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ALIMONY – PROPERTY SETTLEMENTS

SECURITY INTEREST – LIEN – QDRO ENFORCEMENT

Listajo and Jane Pacaro divorce. As part of the Marital Settlement Agreement Jane is awarded monthly alimony for 84 months in the amount of $4,500.00. Additionally, Jane is awarded a half interest in a property owned by Listajo. The property is in state Y, 2,500 miles from State X where the divorce took place.

At the time of divorce Jane's interest in the property was agreed to be $250,000.00. For a variety of considerations the sale of the property is deferred for three years.

The Effort to Secure Jane's Interest Starts Here.

Listajo Pacaro is a participant in a 401(k) Plan. Its value at the time of divorce was $975,000.00. As part of the Property Settlement Jane was awarded half of this value and the plan rolled her interest into an IRA. The balance remaining in Listajo's 401(k) on 9/1/2014 was $487,500.00. By September 2017 Listajo's account balance in his 401(k) Plan had increased to $604,342.00. [1]

The terms of the Marital Settlement Agreement provided that upon the sale of the property Listajo is to pay to Jane her interest in the sold property. The amount payable to Jane is $250,000.00. Listajo became the "Constructive Trustee" of Jane's court awarded share of the property.

Caution.

The intent of the Article is to alert the family practitioner to the fact that though contrary to the Marital Settlement Agreement and in clear violation of the terms of the Constructive Trust, Listajo may not comply with the Agreement and simply not pay Jane her $250,000.00 award in 2017. Is Listajo in violation of the Marital Settlement Agreement? Yes! It is unquestioned that the Marital Settlement Agreement created a contractual obligation, but, that does not mean that Jane can be absolutely certain that Listajo will comply with the agreement.

SUGGESTED ACTION TO FURTHER ASSURE JANE THAT HER AWARD WILL BE PAID IN A TIMELY MANNER.

The Security Interest QDRO or QDRO Lien.

This is not a new or novel procedure. The genesis of this procedure was a 1991 Tax Court Decision; Darby v. Commissioner, 97 T.C. 51. This decision provided:

Under the statute (section 414(p)(1)(A)(i)) as enacted by REA '84…, the status of an order as a QDRO is not affected by whether the order makes the alternate payee an owner of the interest under the plan or merely gives the owner a lien or other security interest in the plan. (emphasis mine)

Shortly after the Darby decision the IRS in a Private Letter Ruling opined:

The Wife would receive a security interest in the Husband's

remaining interest in the Plan, to secure the Husband's obligations to the Wife under paragraph 9 of the Judgment.

ISSUES.

Based on Darby and several Private Letter Rulings it does not contravene ERISA's anti-assignment provisions when a QDRO assigns to a Wife a security interest intended to secure Husbands obligations to Wife as delineated in a Marital Settlement Agreement. [2]

Critical Question.

Is a security arrangement in which a lien is placed against the Husband's interest in the Plan in accordance with the terms of a Qualified Domestic Relations Order an assignment permitted under Internal Revenue Code §401(a)(13)(B)?

The Regulations Provide the Answer.

Under section 1.401(a)-13(c)(1)(ii) of the Income Tax Regulations, the term "assignment" includes any direct or indirect arrangement (whether revocable or irrevocable) whereby a party acquires from a participant or beneficiary a right or interest enforceable against the plan in, or to, all or any part of a plan benefit payment which is, or may become, payable to the participant or beneficiary.

DRAFTING TO CREATE A SECURITY LIEN.

This is likely to require the skills of an experienced QDRO attorney. For your specific matter consult this office.



[1] Increase attributed to earnings and annual contributions.

[2] Merged or Incorporated into the Final Judgment of Divorce.