Severance packages can be a financial wildcard when navigating a divorce. In Colorado and other equitable distribution states, courts determine whether these benefits are marital property—subject to fair division—or separate property, belonging solely to the individual. The stakes are high: classification as marital or separate property can significantly affect each spouse’s financial future. Understanding these guidelines is crucial for anyone facing a divorce where severance benefits come into play in Colorado property division.
What Is a Severance Package?
A severance package is compensation provided by an employer to an employee who is leaving the company, most often due to a layoff, termination, or sometimes retirement. These packages can include:
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- Salary continuation or lump-sum payments
- Payout for unused vacation or sick time
- Health or life insurance extensions
- Retirement benefits or pensions
- Stock options or restricted stock units
- Job placement assistance or other transitional perks
Employers generally offer these benefits to help ease the financial burden of losing a job. However, in divorce proceedings, determining whether these payments should be shared—or not—can be complicated.
How Colorado Courts Decide
Under Colorado Revised Statutes § 14-10-113, Colorado courts follow an “equitable division” model when dividing marital property. Property acquired during the marriage is generally presumed marital, while property acquired before or after the marriage (or via certain other exceptions like inheritance) is typically considered separate.
When determining whether a severance package is marital or separate, courts often look at three main factors:
- Timing
- Was the severance earned during the marriage?
- Was the couple already legally separated or divorced when the severance was offered or paid?
- Purpose
- Does the severance replace future earnings or is it a reward for past services?
- If it’s intended to replace income that would have been earned post-divorce, courts may classify it as separate property.
- If it compensates for work completed during the marriage, it may be considered marital property.
- Terms
- Are the benefits contingent upon a future event, like an office closure or final termination?
- Do the severance terms explicitly tie the payment to services performed during or after the marriage?
Case: In re Marriage of Holmes
A seminal Colorado case that clarifies how courts analyze severance packages is In re Marriage of Holmes, 841 P.2d 388 (Colo. App. 1992). In this case:
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- The husband worked at a nuclear plant set to close. His employer offered a severance plan as an incentive for employees to stay until their positions were terminated.
- The plan included salary continuation, lump-sum payments, and health benefits, but these benefits only became available if the employee remained employed until a termination notice was issued.
- The divorce occurred before his official termination.
What the Court Decided
The Colorado Court of Appeals ruled that the severance was not marital property. Because the payments replaced future income lost after the divorce (i.e., post-termination earnings), and the husband’s eligibility was contingent on an event that occurred after the marriage ended, the court classified it as separate property. This case highlights how timing and the specific purpose behind the severance are vital considerations.
Why the Details Matter
The implications of Holmes reach beyond its specific facts. Courts will carefully examine the:
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- Contractual Language: Does the severance agreement mention service rendered during a particular timeframe, or does it state that the payment is contingent on a future event like job termination after a certain date?
- Payment Schedule: Is the severance paid out over time (mimicking future wages) or is it a lump sum directly tied to work already completed during the marriage?
- Legal Separation Date: Even if you haven’t finalized your divorce, the legal separation date might be critical in determining whether severance is considered marital property.
In short, the more the severance resembles future income—compensation for wages you haven’t earned yet—the more likely it is to be deemed separate property. Conversely, if it appears to be deferred compensation for work performed during the marriage, it will likely be deemed marital property.
What This Means for You
- Carefully Review Severance Documents
- Examine whether the severance is explicitly intended to cover future or past work.
- Check for any wording that ties the benefit to services rendered during the marriage.
- Determine the Legal Separation Date
- The timing of your legal separation or the point at which you filed for divorce can be pivotal.
- Understand the Value at Stake
- Severance packages can be substantial and may significantly affect each spouse’s financial standing post-divorce.
- Consult Experts
- An experienced family law attorney can analyze the complexities of severance agreements, applicable case law, and statutory guidelines.
- Financial experts may also help in accurately valuing the portion of severance attributable to marital versus separate property.
Get Help With Complex Divorce Issues
Dealing with severance packages in a Colorado divorce can be emotionally taxing and legally intricate. The key is to understand how courts look at timing, purpose, and the terms of these packages. Because each situation is highly fact-specific, it’s wise to consult an experienced family law attorney who can:
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- Evaluate the specific severance agreement terms
- Advise on whether your severance is likely to be considered marital or separate property
- Develop a strategy that protects your financial interests during and after the divorce
If you have questions about how severance packages or other employment benefits may be divided in your Colorado divorce, contact us today. Griffiths Law can provide guidance tailored to your unique circumstances, ensuring that you understand your rights and are well-prepared for the road ahead.