There are two different systems of military disability benefits:
1. Military disability retired pay is for members who are sufficiently disabled that they cannot perform their assigned military duties. Compensation is calculated based upon service time, rank (basic pay rate), and disability rating. If a servicemember has sufficient creditable military service, (s)he is placed on the (disability retired list( and begins to draw disability retired pay. This system is managed by the Department of Defense (DoD). 2. The retirement system is managed by the Department of Veterans Affairs (VA). Instead of measuring the ability of the servicemember to perform military duties, the VA compensation system measures the extent of disability and its effect on employability. VA disability ratings are based entirely upon the severity of the injury and do not consider years of service or rank. This system covers injuries or illness that are not necessarily combat related, but only service connected. It covers injuries or diseases that happened while on active duty or were made worse by active duty. Disability ratings range from 0% to 100%. The benefits paid by both systems are tax-free to the servicemember.
Law Prior to 2014
Prior to July of 2014, there was a lot of confusion as to whether or not a former or current, but divorcing spouse could be compensated for any portion of the service members disability pay. The law used to require the servicemember to indemnify the (former) spouse for her portion of the servicemember's disability pay from so other source of income; thereby shirting the issue of the non-divisibility of disability pay. In order to protect a former spouse's income from a servicemembers unilateral decision to waive a portion of his military retired pay in favor of disability, Arizona courts circumvented the federal law that states disability benefits are not divisible as community property. In Merrill v. Merrill, 284 P.3d 880 (2012), Arizona determined that a spouse cannot defeat the nonemployee spouse's interest in retirement benefits already awarded to her by invoking a condition wholly within his control (i.e. requesting a disability rating). The servicemember was ordered to indemnify (make-up the difference to) the former spouse even if it requires the use of the servicemember's disability pay to do it. The court simply orderd the servicemember to make-up the difference and the servicemember is free to do so with any income or asset at his disposal. That has changed.
2014 Amendment to the Law
The law now specifically prohibits indemnification. A.R.S. ? 25-318.01 states that, in making a disposition of property, a court shall not do any of the following: 1. Consider any federal disability benefits awarded to a veteran for service-connected disabilities pursuant to 10 United States Code section 1413a or 38 United States Code chapter 11. 2. Indemnify the veteran's spouse or former spouse for any prejudgment or post judgment waiver or reduction in military retired or retainer pay related to receipt of the disability benefits. 3. Award any other income or property of the veteran to the veteran's spouse or former spouse for any prejudgment or postjudgment waiver or reduction in military retired or retainer pay related to receipt of the disability benefits. Now, even if a couple has been married for 25 years and the servicemember's spouse has not been employed for 20 years, if the servicemembers entire military pension is converted or paid as disability, the spouse will receive no portion of that benefit.
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