Is the VA Disability Waiver Marital Property?

The Uniform Services Former Spouses’ Protection Act (“USFSPA”) allows states to treat disposable military retired pay as marital property in a divorce. 10 U.S.C. § 1408(c)(1) (2000). Former spouses whose marriage to the service member overlapped the service member’s military service for at least 10 years of service may receive their share of military retired pay directly from Defense Finance and Accounting Service (“DFAS”). 10 U.S.C. § 1408(d)(2) (2000). The act defines disposable military pay as the total monthly retired pay less any waiver of retired pay required in order to receive disability compensation and amounts deducted in order to provide a current spouse with a survivor benefit annuity. 10 U.S.C. § 1408 (a)(4) (2000).

Service members who are not qualified to receive military disability retired pay, but still have some form of service-connected disability, are permitted to receive tax-free disability compensation from the Veteran’s Administration (VA) in lieu of taxable retired pay from DFAS. This election is called the VA Disability Waiver (“VA Waiver”). When a service member elects to receive money through the VA Waiver, there is a dollar-for-dollar reduction in the retirement pension. The VA Waiver is distributed through the VA, not DFAS. The VA will not distribute money to the former spouse. When a service member elects to receive tax-free income under the VA Waiver, the former spouse’s payment from DFAS is reduced.

Federal law prevents a court from dividing VA benefits. Mansell v. Mansell, 490 U.S. 581, 595 (1989). For that reason, courts throughout the country use different theories to ensure an equitable division of assets between divorcing spouses.

First, contract theory precludes a service member from unilaterally reducing the amount of property a former spouse was intended to receive based on the prior agreement. See, e.g., Hayward v. Hayward, 868 A.2d 554 (Pa. Super. Ct. 2005); Suratt v. Suratt, 85 Ark. App. 267 (Ark. Ct. App. 2004). Gatfield v. Gatfield, 682 N.W.2d 632 (Minn. Ct. App. 2004); Krapf v Krapf, 786 N.E.2d 318 (Mass. 2003); Shelton v. Shelton, 78 P.3d 507 (Nev. 2003); Scheidel v. Scheidel, 129 N.M. 223 (N.M. Ct. App. 2000) Owen v. Owen, 14 Va. App. 623 (Va. Ct. App. 1992).

Alternatively, constructive trust theory reasons that once the divorce is finalized, the service member holds the portion of retired pay awarded to the former spouse in constructive trust. Thus, the service member cannot unilaterally change that interest without indemnifying the former spouse. See, e.g., Black v. Black, 842 A.2d 1280 (Me.2004); Whitefield v. Whitefield, 862 A.2d 1187 (N.J. Super. Ct. App. Div. 2004); Danielson v. Evans, 36 P.3d 749 (Ariz. Ct. App. 2001); Johnson v. Johnson, 37 S.W.3d 892 (Tenn. 2001); In re Marriage of Krempin, 70 Cal. App. 4th 1008 (Cal. Ct. App. 1997); In re Marriage of Nielsen, 293 N.E.2d 844 (Ill. App. Ct. 2003); In re Strassner, 895 S.W.2d 614 (Mo. Ct. App. 1995); McHugh v. McHugh, 861 P.2d 113 (Idaho Ct. App. 1993).

In In re Marriage of Lodeski, 107 P.3d 1097, 1098 (Colo. Ct. App. 2004), a postdissolution proceeding in Colorado, the former spouse of a military service member filed a motion for contempt, alleging that the service member violated the property division orders by converting his military pension to the VA Waiver. As part of the property division, the former spouse was awarded a fractional share of the service member’s military retirement pay. Unbeknownst to the former spouse, the service member was in the process of converting all of his military pay to the VA Waiver. Once the conversion was processed and the VA Waiver implemented, all payments to the former spouse ceased. The service member contended that because he has the right under federal law to elect to receive veterans’ disability benefits and waive military retirement pay, he could not be held in contempt for converting his pension. The Colorado Appellate Court disagreed. In a holding consistent with constructive trust theory, the Court held that the trial court had authority to impose remedial sanctions for interfering with the former spouse’s share of the retirement.

The states that have addressed this issue appear to be unanimous in holding that the entire military retirement, including the VA Waiver, may be considered by the court in making an equitable distribution of property.

If your divorce involves VA disability, it is important to have a good family law attorney in your corner. Give us a call.