Is it Time for Gillmore to Go?

• Publication year: 2019
• Author: James M. Crawford, Jr.

Is it Time For Gillmore to Go?

James M. Crawford, Jr.

James M. Crawford, Jr. is an employee benefits attorney who for over 34 years has been assisting family law attorneys with the characterization, apportionment, and division of qualified and non-qualified retirement benefits and other forms deferred compensation. He has presented on the subject for various organizations, including the ACFLS, CEB, AAML, the CPA Society, California and Texas State Bars Advanced Courses, McGeroge School of Law, and the Judicial Institute of California. He is a co-author of the chapters on the characterization and division of employee benefits for CEB's Marital Settlement and Other Family Law Agreements, and for a similar publication of Matthew Bender; and has served as CEB's Sr. Editorial Consultant for Dividing Pensions and Other Employee Benefits in California Divorces. Mr. Crawford is also a co-author of "Crossover Issues in Estate Planning and Family Law," published in 2011 by CEB, and updated annually. Mr. Crawford has written a number of articles for the California and Texas bar associations regarding selected issues frequently encountered in QDRO practice.

Introduction.

In re Marriage of Gillmore, 29 Cal. 3d 418 (1981) (Gillmore), the California Supreme Court held that when an employee spouse qualifies for early retirement under his¹ pension plan but is not yet ready to retire; the non-employee spouse may still receive her share immediately by making what has come to be known as a "Gillmore demand." In response, the employee spouse must either pay the nonemployee spouse the actuarial value of her interest² using his own funds or end his career earlier than planned and begin living on his portion of the early retirement benefit. According to the court, the nonemployee spouse's right to access her share before the employee spouse has retired derives from the "fact" that the value of her interest is known,³ the "fact" that this value will be reduced if payment is delayed,⁴ and the "settled principle that one spouse cannot, by invoking a condition wholly within his control—the timing of his retirement—impair the interest of the other spouse."⁵ This ruling substantially changed community property law as it relates to pension rights.

Prior to Gillmore, the court had "made plain in Brown⁶ and its progeny [that the] right to retirement benefits represents a certain kind of property interest. It is a right to draw from a stream of income that begins to flow, and is defined, on retirement;"⁷ with the employee spouse retaining until he retires "the right to decide, and by his decision define, the nature of the retirement benefits owned by the community."

Under this model (sometimes, the "Brown model"), the nonemployee spouse holds an interest in the result of the decisions by which the pension is determined but does not have a right to any particular result. She is therefore compelled by the derivative nature of her interest to share in the employee spouse's risk that the pension, as defined at retirement, will be less than it could have been had he made different decisions,⁸ but by the same token, if that risk should be rewarded by a pension that is more valuable than anticipated, she has a right to share in that as well.⁹

Importantly, as the court was subsequently to spell out in Stenquist,¹⁰ the inter-spousal immunity the employee spouse necessarily enjoys under the Brown model, while he is determining the nature of the benefits that will be shared upon his retirement, necessarily expires when he retires with contractual rights that have ripened under the plan into what Brown had termed a "mature" pension.¹¹ His immunity ends because once the nature of the pension in which the nonemployee spouse has an interest has been finally determined, the employee spouse is precluded from doing anything unilaterally that would impair that value, her interest under the "settled principle that one spouse cannot, by invoking a condition wholly within his control, defeat the community interest of the other spouse."¹² In short, as clarified by Stenquist, the Brown model holds that during the pre-retirement period the nonemployee spouse has an interest only in what might be, whereas post-retirement she has an interest in what is.

Then along came Gillmore, in which the nonemployee spouse ("Vera") claimed that the employee spouse's ("Earl's") pre-retirement decision to keep working when he could have taken early retirement was damaging to the value of her interest. It would be unfair, she asserted, for Earl to have the right to choose with impunity a date when his pension would become fully defined and payable by the plan that was not a date suitable to her needs.

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Had the court chosen to analyze Vera's claim under the Brown model, she clearly would have lost. Since the value of her community interest in Earl's pension as it is defined at retirement cannot be known until his retirement, her claim of loss simply could not have survived the obvious question: "In comparison to what?"

However, that is not what the court did. Apparently convinced that Vera needed to be rescued from the one-sidedness of allowing the spouse who by his choices is defining the pension the freedom to make those choices without having to be responsible to the nonemployee spouse for what might have been, it took a different path entirely. Turning away from what it had said just three years earlier in Stenquist about the nonemployee spouse having no grounds for recovery if the employee spouse should decide to continue working instead of taking early retirement even if that should result in the anticipated pension being "lost" entirely,¹³ the court said that under Stenquist's "settled principle"¹⁴ Earl could be held responsible for what Vera loses as a result of his choice not to terminate his accrual of additional benefits prematurely.

The court effected this startling about face by announcing that a pension is "mature" not only when the employee retires (as it had said in Brown), but when the he first becomes eligible to retire. By this reasoning, even though the ultimate amount of Earl's pension was still years away from being known, his choice to keep earning additional benefits became a decision affecting a "mature" pension in which the value of Vera's interest was "known to the court,"¹⁵ which then allowed it to apply Stenquist's "settled principle" to require Earl to compensate Vera for having impaired that value by denying her access to it.

As a result of this radical departure from the Brown model, every vested employee spouse who is eligible for early retirement must now be prepared upon receipt of a Gillmore demand to either retire immediately, or compensate the nonemployee spouse for what she loses because she will not receive a smaller benefit than she would otherwise¹⁶ Wait, what? Given that the holder of "the right to share in the pension as it is ultimately determined"¹⁷ logically cannot suffer a compensable "loss" if the employee spouse decides to retire early with a smaller than normal benefit,¹⁸ how is it that if the employee spouse avoids that disappointment by deciding not to retire early the result it is seen as anything other than a "gain"?

Plainly, this head-scratcher of an opinion warrants further examination of both the theory on which the court found Earl liable to Vera, as well as its determination of the existence and amount of her "loss." The purpose of this article is to provide that analysis, ¹⁹ and to explain why Gillmore should either be substantially revised so that it is less of an affront to the well-established principles of community property law governing pensions established in Brown and Stenquist, or perhaps overruled altogether as but another example of the perils that can be encountered whenever a court, including the high court, wanders away from Brown to engage in ad hoc decision-making.²⁰

We start by examining how the court came to the conclusion that it was harmful for the nonemployee spouse's interest for her not to be able to access her share of the pension while the employee spouse is still in the process of growing it.

A. To Be or Not to Be an Early Retiree.

The central theme of the Gillmore court's analysis is that the employee spouse's decision not to elect early retirement resulted in the nonemployee spouse not receiving her "full share" of the pension:

Earl retains the right to determine what retirement benefits he will receive. He can retire now or at some time in the future. He also retains the option of choosing between the alternative pension plans offered by his employer. However, if he opts for an alternative that deprives Vera of her full share of the retirement benefits, he must compensate her for the interest she loses as a result of his decision.

Given that, as mentioned earlier, plan participants who retire early generally receive a smaller pension than they would otherwise, the obvious first question raised by this statement is how could Earl's decision to work longer to qualify for a larger pension in which Vera would have an interest rightly be seen as depriving Vera of her "full share of retirement benefits"? Put another way, if Earl "retains the right to determine what retirement benefits he will receive," and if Vera receives her share of those benefits as thus determined,²¹ how could that not be her full share?

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Close inspection of the opinion discloses that the "loss" about which the court was concerned was a reduction in the value of Vera's interest resulting from either (1) the "fact" that Vera must forego the benefits she could have received had Earl taken early retirement;²² (2) the "fact" that benefits delayed are of lesser value than benefits received;²³ or (3) the "fact" that Earl's continued employment put her share at risk of forfeiture if he were to die before retiring;²⁴ or some combination of the three.

Were these valid concerns? Not in the context of any traditional tax qualified defined...