Protecting Yourself from a Spouse Making Retirement Withdrawals During COVID-19

In any divorce, attention should be paid to the risk that one spouse might attempt to deplete community assets – especially large assets such as retirement plans – before the divorce is final and perhaps even before a petition for a divorce is filed. The thinking on the part of the spouse attempting to drain such assets is that he or she is going to keep those assets just for themselves and not have to split those assets with their partner in a divorce. And with certain federal legislation that has been enacted in light of COVID-19 to ease financial strain on the public – including the CARES Act which may make it easier for some to withdrawal up to $100,000 from 401(k), 403(b), 457, and IRA accounts without penalties or immediate tax consequences – the temptation for some to withdraw retirement assets during a divorce or prior to a divorce without their spouse’s approval or even knowledge is likely higher than normal.

As you would imagine, actions to deplete community assets are prohibited under California law, but it is not always easy or even possible to rectify such actions after they are taken. Fortunately, California provides tools to prevent depletion of retirement assets in the first place, namely a notice of adverse interest letter to the retirement plan provider.

Before discussing how a notice of adverse interest letter operates under California, it is helpful to understand how matters proceed absent such a notice. When a petition for divorce and summons are served on a party in California, both parties are subject to Automatic Temporary Restraining Orders, or “ATRO’s”, which, among other things, prevent the parties from disposing of both their separate and community property (e.g. draining retirement funds) except for the “necessities of life” and to pay attorney’s fees. But while you can go after another party for violating the ATRO’s, it may be hard to prove that the depleted funds were not used for “necessities of life” or for attorney’s fees, and, regardless of whether a court finds the ATRO’s were violated, it may be harder still to recover that money down the road, especially where such funds constitute a major portion of marital assets.

Furthermore, if one spouse depletes community retirement assets before a petition is filed, such that the ATRO’s do not yet apply, this is still an issue under the law, and the receiving spouse will need to account for such funds in a final property distribution and may even be subject to penalties for violating their duties to their spouse. But, again, the same problems arise of both proving this and recovering the depleted funds.

This is where a “notice of adverse interest” letter comes in handy by anticipating such issues and preventing your spouse from even withdrawing the funds in the first place. Under California Family Code section 755(b), one party may send a notice of adverse interest letter to the retirement plan (although not all plans are covered by this rule, e.g. some California state public plans) indicating that that spouse has a community property interest in the plan, even if that spouse is not named on the asset, and therefore no funds should be released. By doing so, the plan should not allow any withdrawals by the owner spouse and will be liable if they do.

If you are concerned about the possibility of your spouse removing retirement assets either prior to or during a divorce, work with an experienced family law attorney on all options to protect your interests, which may include the drafting of a notice of adverse interest to all relevant financial entities.

Guidance on Your California Family Law Questions From a Westlake Village Family Law Attorney

If you would like to learn more about how our office can provide guidance on any California family law issues you are facing in Ventura County or Los Angeles County, contact the Zonder Family Law Group office today at (805) 777-7740 or (818) 877-0001, or schedule your strategy session using easy-to-use online form here.