California’s Community Property laws apply to how assets are divided at divorce and how assets are transferrable at death. Federal law, however, preempts (supercedes) California’s Community Property laws with respect both to so-called “ERISA (“Employee Retirement Income Support Act”) Qualified Plans” and to all “Federal Retirement” benefits, including Social Security.  Let us discuss.

As the recent 2016 California Appellate decision in Marriage of Peterson (243 CA4th  943) shows, the division of a married couple’s retirement plan benefits in a divorce can be uneven.  In Peterson, the husband contributed to Social Security.  The wife, however, was a member of the Los Angeles County Employees Retirement Association (LACERA) Plan; thus, under federal Social Security law she was prohibited from contributing to Social Security.  Could the husband’s $228,000 Social Security contributions during marriage could be considered in allocating the wife’s $216,000 in LACERA benefits, a Community Property asset under California State law?

The court held that Federal law prevented the Court from considering the husband’s contributions from marital earnings to Social Security when allocating the wife’s LACERA benefits.   To do otherwise would be to offset the husband’s Social Security benefits against the wife’s LACERA benefits, which is prohibited under Federal Social Security Law.  The wife’s LACERA benefits, however, was Community Property under state law, and had to be divided equally.  Thus, the husband kept his Social Security benefits, entirely, under federal law and gained one-half of his wife’s LACERA benefits, under California state law.

If, however, a spouse, once divorced, dies unmarried and leaves his or her ex-spouse as beneficiary to an ERISA Qualified Plan, then under ERISA the ex-spouse still inherits, notwithstanding that California’s Probate Code provides that divorces terminates the inheritance rights of a surviving ex-spouse.

The lifetime division of a spouse’s ERISA Qualified Plan during a divorce, e.g. a 401(k) retirement plan, however, can be more equitable. Although federal law protects an employee (and his or her beneficiaries) who participates in an ERISA Qualified Plan against any alienation (assignment) of benefits, a significant exception exists for Qualified Domestic Relations Order (“QDRO’s”).  Provided the court’s order meets the QDRO requirements, the court can order the transfer of an interest in an ERISA Qualified Plan to a non participating spouse in dissolution proceedings.

After death, however, a deceased non participating spouse (whose spouse contributed marital earnings into an ERISA Qualified Plan) cannot devise what would have been his or her one-half Community Property interest. So decided the US Supreme Court in the landmark Boggs v. Boggs decision ((1997) 520 US 833).

ERISA also protects a surviving non participant spouse because the participant spouse may not name anyone else as the primary death beneficiary without the non participating spouse’s consent.

Thus unless the non participant spouse survives and inherits the deceased participant’s ERISA Qualified retirement plan, the non participant spouse will not be able to control who later inherits the retirement plan after the surviving participant spouse dies.

With respect to non qualifed plans, however, including Individual Retirement Accounts (“IRA’s), and all other non probate assets that pass to designated death beneficiaries (including regular Life Insurance, Annuities, and Pay on Death Accounts), California’s Community Property Law normally still applies.

The contributing spouse whose name is on the account needs the consent of the non contributing spouse to name death beneficaries with respect to the one-half of the contributions made from marital earnings that belongs to the non contributing spouse.

As discussed, Federal Law can have major implications for the non contributing spouse and his or her beneficiaries. While federal law protects a living non contributing spouse, it does not protect a deceased non participating spouse’s right to transfer his or her one-half Community Property interest.  Clearly, anyone confronting any of these legal issues needs to consult with a qualified attorney for guidance.

“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”