Dividing Marital Assets (and Debts) is a Key Aspect of the Divorce Process in Texas
When going through a divorce, the division of assets is one issue that all couples need to address. While not all couples have children, all couples likely have assets they must divide when bringing their marriage to an end.
Regardless of the value of your marital assets, dividing them in a divorce requires a careful, informed and strategic approach. When dividing marital assets, both spouses may need to make compromises. But, while you may not be entitled to everything, you are entitled to a fair outcome, and you can—and should—work with your attorney to divide your marital assets in a way that meets your needs both now and in the years to come.
Understanding Texas’ “Community Property” Law
Texas is a community property state, meaning that any property acquired during the marriage is considered “community property” and must be divided in a “just and right manner” at the time of divorce. “Separate property” is property obtained prior to marriage or property obtained during the marriage from an inheritance or gift, and it is not subject to division. If you want to protect your separate property, it is important to work with an experienced attorney who can effectively prove that you owned property prior to the marriage or that you received it as a gift or inheritance during the marriage.
What constitutes a “just and right manner” of dividing community property? The short answer is, “It depends.” While other community property states typically require a 50-50 split, Texas law recognizes that equal division is not appropriate in all scenarios. So, while you and your spouse may each be entitled to half of your marital estate, various factors could favor an unequal distribution. Some examples of factors that can come into play when dividing marital assets under Texas’s community property law include:
- Disparities in earning power
- Tax implications (as discussed in greater detail below)
- The spouses’ post-divorce parenting plan
- The spouses’ respective health conditions
- Waste of community assets and other forms of “marital fault”
Division of Marital Property in a Texas Divorce
While any divorce is difficult, those divorces involving significant assets and high-net-worth individuals can become complex very quickly. If you are in a high net worth divorce or have significant assets, you will be forced to divide with your spouse, it is important to protect your rights at the outset. Christine K. Lincoln is an experienced attorney who will take the time to understand your unique concerns and appropriately protect your interest in:
- Real estate (including family residences, vacation homes and investment properties)
- Pensions and retirement accounts (including IRAs, SEP IRAs, Roth IRAs and 401(k)s, 403(b)s)
- Restricted stock units, stock options, performance units, 409(a) plans and non-qualified incentive compensation
- Family businesses and business assets
- Investments (including stocks, bonds, mutual funds, ETFs and digital assets
- Automobiles, boats and other significant items of personal property
- Bank accounts (including any accounts your spouse may be hiding)
- Insurance policies and annuities
- Interests in other privately-owned businesses
- Ownership of intellectual property rights (patents and copyrights)
- Artwork, jewelry, memorabilia and other collections
- Assets with sentimental value (including photo albums and children’s artwork)
There are many strategies used to protect high-net-worth clients. If you and your spouse currently own a business, you may want to hire a business appraiser to determine the business’ fair market value in order to ensure an accurate value is assigned to the business so that the spouse not keeping the business after the divorce is fairly compensated. We will also use experts, including forensic accountants, who are trained in tracing property and appropriate valuations at the time of divorce. Tax consequences are also evaluated in any property division.
Division of Marital Debts in a Texas Divorce
Along with dividing their community assets, divorcing spouses must also divide their community debts. Similar to assets, “community debts” are generally those incurred during the marriage, while “separate debts” incurred prior to the marriage typically are not subject to division. But, as with both community and separate assets, there are exceptions here as well, and divorcing spouses must work closely with their attorneys to determine which debts are at issue in their divorce.
Most couples will have a variety of types of debts that they will need to address during the divorce process. For example, depending on the circumstances under which they were incurred, all of the following could potentially be subject to division:
- Home equity lines of credit
- Personal loans
- Vehicle and boat loans
- Other secured debts
- Medical debt
- Credit card debt
- Personally guaranteed business loans
- Overdue utility bills and other delinquent debts
Dividing debts in a divorce can present unique challenges in some cases. For example, whereas spouses may have qualified for a home loan as a couple, neither may qualify individually for the loan after their divorce. While there are options available in this type of scenario, both spouses must work closely with their respective attorneys and make an informed decision about how best to protect their financial interests long-term.
In some cases, it will make sense for divorcing spouses to pay off joint debts as part of the divorce process. Rather than attempting to refinance or remaining jointly liable for a loan after their divorce, spouses may prefer instead to use their cash on hand or liquidate certain assets so that they can eliminate certain debts and move on. If this is an option that appeals to you, attorney Christine K. Lincoln can help you pursue this route while also addressing the tax and other considerations involved.
Tax Consequences of Property Division During a Divorce in Texas
A divorce can have significant tax consequences for both parties. If you are facing a divorce or you are currently in the divorce process, you will want to know how the property you receive in a divorce settlement will be affected by taxes. For example, if one receives a Roth IRA in a divorce, the income tax has already been paid on those funds and at the time of withdrawal, there is usually no income tax due on the funds withdrawn, unlike a traditional IRA or a 401(k) plan where the income tax is not paid until the funds are withdrawn from the traditional IRA or the 401(k) plan. Another example is funds held in a checking or savings account are generally not subject to income tax other than the interest earned on those accounts, therefore, a dollar in a traditional checking or savings account is usually worth more than a dollar in a traditional IRA or a 401(k) plan because income tax will eventually need to be paid on funds withdrawn in a traditional IRA or a 401(k). Every asset received in a divorce settlement must be considered for possible tax effects. The amount of current or future tax consequences associated with an asset should always be factored in when preparing a division of property in a divorce. Christine K. Lincoln suggests that all prospective and current clients discuss the tax implications of assets received in a divorce with a certified public accountant. Christine K. Lincoln is not a certified public accountant.
Other Tax Issues Related to a Divorce
Christine K. Lincoln is not a certified public accountant and cannot provide tax advice. She suggests that all prospective clients and current clients consult with their certified public accountant to choose the best manner of filing their tax returns and claiming any deductions.
What If I Have a Prenuptial or Postnuptial Agreement?
If you have a prenuptial or postnuptial agreement, the terms of your agreement could significantly impact the distribution of property in your divorce. Texas generally recognizes the enforceability of these agreements (absent issues such as unconscionability and fraud), and property-related terms in particular are likely to be upheld if they reflect a good-faith transaction entered into by spouses who both had a clear understanding of the implications involved.
When divorcing spouses have a valid prenuptial (agreement signed before marriage) or postnuptial agreement (agreement signed after marriage), the terms of their agreement will override Texas’ default community property laws. This means that a prenuptial or postnuptial can remove any creation of community property which would normally be created by income earned by spouses during the marriage and any purchases made with the spouses’ income earned during the marriage, or it can provide that one spouse is entitled to community assets in a manner that is different from what the law would otherwise require. As a result, if you have a prenuptial agreement or postnuptial agreement, it will be important for you to discuss the implications of your agreement with your divorce attorney.
What If My Spouse and I Can’t Agree on How To Divide Our Marital Property?
In an ideal scenario, divorcing spouses will be able to quickly reach an amicable agreement regarding the distribution of their community property. As a practical matter, however, conflicting priorities and competing desires will often lead to disagreements. Fortunately, when these disagreements arise, divorcing spouses have several options short of litigating their divorce in court. For example, mediation and collaborative law are tools that can prove highly effective under the right circumstances, and if you have concerns about how your spouse will approach property division in your divorce, these are options you will want to discuss with your attorney.
Regardless if you have a small estate or a large estate, if you are concerned about protecting “separate property” after a divorce, we can help. At every stage, we will remain advocates, dedicated to helping you protect your financial interests and security after divorce.
We represent clients with estates worth a minimal amount to a substantial amount. Our clients come from diverse backgrounds and some come to us with some complex property division cases. When necessary, we will work with accountants and forensic experts to best protect your rights and fully valuate your business, assets and investments prior to divorce.
Schedule a Confidential Consultation with Divorce Attorney Christine K. Lincoln
If you are contemplating a divorce and would like to know more about what to expect with regard to property division, we invite you to schedule a consultation at The Lincoln Law Firm. To speak with divorce attorney Christine K. Lincoln in confidence, please call 281-970-9005 or tell us how we can contact you online today.