Military Retirement vs. Disability Pay

The order further provided:

IT IS THEREFORE ORDERED AND DECREED that FORMER SPOUSE have judgment against and recover from SERVICE MEMBER the sum equal to 8.1395% of SERVICE MEMBER's disposable retired pay as hereinabove defined, that is, to exclude deduction/reduction for the monthly SBP premium, payable IF, AS and WHEN received by SERVICE MEMBER. IT IS FURTHER ORDERED AND DECREED that the award herein shall in no event be less than $227.99 per month of the disposable retired pay of SERVICE MEMBER. The Court recognizes, in making this award, that the DFAS [Defense Finance and Accounting Service], pursuant to the USFSPA [Uniformed Services Former Spouse Protection Act], is only authorized to pay FORMER SPOUSE the herein awarded percentage of SERVICE MEMBER'S “disposable retired pay,” and this Order, as to the DFAS, should be thusly construed.

The husband contended on appeal that the two provisions quoted above impermissibly interfered with his right to elect disability benefits. The appellate court agreed, noting that a divorce decree may not restrict a service member's future right to waive retirement pay in favor of Veteran's Administration disability benefits. Ex parte Burson, 615 S.W.2d 192, 196 (Tex. 1981) (orig. proceeding); Freeman v. Freeman, 133 S.W.3d 277, 280 (Tex. App.–San Antonio 2003, no pet.). Even when military retirement pay has become a vested right and part of the community, it is subject to defeasance. Burson, 615 S.W.2d at 196; Freeman, 133 S.W.3d at 28.

The First Challenged Provision

Looking at the first challenged provision of the domestic relations order, the court determined that the trial court had erred in restricting Kevin's right to elect disability. See Burson, 615 S.W.2d at 196; Freeman, 133 S.W.3d at 280. The lower court simply was not empowered to issue an order to the effect that any election of benefits Kevin would make could not reduce the amount of retired pay awarded to Lori.

The Second Challenged Provision

However, the appellate court upheld the second at-issue provision of the domestic relations order. Whether this would ultimately help Lori Gillen or not is questionable.

Under this second provision, Lori was awarded an 8.1395% interest in Kevin's retired pay if, as, and when received by him. The domestic relations order further provided that in no event should Lori receive less than $227.99 as her share of Kevin's monthly disposable retired pay. Kevin argued that the award of a minimum of $227.99 had the effect of precluding him from waiving retired pay and electing disability, as there might be less than $227.99 in his monthly retirement pay if he got full or even partial disability. In explanation for its approval of this provision, the court said, “The amount of Kevin's retired pay Lori receives is dependent on the amount of available retired pay. As long as there is disposable retired pay available, Lori will receive either $227.99 or 8.1395% of the pay, whichever is higher. Lori's portion of Kevin's retired pay is derived solely from Kevin's disposable retired pay, therefore, she can only receive what is available.

If Kevin's retired pay is reduced to zero because he elects disability benefits, Lori will receive nothing. The language in this paragraph does not restrict Kevin's right to make such an election.” Thus, Kevin could still elect disability to his heart's content, and if less than $227.99 in military retirement were left, Lori could end up with a lesser amount or, if Kevin's disability were total, nothing at all.

Alaskan Court's Solution Runs Afoul of State and Federal Law

In Young v. Lowery, 221 P.3d 1006 (Alaska, 12/24/09), decided in the same month as Gillen, Alaska's Supreme Court shot down another creative attempt by a trial court to make sure that the spouse of a military member would not be cheated out of her share of his retirement pay. The trial court in Young attempted to protect the wife by imposition of a constructive trust.

The Young case involved U.S. Coast Guard retiree Scott Young and his wife, Cheryl Lowery, to whom he had been married for less than the period of his full military career. They had entered into marriage in 1994 and the wife filed for divorce in January 2007. A week before trial, Young was awarded an unspecified amount of disability pay, which would reduce his retirement pay. The trial court awarded the wife one half of the marital portion of Young's pension. The marital portion was that portion of the full pension amount accrued during the years in which Young's military service overlapped with his marriage ' here, the marital portion of the pension was calculated at 50.68%, and the wife was awarded half of that portion, or 25.34%, of Young's total monthly retired pay.

The trial court entered a qualified order instructing the Coast Guard to distribute each spouse's share of the retired pay directly to that spouse. The qualified order required division and payment according to the percentages announced in the court's written decision, but stated further that Lowery's monthly payment “shall not be less than $614.36 per month with cost-of-living increases.” The order also provided, however, that if Young elected to receive disability payments in lieu of retirement benefits he would be deemed to have created a constructive trust in his wife's favor. It went on to say that, upon that event, Lowery would “have an interest in, and the right to immediate possession of, so much of [the husband's] property as is necessary to satisfy said trust.”

Young first argued on appeal that because he was required by law to use a portion of his $2,424.45 monthly pension payment as a substitute for his disability payment, the court-ordered $614.36 (25.34% of $2,424.45) minimum payment to his wife erroneously reduced his disability payment. The Alaska Supreme Court agreed and vacated that portion of the order, finding that the trial court's failure to limit the property division to Young's actual disposable retired pay violated the USFSPA.

As for the creation of a constructive trust, that remedy also was not authorized by Alaska law. In Alaska, a constructive trust is only available when it can be shown by clear and convincing proof that the party against whom the trust will be imposed has been unjustly enriched by receiving assets that rightly belong to the party in whose favor the trust will be created. Riddell v. Edwards, 76 P.3d 847, 852 (Alaska 2003). The constructive trust arises to prevent the property holder from retaining property obtained “by reason of unjust, unconscionable, or unlawful means.” McKnight v. Rice, Hoppner, Brown & Brunner, 678 P.2d 1330 (Alaska 1984). With these principles in mind, the Young court stated: “The trial court did not expressly forbid Young from taking action that would reduce Lowery's monthly retired pay; instead it required him to make up that difference if he elected to do so. Young therefore would not violate the terms of the court's order by waiving more retired pay, nor would he violate any state or federal law by doing so. We also do not believe that choosing to receive more disability pay in lieu of retired pay to reduce one's tax burden, which federal law permits, is so 'unjust' or 'unconscionable' as to warrant a constructive trust.” The Alaska Supreme Court did say, however, that the trial court could have expressly ordered Young not to reduce his disposable retired pay and could have required him to indemnify Lowery for any amounts by which her payments were reduced below the amount set on the date the amended qualified order was entered. Therefore, the court concluded by stating, “We vacate the portion of the qualified order relating to a constructive trust; on remand the court may in its discretion replace that language with an appropriate indemnity provision.”

Janice G. Inman is Editor-in-Chief of this newsletter.

When handling the divorce of a couple that includes at least one military member or retiree, special concerns must be addressed. These include some obvious things, such as child custody and visitation schedules when one party may be deployed overseas or relocated to a distant base. Another well-known problem for family law attorneys is the complications posed by the laws related to military retirement and service-related disability benefits. Even when a lawyer is aware of the complications that can arise, attempts to protect the civilian party's rights to a portion of the service member's retirement may go awry. Recent cases in Alaska and Texas illustrate the problems that attempts to work around the laws can cause.

This article looks at what happened with these cases, as well as an older case out of New York.

State Courts, Retirement Pay and Disability Pay

The statutory and case law surrounding the division of military retirement pay delineates the rights of the parties, as well as the abilities of state courts to determine them. State courts are permitted to divide military retired pay, but only as authorized by the Uniformed Services Former Spouses' Protection Act (USFSPA). See 10 U.S.C.A. ' 1408(c)(1) (West 1998); Mansell v. Mansell , 490 U.S. 581, 589 (1989). Under the USFSPA, a divorce court may treat military retirement pay as marital property subject to division in accordance with the law of its own jurisdiction. 10 U.S.C. ' 1408(c)(1); see also Havlen v. McDougall , 22 S.W.3d 343, 345 (Tex. 2000); Cameron v. Cameron , 641 S.W.2d 210, 212-13 (Tex. 1982). However, a divorce court is permitted to dispose only of a military serviceperson's “disposable retired pay.” 10 U.S.C.A. at ' 1408(c)(1); see Mansell, 490 U.S. at 585-86. The definition of “disposable retired pay” excludes disability pay, including the retirement benefits that must be waived in order to collect disability benefits. 10 U.S.C.A. at ' 1408(a)(4)(C).

Pursuant to federal law, the decision to receive military disability benefits involves a dollar-for-dollar waiver of military pension benefits. See 38 USC ' 5305. And a divorce court cannot apportion military retirement pay that has been waived by the military retiree in order to receive Veterans Administration disability benefits. Mansell, 490 U.S. at 594-95. A divorced service retiree's election to receive disability benefits therefore results in a reduction in the amount of retirement income available to the spouse of the military retiree, with the former service member retaining more (and sometimes all) of the benefits to himself. In addition, military disability benefits are exempt from taxation, unlike military retirement pay. 38 U.S.C. ' 5301(a). Therefore, the military retiree who receives all or part of his or her benefits in the form of disability pay gets an additional sum due to this type of pay's tax-free status. This alone offers a strong incentive for retired military members to seek disability payments instead of retirement benefits. Add to this the fact that getting the federal government to recognize that an injury or other disability that occurred during the term of military service was service related, and you can see that the questions we will address here are far from unusual.

Texas Domestic Relations Order Oversteps Bounds

The parties in the Texas case Gillin v. Gillin, — S.W.3d —-, 2009 WL 4339164 (Tex.App.-San Antonio, 12/2/09), were Kevin and Lori Ann Gillin, who were married in 2004. At the time of the marriage Kevin had completed more than 20 years of military service. While married, he served four years and one month more, to reach a total of 25 years and one month of military service. The parties divorced after Kevin had retired from the military. In those proceedings, the trial court rendered a final divorce decree and a separate domestic relations order, which was incorporated into the decree by reference. The domestic relations order contained the following provisions:

The order further provided:

IT IS THEREFORE ORDERED AND DECREED that FORMER SPOUSE have judgment against and recover from SERVICE MEMBER the sum equal to 8.1395% of SERVICE MEMBER's disposable retired pay as hereinabove defined, that is, to exclude deduction/reduction for the monthly SBP premium, payable IF, AS and WHEN received by SERVICE MEMBER. IT IS FURTHER ORDERED AND DECREED that the award herein shall in no event be less than $227.99 per month of the disposable retired pay of SERVICE MEMBER. The Court recognizes, in making this award, that the DFAS [Defense Finance and Accounting Service], pursuant to the USFSPA [Uniformed Services Former Spouse Protection Act], is only authorized to pay FORMER SPOUSE the herein awarded percentage of SERVICE MEMBER'S “disposable retired pay,” and this Order, as to the DFAS, should be thusly construed.

The husband contended on appeal that the two provisions quoted above impermissibly interfered with his right to elect disability benefits. The appellate court agreed, noting that a divorce decree may not restrict a service member's future right to waive retirement pay in favor of Veteran's Administration disability benefits. Ex parte Burson, 615 S.W.2d 192, 196 (Tex. 1981) (orig. proceeding); Freeman v. Freeman , 133 S.W.3d 277, 280 (Tex. App.–San Antonio 2003, no pet.). Even when military retirement pay has become a vested right and part of the community, it is subject to defeasance. Burson, 615 S.W.2d at 196; Freeman, 133 S.W.3d at 28.

The First Challenged Provision

Looking at the first challenged provision of the domestic relations order, the court determined that the trial court had erred in restricting Kevin's right to elect disability. See Burson, 615 S.W.2d at 196; Freeman, 133 S.W.3d at 280. The lower court simply was not empowered to issue an order to the effect that any election of benefits Kevin would make could not reduce the amount of retired pay awarded to Lori.

The Second Challenged Provision

However, the appellate court upheld the second at-issue provision of the domestic relations order. Whether this would ultimately help Lori Gillen or not is questionable.

Under this second provision, Lori was awarded an 8.1395% interest in Kevin's retired pay if, as, and when received by him. The domestic relations order further provided that in no event should Lori receive less than $227.99 as her share of Kevin's monthly disposable retired pay. Kevin argued that the award of a minimum of $227.99 had the effect of precluding him from waiving retired pay and electing disability, as there might be less than $227.99 in his monthly retirement pay if he got full or even partial disability. In explanation for its approval of this provision, the court said, “The amount of Kevin's retired pay Lori receives is dependent on the amount of available retired pay. As long as there is disposable retired pay available, Lori will receive either $227.99 or 8.1395% of the pay, whichever is higher. Lori's portion of Kevin's retired pay is derived solely from Kevin's disposable retired pay, therefore, she can only receive what is available.

If Kevin's retired pay is reduced to zero because he elects disability benefits, Lori will receive nothing. The language in this paragraph does not restrict Kevin's right to make such an election.” Thus, Kevin could still elect disability to his heart's content, and if less than $227.99 in military retirement were left, Lori could end up with a lesser amount or, if Kevin's disability were total, nothing at all.

Alaskan Court's Solution Runs Afoul of State and Federal Law

In Young v. Lowery , 221 P.3d 1006 (Alaska, 12/24/09), decided in the same month as Gillen , Alaska's Supreme Court shot down another creative attempt by a trial court to make sure that the spouse of a military member would not be cheated out of her share of his retirement pay. The trial court in Young attempted to protect the wife by imposition of a constructive trust.

The Young case involved U.S. Coast Guard retiree Scott Young and his wife, Cheryl Lowery, to whom he had been married for less than the period of his full military career. They had entered into marriage in 1994 and the wife filed for divorce in January 2007. A week before trial, Young was awarded an unspecified amount of disability pay, which would reduce his retirement pay. The trial court awarded the wife one half of the marital portion of Young's pension. The marital portion was that portion of the full pension amount accrued during the years in which Young's military service overlapped with his marriage ' here, the marital portion of the pension was calculated at 50.68%, and the wife was awarded half of that portion, or 25.34%, of Young's total monthly retired pay.

The trial court entered a qualified order instructing the Coast Guard to distribute each spouse's share of the retired pay directly to that spouse. The qualified order required division and payment according to the percentages announced in the court's written decision, but stated further that Lowery's monthly payment “shall not be less than $614.36 per month with cost-of-living increases.” The order also provided, however, that if Young elected to receive disability payments in lieu of retirement benefits he would be deemed to have created a constructive trust in his wife's favor. It went on to say that, upon that event, Lowery would “have an interest in, and the right to immediate possession of, so much of [the husband's] property as is necessary to satisfy said trust.”

Young first argued on appeal that because he was required by law to use a portion of his $2,424.45 monthly pension payment as a substitute for his disability payment, the court-ordered $614.36 (25.34% of $2,424.45) minimum payment to his wife erroneously reduced his disability payment. The Alaska Supreme Court agreed and vacated that portion of the order, finding that the trial court's failure to limit the property division to Young's actual disposable retired pay violated the USFSPA.

As for the creation of a constructive trust, that remedy also was not authorized by Alaska law. In Alaska, a constructive trust is only available when it can be shown by clear and convincing proof that the party against whom the trust will be imposed has been unjustly enriched by receiving assets that rightly belong to the party in whose favor the trust will be created. Riddell v. Edwards , 76 P.3d 847, 852 (Alaska 2003). The constructive trust arises to prevent the property holder from retaining property obtained “by reason of unjust, unconscionable, or unlawful means.” McKnight v. Rice, Hoppner, Brown & Brunner , 678 P.2d 1330 (Alaska 1984). With these principles in mind, the Young court stated: “The trial court did not expressly forbid Young from taking action that would reduce Lowery's monthly retired pay; instead it required him to make up that difference if he elected to do so. Young therefore would not violate the terms of the court's order by waiving more retired pay, nor would he violate any state or federal law by doing so. We also do not believe that choosing to receive more disability pay in lieu of retired pay to reduce one's tax burden, which federal law permits, is so 'unjust' or 'unconscionable' as to warrant a constructive trust.” The Alaska Supreme Court did say, however, that the trial court could have expressly ordered Young not to reduce his disposable retired pay and could have required him to indemnify Lowery for any amounts by which her payments were reduced below the amount set on the date the amended qualified order was entered. Therefore, the court concluded by stating, “We vacate the portion of the qualified order relating to a constructive trust; on remand the court may in its discretion replace that language with an appropriate indemnity provision.”

Janice G. Inman is Editor-in-Chief of this newsletter.