
Trial court could properly apply the present tax rates when considering tax consequences even if the rate used by the trial court was the highest applicable rate.

Where court divides pension by reserved jurisdiction, the tax consequences are much less speculative and may be reasonably calculated.

Fergus v. Fergus, 117 OApp3d 432, 690 NE2d 949
Tax consequences need not be considered when they are speculative.

Guziak v. Guziak, 80 OApp3d 805, 610 NE2d 1135
The court was not required to address the tax effects of dividing the husband’s monthly pension payment where the wife’s share qualified or tax purposes as alimony paid.

Guidubaldi v. Guidubaldi, 581 N.E. 2d 621 (1990)
Do not consider.

Noll v. Noll, 55 OApp3d 160, 563 NE2d 44
Whether or not the value of a party’s pension and retirement plans which are not immediately terminated should be reduced by estimated future tax consequences on distribution and, if so, by how much, is a factor best left to the discretion of the trial court after hearing all the evidence and any expert testimony as to those tax consequences.

OKLAHOMA

Carpenter v. Carpenter, 657 P.2d 646 (1983)
Do not consider in valuation - too speculative

OREGON

In re Marriage of Drews, 153 Or. App. 126, 956 P.2d 246 (1996)
The trial court did not err in discounting the value of the husband’s retirement accounts by 40% for future income tax liability.

In re Marriage of Colling, 139 Or. App. 16, 910 P.2d 1165 (1996)
Appeals court held that it is appropriate to discount the value of a retirement account for taxes when there is evidence in the record specifically establishing the tax rate.

In re Marriage of Rogers, 47 Or.App. 963, 615 P.2d 412 (1980)
Taxes should be subtracted in valuing pensions.

In re Claperton, 649 P. 2d 620 (1982)
Do not consider in valuation - too speculative.

In re Helm, 813 P. 2d 1994 (1986)
Too speculative to consider.

PENNSYLVANIA

Hovis v. Hovis, 518 Pa. 137, 541 A.2d 1378 (1988)
It is improper to deduct income taxes when valuing a retirement plan, primarily because future tax rates are unknowable and thus speculative.

Potential tax liability may be considered in valuing marital assets only where taxable event has occurred as result of divorce or equitable distribution of property or is certain to occur within time frame in which tax liability can be reasonably predicted.

Smith v. Smith, Pa. Super., 653 A.2d 1259 (1995)
When a retirement plan is distributed through a qualified domestic relations order (QDRO) which provides each spouse with a share of the plan, the future income tax liability does not have to be deducted.

RHODE ISLAND

SOUTH CAROLINA

Graham v. Graham, _ S.C. 390 S.E.2d 469 (Ct. App. 1990)
Trial court should have deducted income taxes as well as early withdrawal penalty when it determined present liquidated value of husband’s individual retirement account.

Contra Graham v. Graham, 301 S.C. 128, 390 S.E.2d 469 (Ct. App. 1990)
Early retirement penalties should not be deducted absent evidence that the property distribution necessitates the withdrawal.

Harwick v. Harwick, 399 S.E. 2d 791 (1990)
Do not consider.

SOUTH DAKOTA

TENNESSEE

TEXAS

UTAH

Howell v. Howell, 806 P. 2d 1209 (1991)
Too speculative to consider.

VERMONT

VIRGINIA

Broom v. Broom, 15 Va. App. 497, 425 S.E.2d 90 (1990)
Early retirement penalties should not be deducted absent evidence that the property distribution necessitates the withdrawal.

Payne v. Payne, No. 1751-88-4 (Ct. of Appeals Apr. 17, 1990)
Trial court did not err in failing to adjust the award for tax consequences, where the parties failed to present evidence concerning the tax consequences if, in fact, liquidation of property were necessary to satisfy the award.

Newland v. Newland, No. 1837-96-4 (Ct. of Appeals Apr. 8, 1997)
Having considered the tax consequences before reaching its decision on the method of distributing the parties’ marital assets, the court was not required to frame its ruling to minimize or eliminate all negative tax consequences to husband.

WASHINGTON

WEST VIRGINIA

Kapfer v. Kapfer, 187 W. Va. 396, 419 S.E.2d 464 (1992)
Circuit court should consider the tax consequences in determining the division of stock shares.

WISCONSIN

Corliss v. Corliss, 107 Wis. 2d 338, 320 N.W.2d 219 (Ct. App. 1982)
Income taxes should be subtracted when valuing a retirement plan, since the income will definitely be taxed when received.

Wahl v. Wahl, 159 N.W. 2d 651 (1968)
Too speculative to consider.

WYOMING

Blanchard v. Blanchard, 770 P. 2d 227 (1990)
Do not consider.


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