4 of 5 DOCUMENTS 

Copyright (c) 1996 by the Florida Bar
The Florida Bar Journal 

June, 1996 

70 Fla. Bar J. 101 

COLUMN: FAMILY LAW: THE NOT-SO-SIMPLE COVERTURE FRACTION: DO ATTORNEYS RISK MORE THAN EMBITTERED CLIENTS? PART 2 

by Jerry Reiss and Douglas Reynolds 

Jerry Reiss is an associate of the Society of Actuaries based in Palm Harbor. As an enrolled actuary, he has extensive experience with retirement plans. Among several other articles on the topic, he co-authored "Drafting QDRO's: A Malpractice Waiting to Happen," in the February and March 1995 issues of the Bar Journal, and "The Pension Trap: Trading Rights in a Divorce Settlement," in the June 1995 issue of the Illinois Bar Journal. 
Douglas H. Reynolds is a Florida board-certified marital and family law attorney with the law firm of Cox & Reynolds in Ft. Lauderdale and practices in the areas of civil litigation and family law. 
This column is submitted on behalf of the Family Law Section, Renee Goldenberg, chair, and William D. Palmer, Edna Y. Elliott, and Jane L. Estreicher, editors.  

TEXT: 
 [*101]  Part 1 (May 1996) of this article identified proper and improper coverture fraction uses. It showed proper use limited to QDROs. Six separate fact scenarios were identified that produced unintended results even when coverture fractions were applied properly. Issues were discussed that showed how language modifications would guard against unintended results. A connection was demonstrated between proper use, original intent for its use, and how both conformed to the way most benefit accruals are actually determined under ERISA. Part 1 concluded with a discussion of the Marital Foundation Theory, which is gaining acceptance among more states. 
Part 2 will show the improper use of the coverture fraction suggested by Trant v. Trant, 545 So. 2d 429 (Fla. 2d DCA 1989). Even though Trant ruled on a present value of a marital portion of a (defined) benefit, one can see everyday applications of Trant in drafting of QDROs. This part will show that the methodology suggested in Trant produces incorrect, unintended, and even nonsensical results. These results violate the statutory definition of marital and nonmarital property. Part 2 will conclude by demonstrating how the Trant methodology violates valuation procedure that should be evident to any layperson. 

Improper Use of a Coverture Fraction 

. The Legacy of Trant 
In fairness to the Trant court, the decision stated that there was no appellate decision that the court could find that told it how to determine a present value of a marital portion. Unfortunately, the court borrowed a finding from a Pennsylvania ruling that was inappropriate under the circumstances under which the coverture fraction was applied, n1 and the use of this method, as shown below, produces a value inconsistent with the Florida statutory definition of marital and nonmarital property. 
n1 There are many reasons supporting the use of a coverture fraction applied to a benefit when the participant retires. They are stated in a multitude of foreign case law. A nexus was improperly assumed to exist between the deferred distribution method and the immediate offset method that was based upon these same supporting reasons. A simple analysis shows that there is no connection between the two methods. When the two methods are independently analyzed, very different results are anticipated. 

. Using the Trant Methodology 
A coverture fraction is determined by the number of marital years of participation divided by the number of years of participation that figured into the current accrued benefit. This fraction is then multiplied by the current accrued benefit in order to determine a marital portion of that accrued benefit. 
Example 3: Assume the same facts as in both Examples 1 and 2 of Part 1. The Trant methodology is applied in order to determine a marital portion of benefit attributable to the husband, now age 45, who files for divorce. 
The coverture fraction, as it applies to this example, equals 10/20. This coverture fraction is then multiplied by the current accrued benefit in order to produce a marital portion of the benefit: 10/20 x $ 1,000 = $ 500 per month, according to Trant. Naturally, that produces a premarital portion of $ 500 per month: $ 1,000 - $ 500 = $ 500. 
Example 1 provided an exact calculation of the accrued benefit based upon these facts equal to $ 250 per month, and not $ 500 per month. Under the ERISA definition of accrued benefits, this would translate into error. The question is then raised, can this increase be explained under family law as passive appreciation? 

. Why Trant Violates Florida Statutes 
Recalling Example 2, the same participant in Example 1 entered the marriage with a $ 250-per-month accrued benefit payable at age 65. A statement was made in Part 1 that a defined benefit plan automatically provides passive appreciation to any benefit accrual. In order to demonstrate this, accept the premise that this $ 250 monthly benefit can be valued at age 35 with 1983 Group Annuity Mortality for both pre- and post-retirement, and seven percent interest. The present value of that $ 250-per-month benefit is $ 3,154.53. At age 45, that value increases to $ 6,272.55. This results in an increase of seven percent per year, plus a survivorship component increase. This survivorship component is the result that it is more likely that a participant age 45 will survive 20 years, than someone age 35 will survive 30 years. Both increases result in real passive appreciation. 
On the other hand, $ 500 per month, determined by a coverture fraction, produces a present value at age 45 of $ 12,545.10. The difference can perhaps  [*102]  be viewed under marital law (as opposed to ERISA) as appreciation in value. It cannot be argued to be passive appreciation under marital law, because the $ 250-per-month benefit can only increase to $ 500 per month with marital efforts. n2 Had the participant separated from service at age 35, he would still have only received the $ 250-per-month benefit to first begin at age 65. 
n2 In order to accrue the other $ 250 per month, the participant would need to work a sufficient number of hours in each year. 
Examples 1 and 2 demonstrate that the defined benefit plan is a moving target. At age 35, the projected benefit was $ 1,000 per month, and this benefit will be fully earned after 30 more years of service. At age 45, the projected benefit based upon a later higher average salary is $ 2,000 per month. This new, higher benefit will be fully earned after 20 more years of service. As a moving target, the defined benefit plan defines current benefits based upon future events that constantly change with time. 
This fact raises an important question with respect to benefit accruals: Should post-dissolution salary increases be recognized in the earned marital benefit? Accrued benefits determined under a plan, or ERISA, as the case may be, are defined in terms of what can never be reduced if the employee was then to separate from service. Many court rulings have determined that it is improper to make an assumption of termination when measuring the marital portion of benefit. n3 If it is improper to assume termination of employment, it follows that the marital benefit must include post-dissolution salary increases. n4 This is a natural consequence of logic. The only way to conclude that inclusion of post-dissolution salary increases in the marital benefit results in post-dissolution accruals is then to compare the accrued benefit that incorporates an assumption of termination of employment against one which does not. 
n3 See Franklin v. Franklin, 116 N.M. 11, 859 P.2d 479 (1993); In re the Marriage of Nordahl, 834 P.2d 838 (Colo.App. 1992); In re Marriage of Clabault, 249 Ill.App. 3d 641, 619 N.E. 2d 163 (Ill. App. 2d Dist. 1993); Layne v. Layne, 83 Oh. App. 559, 615 N.E. 2d 332 (1992). 
n4 See Diffenderfer v. Diffenderfer, 491 So. 2d at 267 (1986). 
A coverture fraction that is used to factor in post-dissolution salary increases provides such increases to both premarital and marital portions of benefits. When that is done, both portions are determined by an average salary at some distant point after the marriage terminates, and both portions increase in a manner somewhat related to COLA increases in salary. While this could still conceivably present a problem with respect to passive earnings, one must keep in mind that a defined benefit plan has been shown to be a moving target. Therefore, it could be argued that the passive earnings definition has not been violated, because the perspective has changed when the measurement is made after all the facts are available. n5 It also corrects a fairness problem that is only present in defined benefit plans, n6 and at least corrects it by applying the same definition of COLA increases to both premarital and marital portions alike. 
n5 See Reiss, The Emerging Marital Controversy: When Should Postdissolution Retirement Benefits Be Included As Marital Property?, 7 DIVORCE LITIGATION 8, at 166-167, 171 (National Legal Research Group, Inc., Aug. 1995). 
n6 See, Reiss, The Role of the Pension Actuary in Valuation and Division of Retirement Plan Benefits, 20 FAM. LAW COMMENTATOR 5, at 8-9 (1995). 
There is no applicable moving target issue when a coverture fraction is applied to a fixed benefit, using fixed earnings. There is also no fairness problem that needs to be corrected. There is nothing fair about providing a premarital portion with marital increases, and asking that these increases be paid by decreasing an otherwise frozen earned marital benefit. 
In the example above, the actual benefit earned during the marriage was $ 750 per month. It was determined by subtracting the premarital earned benefit from the earned benefit including both portions. By applying a coverture fraction to the current accrued benefit, as opposed to some distant future benefit, the premarital portion of benefit is allowed to increase by an actual average salary increase that occurred during the marriage (from $ 2,000 to $ 4,000). This is illogical on its face and serves no purpose. Either both marital and premarital portions receive COLA increases in salary, or benefits are measured for each portion without respect to such increases. The result is even more difficult to defend when one comes to understand that the marital earned benefit is discounted in order to pay for the COLA salary increases in the premarital portion. 

. Crossover Problems: When Proper Use Becomes Error 
The coverture fraction applied to some distant future benefit works as contemplated by providing both the premarital portion of benefit and the marital portion of benefit passive increases in the monthly amount of payout. One must understand that this approach harmonizes with the way most earned benefit accruals are determined under ERISA. This standard was previously defined as the Fractional Methods. Under the Fractional Method, a service fraction is applied to some projected future benefit at normal retirement age (defined in the plan) in order to determine a benefit accrual. 
Even though a coverture fraction works well when applied to a future distributable benefit, there are hidden dangers with its use that many evaluators and attorneys do not understand. It was shown above that if the participant had a premarital portion of benefit and the nonparticipant spouse elects benefits at or near the date of divorce, no passive increase could then be paid. The coverture fraction applied to a distributable benefit at or near the divorce would actually decrease the marital benefit, as in Example 3. n7 Proper use of a coverture fraction should require that the drafter provide a floor minimum of what would have been paid in the absence of its use. No increase would be paid for several years following the divorce, and unless the marital benefit is properly defined in the QDRO, the marital benefit could decrease. 
n7 It would be improper to discount a benefit based upon an election of the nonparticipant spouse to receive benefits at the participant's earliest retirement date unless the participant is retired, because the total benefit structure has not been built. There is no justification for the discount when the participant can continue to improve the total benefit structure. 
Example 3 showed everyday valuation results that can be in error by 50 percent, or more, solely on account of applying a coverture fraction to a current accrued benefit. If the present value of benefit is based upon this misapplication of methodology, and it is widely used, it follows logically that present values are often wrong by huge amounts. Consequently, one should be wary of "experts" who claim that present values can be determined directly by nonexpert attorneys by the simple use of a table, or access to some computer program. 
Unfortunately, unqualified "experts" making inaccurate claims leads to further  [*103]  confusion among family law attorneys and judges. Confusion can also result when family law attorneys give nonactuaries responsibility for complicated actuarial computations. These examples also demonstrate that the drafter of the QDRO who does not understand valuation issues can draft a QDRO which contains a 50 percent payout error, and this error is only a starting point to which other errors involving much more complicated issues n8 can be added. 
n8 See Miller & Reiss, Drafting QDROs: A Malpractice Waiting to Happen, 69 FLA. B.J. at 43 (Feb. 1995), and 69 FLA. B.J. at 36 (Mar. 1995), Westlaw 69-Mar FLBJ 36. 

. Defined Contribution Errors: Even More Serious 
A coverture fraction applied to a defined contribution plan accrued benefit also greatly distorts the marital portion of benefit, generally leading to a very overstated marital benefit. This over-statement is the result of giving premarital contributions, that have had many extra years of compounding interest, equal weight with marital contributions that have had fewer years during which interest may compound. This error could be as high as 100 percent of the benefit in several defined contribution plan types, because the participant can have control over both contributions and withdrawals. n9
n9 See the coverture fraction example in Waters & Reiss, The Pension Trap: Trading Pension Rights in a Divorce Settlement, ILL. B.J. at 304 (June 1995), Westlaw 83-ILBJ 302. 
Viewed from another perspective, in order for a coverture fraction to exactly divide defined contribution benefits between marital and nonmarital portions, both benefit accruals and passive earnings must uniformly accrue in each year. This result will occur only when the rate of return for each year equals the rate of salary increase for the prior year, and the rate of contribution is constant during the entire period during which the measurement is made. Historically, investment earnings have far out-distanced salary increases. Accordingly, one can expect that the coverture fraction applied to an account balance will greatly overstate the marital portion of that benefit. Unlike the defined benefit plan, where current plan earnings are based upon a foundation of efforts, current earnings under the defined contribution plan are directly related to current efforts. Therefore, its use should result in reversible error under any circumstances. n10
n10 See In re Marriage of Hester, 856 P.2d 1048 (1993). 
Yet the marital portion of benefit can be determined with precision by employing the same technique that actuaries have used for extrapolating raw rates of mortality from population studies. Precision is important and made more difficult when the measurement period must be restricted to four or five years, because the mortality rate that is being measured is constantly improving n11 as a result of advancements in medicine. 
n11 See ROBERT W. BATTEN, MORTALITY TABLE CONSTRUCTION (Prentice Hall, Inc., for the Society of Actuaries, 1978). 

Correct and Incorrect Valuation Procedure 
Family law attorneys often do not understand valuation methodology, which should come as no surprise because law schools teach law and not actuarial work. However, even unskilled laypeople can understand that when a procedure results into dividing a benefit into many pieces, the resultant pieces should add up to the entire benefit. If it does not, the procedure must be flawed. Proper use of a coverture fraction satisfies the laypersons standard, yet improper use violates this standard. 
Example 4: Assume the same facts as in Examples 1 and 2 found in Part 1 of this article, except that the participant-husband was married when he first began participating, met his second wife while he was married to his first wife, and married his second wife immediately after divorcing his first wife. Also assume that this participant repeats this pattern every 10 years until he retires. His salary, which doubled in Example 2, continues to double every 10 years. 
It was previously shown in Examples 1 and 2 of Part 1 that this participant had an accrued benefit at age 35 of $ 250 per month, and $ 1,000 per month at age 45. Applying the same methodology that was used in "The Coverture Fraction and Its Roots" in Part 1 to produce these values, against the $ 8,000-per-month average salary at age 55, and $ 16,000-per-month average salary at age 65, will result in an accrued benefit at age 55 of $ 3,000 per month, and a matured benefit fully accrued of $ 8,000 per month at age 65. 
The correct procedure applies the same coverture fraction of 10/40 to the $ 8,000-per-month benefit-in-pay status, because each marriage was 10 years in duration. Each marital portion of benefit is $ 2,000 per month for each of the four marriages. The sum of the marital portions is $ 8,000 per month, making the entire benefit 100 percent marital with respect to all four wives, as one would expect. 
Another correct procedure provides that benefit accruals be determined by tracing actual benefit accrual increases over what was accrued during the prior period. If the benefit accruals earned during each marital period are actually traced, the following results are obtained: 
Marriage 1:	
  $ 250/mo. - $ 0 =	$ 250/mo.	
	
Marriage 2:	
  $ 1,000/mo. - $ 250/mo. =	$ 750/mo.	
	
Marriage 3:	
  $ 3,000/mo. - $ 1,000/mo. =	$ 2,000/mo.	
	
Marriage 4:	
  $ 8,000/mo. - $ 3,000/mo. =	$ 5,000/mo.	
	
Total:	$ 8,000/mo.	
 
Although this divides the benefit into very different pieces, the procedure itself is sound because the pieces when added equal the total benefit that was divided. 
The incorrect procedure suggested by Trant applies 10/10 to the accrued benefit at age 35 for Marriage 1, 10/20 to the accrued benefit at age 45 for Marriage 2, 10/30 to the accrued benefit at age 55 for Marriage 3, and 10/40 to the accrued benefit at age 65 for Marriage 4. This results in a $ 3,750-per-month benefit that is marital: 
Marriage 1: 10/10 x $ 250 =	 $ 250	
	
Marriage 2: 10/20 x $ 1,000 =	$ 500	
	
Marriage 3: 10/30 x $ 3,000 =	$ 1,000	
	
Marriage 4: 10/40 x $ 8,000 =	$ 2,000	
	
Total:	$ 3,750	
 
The inaccuracy of the coverture fraction application in Example 4 has little to do with the exact facts. If the facts in Example 4 were changed so that there were only two marriages, the first 30 years long, and the second 10 years long, the total marital benefit determined by the Trant methodology increases from $ 3,750 to $ 5,000, but far short of an obvious $ 8,000 marital benefit. Attorneys who would view the issue one-dimensionally with a first marriage n12 should be cautioned: Unless the benefit is in pay status, the participant could easily remarry in the future. 
n12 It also does not mean that the Trant methodology is not flawed even with one marriage, proving it was made more difficult because the Trant methodology only determines a marital portion of benefit. This is why a 100 percent marital benefit was used. 
It is clear that the use of a coverture  [*104]  fraction, as suggested by Trant, produces unintended results. Under the current examples, it produced marital benefits that were somewhat more or less than half of what any layperson could determine with common sense. A method that always produces a discounted portion cannot be uniformly applied and it be expected that the sum of such portions will not be less than the benefit before it was divided. This is the fallacy of Trant. When the coverture fraction is applied properly, certain marital portions will be enhanced with post-dissolution salary increases, while other marital portions near retirement will be discounted, as they should be. The marital overstatements offset the marital understatements and the benefit pieces add up to the benefit that was divided. Therefore, it should be clear that the Trant methodology is flawed, and why it is flawed. 

Conclusion 
Use of a coverture fraction for purposes of determining a marital portion of benefit is perhaps the most widely used valuation technique in family law, and is often used by family law attorneys without the blink of an eye. It is simplistically and incorrectly applied in almost all cases. The error that results from the incorrect use of a coverture fraction can be huge. It follows that the potential malpractice liability that results from improper use of a coverture fraction is the tip of the iceberg for purposes of measuring the entire malpractice exposure associated with benefit valuations and QDROs. 
Future family law courts must reject the Trant methodology used for purposes of determining a present value of a marital benefit, and a marital portion of benefit under a QDRO. The Trant methodology produces unintended and even nonsensical results. It is based upon a valuation foundation that is inherently flawed. 
Two choices remain with respect to QDROs, but only one for valuations. Valuations must be based upon tracing earned marital benefits unless the participant is at or near retirement. In that limited situation, a coverture fraction may be used in order to correct typical overstatement of benefits near retirement not related to marital efforts. QDROs can use coverture fractions applied to future accrued benefits, or benefits that are later divided may be traced. The choice of which to use may be based upon the specific facts that will determine what equity may be needed. It was shown that the coverture fraction distorts the true meaning of an earned martial benefit when the participant enters the marriage with a significant nonmarital benefit. Under such circumstances, tracing may be preferred. Ideally, a first long-term marriage should not receive less benefit than a second short-term marriage. This anomaly can be corrected by the proper use of a coverture fraction applied to an accrued benefit-in-pay status. 
The frequency of coverture fraction errors alone, together with the likely magnitude of these errors, should awaken legal professionals to the grim reality of the probability of a malpractice timebomb ticking away in each file drawer containing clients with retirement benefits. It is easiest to deal with a bomb by diffusing it before it goes off.  

GRAPHIC: 
PHOTO 1, REISS; PHOTO 2, REYNOLDS