§ 8.03 Disability Benefits
| Jurisdiction | United States |
| Publication year | 2021 |
§ 8.03 Disability Benefits
The characterization of disability benefits as marital or separate property is anything but simple. For example, there are different types of disability benefits. Moreover, some types of benefits are paid from "disability retirement" plans which incorporate some aspects of a retirement plan benefit whereas other benefits solely are income replacement plans which incorporate no aspects of a retirement plan benefit. Income replacement plan benefits generally terminate when the disabled person attains the normal retirement age,261 and the amount of the benefit does not depend upon length of service. Disability plans that replace longevity retirement generally continue until death and the benefit amount is affected by length of service.
The differences among the various types of disability plans may be at least part of the reason why courts in different states have reached different conclusions regarding the function of such benefits. Some courts have decided that disability benefits compensate the injured spouse for pain and suffering,262 while other courts have concluded that the benefits are intended to replace lost earnings.263 Other decisions state that disability benefits are intended to compensate various losses, such as pain and suffering, lost earnings,264 and even pension rights in some circumstances.265
Because disability plans can serve such different functions, some courts have urged that disability benefits be characterized on a case-by-case basis.266
In light of the different types of disability plans and the courts' conflicting perceptions of the function of the benefit, it is not surprising that decisions in this area are not consistent.
[1]—Benefits Received During Marriage Regarding a Disability During Marriage
Most courts would agree that benefits received during marriage regarding an injury during marriage are marital property. Under the implied exclusion approach267 most courts would agree that the benefits would be marital property, since disability benefits are not included in the examples of separate property set forth in the statute.268 The onerous title analysis269 would yield the same result if the disability benefit is perceived to represent lost earnings. Since earnings during marriage are marital property, a replacement award should be characterized identically.270 If the award included compensation for lost earnings after divorce, however, that portion of the award would be separate property.271
Under an "analytic" approach, disability benefits received during marriage generally would be characterized as separate property if the benefits were considered compensation for pain and suffering. If this conclusion is reached, and an onerous title analysis is applied, and pain and suffering awards during marriage are considered separate property in the state, the benefits would be considered the separate property of the disabled spouse.272
If a court applied an "analytic" approach to determine the character of disability benefits,273 the portion of the recovery intended to compensate the injured spouse for post-divorce lost earnings, would be that spouse's separate property, even if the entire benefit is received during marriage in a lump sum.274 If the award is intended to compensate both lost earnings during marriage and lost earnings after divorce, the recovery would be partly separate and partly marital. It may be difficult in some instances to determine how much of the award represents post-divorce lost earnings.275 Under the analytic view, benefits received to replace lost earnings during marriage would be marital property.276
In a Georgia case, the husband became totally disabled during the marriage and received a lump-sum payment during marriage for $1,500,000. The Georgia Supreme Court noted that the benefit had no retirement component. As such, under the analytic approach the marital estate had a claim to the settlement to the extent that it was intended to compensate for medical expenses incurred during marriage paid with marital funds or for lost wages during marriage. Apparently there was no claim that the award was intended to compensate for medical expenses. Therefore the marital claim in this case was limited to the portion of the settlement that was attributable to lost wages during marriage. The court calculated that the husband did in fact lose about $200,000 in wages during marriage as result of his injury. However as of the date of divorce the parties had spent $640,000 of the settlement. The Georgia Supreme Court concluded that, as a result of these expenditures, there was no residual marital claim to the remaining settlement proceeds.277
[2]—Benefits Received After Divorce Regarding a Disability During Marriage
[a]—Whether Property Is "Acquired" During Marriage
In marital property jurisdictions,278 a divorce court may only divide marital property. Marital property is generally defined as property "acquired" during the marriage. In this context, it would have to be decided whether the right to the disability payments should be deemed acquired during marriage, even though the benefits would not be received until after divorce. Courts sometimes have concluded that pending personal injury claims are not acquired during marriage.279 However, workers' compensation claims that are pending at divorce normally are considered acquired during marriage.280 The issue has not been considered in many disability cases.281
The Fifth Circuit seemed to apply this approach when considering the character of a disability benefit being received by a former professional football player. He was married while playing football; he and his wife divorced after his retirement from football. After divorce, the former player became disabled and, as a result, entitled to payments from an NFL disability plan. When his ex-wife sued to obtain a portion of the benefits, the Fifth Circuit held she was entitled to some of these benefits, because he had "earned" them by playing football during the marriage.282
A North Carolina court took a different view toward NFL disability benefits. The husband played football for six years during marriage. He was injured three times during marriage and a fourth time after the parties separated. After the final injury, he qualified for two different disability benefits from the NFL. One was a "line of duty" disability benefit, a benefit paid to players when they are injured and can no longer play football. The other was a "total permanent disability benefit," a benefit paid to players whose injury makes them unable to sustain any type of employment. The court of appeals ruled that both benefits should be characterized based on what wages are being replaced.283
[b]—Characterization Based upon What the Benefits Replace
An onerous title analysis (the "analytic" approach)284 would attempt to determine the character of the property being replaced by the disability benefits. This is the most common approach used today for disability benefits. If it is perceived that the property being replaced is lost earnings during marriage, the benefits would generally be considered marital property. The benefits would be considered separate property to the extent that lost wages after divorce were being compensated, since such wages would have been separate property.285 To the extent the benefits represented pain and suffering286 or pension benefit287 replacement, the benefits would be characterized in the same manner as the benefit replaced. (This would also be true in "kitchen sink" states because in those states post-divorce acquisitions are not divisible).288
If a court applies such an "analytic" approach it should not matter whether the injured party receives periodic payments or a lump sum settlement.289
In an Arizona case, the husband became disabled during the marriage and began receiving monthly disability benefits. The benefits were to continue until he reached the age of sixty-five. When the parties later filed for divorce, the wife argued that the benefits to be received after divorce should be included in the marital estate. Applying the "analytic" approach, the appellate court affirmed the ruling by the trial court that they were the husband's separate property, as a replacement for his lost post-divorce income.290
To such courts, it may be significant whether the injured spouse's earning capacity has really been affected. For example, when justifying including the disability award in the marital estate, a Nebraska court noted that the husband remained employed.291 In contrast, in a Pennsylvania case the court held that the post-divorce periodic benefits were the injured spouse's separate property.292 The court emphasized that the benefits were payable only as long as the insured could not work.
Indiana has developed an unusual test in this area. If no marital funds were used to purchase the disability protection (apparently via an employer bearing the total cost), the post-divorce benefits are not in the marital estate.293 If marital funds are used to pay for the insurance, the benefits are marital property.294
Most courts have not accepted this analysis. For example, an Arizona court held that the husband's post-divorce disability benefits were separate property even though the disability insurance premiums were paid with marital property.295
When applying the onerous title analysis to disability awards, the California Supreme Court has distinguished between disability awards and pensions. The court characterized pensions as deferred compensation for past services. In contrast, disability awards were perceived as payments "to compensate the disabled [person] for the loss of . . . [wages] caused by his premature retirement and for his diminished ability to compete for . . . employment."296 In addition, the California court concluded that disability benefits are partially pain and suffering compensation, a characteristic not found...
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