California Family Law Report

Case of the Month Archive

Justices suggest establishing trust to receive survivor benefits from which to pay wife’s share . . .

In opinion on remand, Sixth District holds that trial court abused it discretion by ruling that reacquired service credits in husband’s retirement benefits were all community property and by awarding entire survivor benefit to his ex-wife with limited equalizing payment

When Gordon Sonne began working as a Monterey County deputy sheriff in 1971, he acquired membership in the Public Employees’ Retirement System (PERS). At the time, he was married to his second wife, Dalia, but that marriage ended in 1991. In their disso judgment, the trial court awarded Dalia an interest in Gordon’s PERS retirement as part of its division of the parties’ community property. Gordon married Theressa in November 1994.

In 1995, Dalia cashed out her interest in Gordon’s retirement by withdrawing her share from his contributions to and the interest on his retirement account. Two years later, Gordon, who wished to reacquire the service credits to which Dalia’s withdrawal related, began redepositing contributions and interest through monthly deductions from his paycheck (and later from his retirement allowance payments). Gordon was elected Sheriff of Monterey County in 1998. By February 2002, he had reached the age and years of service that entitled him to maximum retirement benefits. In November 2002, in preparation for his retirement, Gordon selected PERS Option 2 as his retirement plan; Option 2 provided a retirement allowance until Gordon’s death and thereafter to his designated beneficiary for life. Gordon designated Theressa as his beneficiary. He retired in December 2002.

Unfortunately, as often happens, retirement did not prove to be conducive to marital bliss. Gordon and Theressa separated and he filed for divorce in January 2004. In response to Theresssa’s motion, the trial court later awarded her pendente lite spousal support and attorney’s fees. In March 2005, the court ordered PERS joined in the disso. At the disso trial in June 2005, Gordon’s expert pegged the actuarial value of Gordon’s stream of retirement allowance payments at $1.7 million, not including the survivor benefit, and attributed $250,000 of that value to Gordon’s contributions and accrued interest. The expert testified that by choosing Option 2 instead of an unmodified retirement allowance, Gordon received monthly payments that were roughly $684 lower, and that the total value of his retirement allowance was 6.6% lower; the expert estimated that the actuarial value of the reduction was $212,000. The expert also asserted that the survivor benefit, which he characterized as a life insurance policy, would provide lifetime payments to Theressa of $4,496 per month and had an actuarial value of $403,000. When he added that value to the actuarial value of Gordon’s retirement allowance, the two totaled more than $2 million. The expert calculated Theressa’s community share of the benefits at $250,000, but claimed that she should make an equalizing payment to Gordon of $153,000 to make up for the difference between her community share and the value of the survivor benefit. In the expert’s view, Theressa was not entitled to share Gordon’s retirement allowance because she would receive the entire survivor benefit. He opined that the reacquired service credits were Gordon’s separate property, but the community had a right of reimbursement for the community funds used to make the redeposit.

Theressa’s expert agreed with the calculations of Gordon’s expert, but not with the proposed method of division. Her expert recommended that Theressa be awarded the full survivor benefit, but be required to reimburse Gordon for the cost of the benefit, $122,000. In a post-trial submission, her expert contended that the service credits attributable to the redeposit made with community funds should be considered community property. He calculated Theressa’s community interest in Gordon’s retirement benefits at 11.75%, and with additional years for reacquired credits, at 21.03%.

In February 2006, the trial court entered a disso judgment in which it found that the service credits reacquired with the redeposit of community funds were community property, and that the community’s share of Gordon’s retirement benefits was 41.22%, making Theressa’s share 20.61%. The trial court awarded all of the survivor benefit to Theressa, but ordered her to pay its monthly cost ($680) from her share of the PERS retirement. The trial court reasoned that this payment would give Gordon the amount of monthly benefit he would have received if he hadn’t elected Option 2 and would thus make him whole. The judgment also ordered Gordon to pay spousal support of $3,065 a month to Theressa until she began receiving her PERS payments, after which his payments would drop to $1,500 a month until they ceased altogether on July 1, 2008. Gordon was also ordered to pay $10,000 toward Theressa’s attorney’s fees.

Gordon appealed and Theressa cross-appealed. In a now-vacated opinion, the Sixth District affirmed the trial court’s order regarding the reacquired service credit, but reversed as to its orders regarding the survivor benefit. Gordon petitioned the California Supreme Court for review, and, after limiting the issue to the reacquired service credit, the Supremes reversed and remanded to the Sixth District for further proceedings consistent with its opinion. In its opinion on remand, the Sixth District reversed the trial court’s judgment and remanded with directions.

The word from on high . . .
Turning first to the issue of the reacquired service credit, the justices followed the high court’s lead in analyzing the trial court’s method of calculating the community interest in that credit. Echoing the Supremes, the panel noted that the trial court failed to understand that Gordon’s retirement allowance was made up of two parts, the annuity and the pension, and that the community contributions funded only the annuity part, while employer contributions funded the pension part. Moreover, the justices continued, the trial court failed to grasp that the community had not purchased the reacquired service credits through its contributions; instead, the redeposit of member contributions was a condition precedent to receiving the credits. Gordon had earned the service credits during his marriage to Dalia that were later reacquired through community contributions. The community acquired a pro tanto share only in the annuity portion, not in the employer-funded part, which Gordon had earned while he was married to Dalia. The trial court, however, had treated the benefits as all of one kind. Therefore, the justices remanded to the trial court for it to take evidence, select, and apply an appropriate apportionment method.

If it seems too good to be true . . .
The justices next considered whether the trial court abused its discretion by awarding Theressa the entire survivor benefit, with an equalizing payment of only the monthly cost of the benefit. The panel reasoned that the trial court’s method of division did not result in the statutorily-required equal division because the cost of the benefit was not equal to its value. The evidence showed that the actuarial value of the survivor benefit was $403,000, which far exceeded its cost of $121,000. Thus, the trial court, proceeding from a faulty premise, reached a result that failed to fairly consider the value of his separate and community interests in the survivor benefit or the relative contributions of the separate and community estates. The justices noted that the lower court was not required to accept Gordon’s proposal that it order Theressa to pay his share of the benefit’s present actuarial value as an equalizing payment, but, it was not permitted to choose an apportionment method that did not reasonably reflect the relative separate and community contributions. Instead of following the requirements of Fam C §2550 [equal division] and §2610 [each party must receive full community share of retirement benefits], and In re Marriage of Lehman (1998) 18 Cal.4th 169, 74 Cal.Rptr.2d 825, 1998 CFLR 7933, 1998 FA 856 [trial court has discretion to choose apportionment method, but chosen method must produce result representing relative separate and community contributions], the panel said, the lower court chose a method of apportioning the survivor benefit that did not comply with the law. Thus, the justices reversed and remanded for the trial court to use a proper apportionment method, either the same one applied to the retirement allowance, with a trust to direct the payment of Gordon’s share to his estate, heirs, or designated beneficiary; or another method that complies with the statutes and Lehman .

In the aftermath . . .
Theressa argued that if the justices reversed the trial court’s judgment, they should also order the lower court to reconsider both its spousal support and attorney’s fees orders because the reversal would significantly impact her financial situation. The panel agreed, authorizing the lower court to reconsider both rulings. In addition they reversed and remanded with directions to the trial court to hear evidence, then select and apply an appropriate method of apportioning the community interest in Gordon’s retirement benefits. In addition, the justices directed the court to either issue an order directing the establishment of a trust into which Gordon’s survivor benefits would be paid and providing that Theressa would receive her share of the community interest in each payment, with the rest paid to Gordon’s heirs, estate, or other designee, or to select another method of apportioning the survivor benefit that complies with statutes and case law.