Chapter 36 - § 36.4 • COLORADO'S APPROACH

• Jurisdiction: Colorado

§ 36.4 • COLORADO'S APPROACH

Prior to enactment of the USFSPA, Colorado had determined in In re Marriage of Ellis, 552 P.2d 506 (Colo. 1976), that military retired pay did not meet its definition of property, and the wife was given no part of the husband's military retired pay. Even after passage of the USFSPA, Colorado continued to apply the decision in Ellis that military retired pay did not meet Colorado's definition of property.

However, in the 1987 case of In re Marriage of Grubb, 745 P.2d 661 (Colo. 1987), the Colorado Supreme Court determined that both the husband's contributions to a pension plan and the employer's contributions, to the extent that they were made during the marriage, constituted marital property even though the husband's right to employer contributions was subject to the contingency that he survive until commencement of his retirement. Additionally, in Grubb, the Colorado Supreme Court acknowledged two possible approaches to the division of pensions and retirement benefits, although not specifically labeling them. They are, today, net present value and deferred distribution. The law quickly developed in this area after Grubb.

Thus, in Grubb, Colorado adopted the rule acknowledging that pension and retirement benefits were marital property, overruling Ellis. Subsequently, in the 1988 case of In re Marriage of Gallo, 752 P.2d 47 (Colo. 1988), the Colorado Supreme Court determined that military retired pay was marital property and subject to division in dissolution of marriage cases. Overruling Ellis, the Colorado Supreme Court, for the first time, acknowledged USFSPA. Thereafter, two cases, In re Marriage of Hunt, 909 P.2d 525 (Colo. 1995), and In re Marriage of Kelm, 912 P.2d 545 (Colo. 1996), are natural extensions of the opinions in Grubb and Gallo.

§ 36.4.1—Colorado Adopts Time Rule Formula Under Marital Foundation Theory

In 1995, Colorado adopted the "time rule" formula under the marital foundation theory in the case of Hunt, 909 P.2d 525. In doing so, the Colorado Supreme Court adopted the holdings in several other cases throughout the country. The California case of In re Marriage of Adams, 134 Cal. Rptr. 298 (Cal. App. 1976), held that two of the factors causing the increase in benefits — namely "time on the job" and "increased earnings" — were directly enhanced by the many years credited to the marriage. In In re Marriage of Stoerkel, 711 S.W.2d 594 (Mo. App. 1986), the Missouri Court of Appeals held that "increased benefits arise in part from the service performed during the marriage and for that reason it is proper to make the award on the basis of the total amount which [the employee spouse] would receive at the time such benefits commence." Id. at 597. Additionally, in In re Marriage of Lynch, 665 S.W.2d 20 (Mo. App. 1983), the Missouri court held that "the higher retirement benefits that may be realized by the [employee spouse] by continued employment after the dissolution are made possible, in part, by [the employee spouse's] years of employment during the marriage." Id. at 24. In addition, in Gemma v. Gemma, 778 P.2d 429 (Nev. 1989), it was held that "early working periods are the building blocks to upward mobility and hopefully an increased salary." Id. at 431.

In adopting the time rule formula in Hunt, the Colorado Supreme Court announced that the formula cannot be changed or altered by the court (the parties are free to agree to alternatives), and concluded that equitable considerations are relevant only in choosing which of the three methods (net present value, deferred distribution, and reserve jurisdiction, discussed in detail in § 36.4.4) to use in apportioning the pension. If the deferred distribution method is chosen, the time rule formula as applied to this method cannot be altered.¹⁷ The Colorado Court of Appeals has remarked that the supreme court's decision concerning the time rule formula could only be revisited by the supreme court. In re Marriage of Lockwood, 971 P.2d 264 (Colo. App. 1998). The court in Lockwood also determined that the trial court could not create a fictitious dissolution date for purposes of calculating the wife's share of the husband's military retired pay. Id.

§ 36.4.2—Fault Cannot Be Considered by Court

Fault cannot be used to alter the time rule formula. In re Marriage of Casias, 962 P.2d 999 (Colo. App. 1998). The trial court does have discretion as to which approach it may use: net present value, deferred distribution, or reserve jurisdiction. However, when the trial court elects the method to be used and elects either deferred distribution or reserve jurisdiction, the court must split the marital portions of each pension equally between the parties per the time rule formula set forth in Hunt. In Casias, the husband had been convicted of a felony and received a sentence of 24 years to the Department of Corrections for sexually assaulting the wife's developmentally disabled son and the son's girlfriend, but the time rule formula still applied.

§ 36.4.3—The Coverture Fraction

The coverture fraction is the baseline from which pensions and retirements are valued and is defined as the fraction used to determine the portion of the employee spouse's pension that was acquired during the marriage. The coverture fraction changes depending on the method of valuation the court wishes to use (net present value, deferred distribution, or reserve jurisdiction).

§ 36.4.4—Three Methods of Distributing Pension Benefits in Colorado

Net Present Value Method

Using the net present value method, the former spouse exchanges future contingent post-dissolution enhancements for the benefits of immediate distribution. At the same time, the military member spouse reaps the benefit of potential enhancements that occur post-dissolution. "In addition, if the employee spouse foresees that his or her extraordinary efforts will dramatically increase the value of the pension after the marriage, that spouse may have an incentive to 'cash out' the interest of the nonemployee spouse. Under such circumstances, each spouse stands to benefit." See Hunt, 909 P.2d at 540 n. 14.

The net present value method is final, equitable, and immediately resolves the division of a pension or retirement. However, such division is dependent upon the existence of other assets to be exchanged for the non-employee spouse's interest in the pension or retirement. While this is feasible with shorter marriages, the longer the marriage, the more likely it is that the net present value of the military retirement exceeds the value of the parties' other assets.

Another approach to net present value, where both husband and wife have retirement or pension benefits, is to value both retirements — offsetting one from the other — to allow one to have his or her retirement in full, while receiving a reduced amount of his or her spouse's retirement, calculated on the date of earliest retirement regardless of whether the spouse retires.

Net Present Value and the Time Rule Formula

Colorado, like other states, allows for the division and distribution of retired pay using a time rule formula. Among the formulas is the net present value approach, where the coverture fraction is months of marriage overlapping service, divided by the total months of service to date of decree or retirement (whichever comes first). This fraction, the marital fraction, is then multiplied by the net present value (discounted value) of the projected monthly military retirement, multiplied by 50 percent to determine the dollar value of the military retirement allocated to each spouse. Offsetting can then take place where the military member receives his or her military retirement in exchange for giving up, say, the equity in the house or other property. Additionally, the offsetting asset or assets may be the value of the former non-military spouse's retirement or other assets he or she may want.

The theory of net present value is to determine the immediate value of money to be received in the future. Once the monthly amount to be received is known, several assumptions are applied to determine its net present value; these are the discount rate, life expectancy, and the cost-of-living allowance. In recent years, the discount rate has been lower than its historic average. Colorado has approved using...