In Texas, people often assume property is divided equally (“50/50”) between the parties, however, Texas law provides that community property be divided in a “just and right” manner. Although that can sometimes mean that everything is split in half, 50/50 isn’t always just and right. Many factors impact how property is divided, including waste, fraud, affairs, and the needs and income levels of the parties involved. There are many other reasons courts deviate from a 50/50 division, so it’s important to arm yourself with information regarding the options before agreeing to divide any property. To effectively divide property, all debts and assets owned by the parties must be assigned values, identified, and characterized.

Characterization

In a divorce, debts and assets are categorized as either community property or separate property for ownership interest. Community property is property to which both spouses have a claim. For example, the marital home is often considered community property because it was purchased during the marriage with funds earned during the marriage. Even if only one spouse bought the house, the other spouse would still have a claim to the equity in the home.

Conversely, separate property belongs to only one spouse. Usually, this is because the property was acquired before the marriage occurred. For example, if you buy a car before getting married, the vehicle will generally be characterized as separate property. Separate property can also be created if you are gifted or inherit property during the marriage. Property can also be characterized as mixed when assets have been commingled, and there may also be other claims related to property ownership like reimbursement claims.
In Texas, the law presumes that all property owned by the parties is community property. Parties that claim certain debts or assets as separate property have the burden of rebutting the community property presumption by clear evidence, which typically requires tracing the source of the asset/property. See Boyd v. Boyd, 131 S.W.3d 605 (Tex. App. 2004).

Likewise, property acquired after the dissolution of marriage is separate property. It is important to note that the characterization of separate property does not occur when two legally married parties cease living together or when two legally married parties file for divorce. Texas does not recognize legal separation; this means that property acquired while separated is not considered separate property.

Because of the nuances of characterization and tracing, and the presumption in Texas that all property in a marriage is community property, it is important to work with an attorney experienced in these subtleties.

Martial Property Characterization

During the process of characterizing property, lawyers and experts determine what the marital estate consists of by looking at the date the property was acquired and then determining whether each asset is common, separate, or a combination of the two, and whether there are claims as a result.

Separate property is property that you owned before the marriage, or were given as a gift or inherited during the marriage. Marital property is all property acquired by both parties since the date of marriage. For example, in Texas, a professional practice opened during a marriage would typically be considered community property.

While characterizing property may sound straightforward, there are many instances in which separate property can become community property, and community property can become separate. Most commonly, prenups and postnups preemptively affect the characterization of assets before a divorce is even filed.

Community Property

Although there is no precise definition of community property in the Texas Constitution, the Texas Family Code defines it as “the property, other than separate property, acquired by either spouse during marriage.” TEX. FAM. CODE § 3.002; Douglas v. Delp, 987 S.W.2d 879, 882 (Tex. 1999).

Texas is a community property state, which means that all property acquired during the marriage is presumed to be community property; it belongs to both you and your spouse. Since the law provides that both parties own marital property, the court will typically divide the estate as equally as possible (usually 50/50). However, there are also many factors that a court can consider when awarding either party a disproportionate division of the community estate.

Remember the vacation home you and your spouse purchased several years ago? Since you and your spouse acquired the house while you were still married, Texas courts will make the presumption that your vacation home is community property. This philosophy also extends to pets. If you and your spouse cannot agree on who will keep the dog, a court will decide for you. The definition of an ‘equal division’ is not a standard formula, and there are many factors that a court may consider when determining what and how much of the marital property each party shall receive.

Separate Property

Generally, property acquired before marriage or as a gift or inheritance during marriage is separate property. Texas Family Code Sec. 3.001 defines a spouse’s separate property as:

  • Property owned or claimed by the spouse before marriage;
  • Property acquired by the spouse during marriage by gift, devise, or descent; and
  • The recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.

However, property acquired before the marriage can become community property if there is an agreement between the spouses to convert the property to community property and divide it. Additionally, if sperate property becomes co-mingled with community property, and you are unable to locate the documents necessary to trace the source of the funds, the separate property may become community property.

If a spouse gifts their separate property to their spouse during the marriage, that becomes the separate property of the receiving spouse.

Mixed (Separate & Community) Assets

Sometimes—even inadvertently—parties mix their separate and community estates. Imagine your uncle left you $100,000 when he died, and you used some of that money (as well as funds from a joint savings account that grew during your marriage), to make a down payment on a house. Since both separate and community funds were used, the home you purchased will be both community and separate property, to the extent and proportion that the property was purchased with separate and community property funds.

Stock & Retirement Accounts

You might be wondering if your spouse will have any claim to your stock options in a divorce. To determine the characterization of your current portfolio, you will want to gather the following information/documentation:

  • Information from your employer that grants you the restricted stock or restricted stock units;
  • Contact information for the plan administrator;
  • The account number for the stock;
  • A copy of the restricted stock benefit plan; and
  • Documentation reflecting the vesting schedule for the restricted stock or restricted stocks, award date, information about the shares, and the vesting date.

In Texas, there are several options for the division of restricted stock in a divorce:

  • If the stock was awarded and vested before the marriage, it is typically considered separate property.
  • If the stock was awarded before the marriage but vested during the marriage, part of it is community property, and part of it is separate property.
  • If the stock was awarded and vested during the marriage, all of it is considered community property.
  • If the stock was awarded during the marriage but vested after the divorce, part of it is community property, and part of it is separate property.

Like stocks, retirement accounts often require an analysis because even if the plan was obtained before the marriage, the portion contributed and the interest accrued can still be considered community property.

Reimbursement Claims

When a court divides property, it deals with three marital estates: each spouse’s separate estate and the community estate. After the court determines which assets belong to each estate, the court, if requested, will look to see if any of the marital estates are entitled to reimbursement.

Since in Texas, all property in a divorce is presumed to be community, a reimbursement claim must be proven by the requesting party, which can include documentary evidence, testimony, or a forensic expert. A common example of a reimbursement claim is as follows: Wife owns a house before marriage, and it is Wife’s separate property. At the start of the marriage, the balance owed on the mortgage was $100,000. During the marriage, the parties’ income (community property) paid $20,000 towards the balance owed on the mortgage, so when Wife and Husband get divorced, Wife will owe $80,000 of the house. Because community property was used to pay off the debt on Wife’s house, the community estate would have a reimbursement claim for the portion of the mortgage payments made during the marriage towards the principal balance owed.

If you’re filing for divorce, call our team, and we’ll help you to keep what is rightfully yours!

Valuations

The fair market value is the amount that a buyer would pay to a seller in an open market for an asset. The Texas Supreme Court further defines market value as between a “willing buyer” and a “willing seller.” In other words, both parties involved must be willing and able to buy or sell the property for such an action to determine market value.

Determining market value for divorce can be complicated because the valuation is often hypothetical. Actual value comes from negotiations between the buyer and the seller. When working in hypotheticals for the divorce, these negotiations never take place, so the real value is more difficult to determine. Figuring out the market value, therefore, relies on various approaches depending on the asset in question.

Business Valuations

Often one of the more complicated yet vital parts of a divorce is valuing a closely owned business. A business has value, and that value will have to be taken into consideration by the trial court in dividing up the community estate. Just like any other asset, a business is to valued as the amount a willing buyer (who is under no compulsion to buy) would pay a willing seller (who is under no compulsion to sell).

Valuing a business can be a complicated matter, and it will often require the work with an expert certified in business valuation. Generally speaking, the expert will use one of three approaches to valuating a business:

  1. Market Approach
  2. Asset Approach
  3. Income Approach

Market Approach
The market approach simply looks at what a company has sold for on the market. There is rarely information available for the expert to rely on the market approach.

Asset Approach
Generally speaking, the asset approach is accomplished by looking at the assets owned by the business, and it can often be accomplished by looking at the business’ balance sheet. The expert would simply add the value of the assets (accounts receivable, cash on hand, equipment, etc.) and subtract the liabilities (accounts payable, credit cards, lines of credit owed, etc.) to come up with the value. The asset approach does not take into consideration that the business is an ongoing concern.

Income Approach
The income approach values the business as an ongoing concern and takes into account the intangible asset of goodwill (see below discussion on goodwill). In other words, this approach values the business as if it will continue to make money, thus increasing the value of the business. Generally speaking, the expert will look at historical income data for the business and project income into the future. The expert will then apply a capitalization rate on that projected income to determine the value of the business before discounts and before backing out personal goodwill.

Discounts
In using the income approach, the expert will often apply discounts to the value of the business. The most common discounts are marketability discounts and lack-of-control discounts. A marketability discount takes into account how long it may take to sell the business. The longer it potentially would take to sell a business, the greater the discount. A lack-of-control discount takes into account ownership of the business. If one does not have a majority interest in a business (and therefore cannot control the decisions of the company), that interest is worth less than if the owner has a majority interest of the business. The lack of control discount takes these factors into account.

Goodwill
Goodwill can be a confusing and complicated process of business valuation. There are two types of goodwill: personal and enterprise goodwill.

Enterprise goodwill is defined by the International Glossary of Business Valuation Terms, as “[t]hat intangible asset arising as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified.” As an example, think of Rolex. Rolex is worth much more than just its stock, real estate, and capital. The name Rolex means something; it has value. That name is Rolex’s enterprise goodwill and is no different than a closely held business. The name, reputation, and structure have value.

Personal goodwill is the value of the business attributable to the individual owner of the company. The Pattern Jury Charge defines personal goodwill as “the goodwill attributable to an individual’s skill, abilities, and reputation.” For example, a world-renowned chef may make plenty of income through their catering business. Still, that success is attributed to the chef and their culinary skills, not to the general reputation of their catering company.

In Texas, personal goodwill is not taken into consideration in the overall value of a business. In a divorce in Texas, a business is valued as if the seller intends to open up a new business across the street to compete with the company they just sold. How much would you pay for that business? You wouldn’t pay much to run a chef’s catering company without the chef, but you would spend quite a bit to run a Rolex retailer.

When the expert uses the income approach, he or she will most likely apply a personal goodwill discount to the overall valuation. The discount amount is a judgment call by the expert and can often lead to wide variations in value if experts disagree on the amount.

Court Decision
Very few courts will require that the parties continue in the business together, so one spouse typically buys out the other by awarding community property to that spouse and/or with cash payments over time. It is, therefore, critical that the valuation is accurate because it directly determines how much one spouse must pay the other. Unless the business is traded on the stock market, valuations can be very complicated. Often, each side will hire a forensic expert to determine the value of the business.

Courts faced with determining the value of a business may consider both valuations and assign a value to be somewhere between the two numbers given by opposing sides, or they may adopt the value of one over the other.

Sometimes the court will order the sale of the business or the liquidation of retained earnings since that may be the only way to pay out one side or the other. Additionally, cash payments used to buy one spouse out of the business need to be secured against something (typically the business or real property), which requires drafting complicated documents to protect both parties.

Retirement Accounts

If you or your spouse owned retirement accounts before getting married, there might be claims on the value of the contributions made as well as the interest accrued during the marriage. A simplified way of thinking about it is, you will need to determine the value of the plan at the time of the marriage and subtract it from the plan’s value at the time of the divorce. The community estate would have a claim for this portion of the account. However, it’s not always that simple.

Valuing Retirement Accounts
Though the method above is one way to determine the portion of a 401(k) (or defined contribution plan) that is community property, your spouse may not agree to follow this simplified formula. This method does not account for the growth of assets, which may require a tracing. Texas courts recognize this discrepancy use other factors in determining community and separate property in these instances.

Division of Retirement Accounts
Many factors can complicate the division of a 401(k) plan. If either party borrowed against a 401(k), it is crucial to capture the account balance as well as the loan balance and award these accordingly. If the overall property division requires that a 401(k) account be divided between spouses, it’s important to understand that the value of the funds in the account is not equal to the amount you would receive in cash if you withdrew the funds. We often see instances in which Spouse A asks for a portion of Spouse B’s 401(k) in an equal amount to a cash account Spouse B is taking. When they do this, they don’t realize that a cash account is worth more than a retirement account with the same balance (due to the tax consequences and early withdrawal penalties they would likely incur if they attempt to withdraw funds from the 401(k) account).

Stock Options

Stock options (a grant of company stock) awarded as employee benefits are an asset that will need to be valued. The recipient of the stock (the employee) is unable to use the stock until the shares vest. This period of restriction is also known as the vesting period. After the vesting period ends, the recipient can own those stock shares outright, and they can then do whatever they want with the stock shares.

In addition to being granted as a benefit, restricted shares may also incentivize employees to remain with the company. If an employee quits or loses their job during the vesting period, they forfeit ownership of the stock shares.

Restricted Stock Award Plans
Many corporations have bylaws that restrict the transfer of interests or shares. In divorce, this can have implications for the spouse who is not involved in the firm as these bylaws may apply to the non-involved spouse. Every situation differs, so consider whether the non-involved spouse signed agreements that allow restrictions on transfers as well as the nature of any agreements signed.

Many partnerships contain buy-sell agreements. These agreements protect shareholders and partners and make sure that the business is well run. Generally, these agreements also include information regarding the buying and selling of stock or interest and may limit the value of the interest awarded in the divorce.

Prenups & Postnups

Most people seem to know what a prenuptial agreement (“prenup”) is, but many are not aware that you can make property agreements after a couple says, “I do” in the form of a postnuptial agreement (“postnup”). The primary difference between a postnuptial agreement and a prenuptial agreement is that prenups are written before a marriage and postnups are written during a marriage. Both agreements are contracts for the future division of property between a couple.

Prenuptial Agreements

Texas Family Code section 4.002 requires that a prenuptial agreement be in writing and signed by both parties. Furthermore, the two contracting parties do not need to exchange money or property for a valid prenuptial agreement to take place.

What Can Be Agreed to in a Prenuptial Agreement?
Texas Family Code section 4.003(a) specifies what can be in the contract:

  • The rights and obligations of each of the parties in any of their property of either or both of them whenever and wherever acquired or located;
  • The right to buy, sell, use, transfer, exchange, abandon, lease, consume, expend, assign, create a security interest in, mortgage, encumber, dispose of, or otherwise manage and control property;
  • The disposition of property on separation, marital dissolution, death, or the occurrence or nonoccurrence of any other event;
  • The modification or elimination of spousal support;
  • The making of a will, trust, or other arrangement to carry out the provisions of the agreement;
  • The ownership rights in and disposition of the death benefit from a life insurance policy;
  • The choice of law governing the construction of the agreement; and
  • Any other matter, including their personal rights and obligations, not in violation of public policy or a statute imposing a criminal penalty.

What Cannot Be Included in a Premarital Agreement?
A premarital agreement cannot adversely affect a right of child support. In other words, the parents cannot agree through a premarital agreement to a reduced amount of child support. Additionally, a prenup can’t contemplate possession and access or conservatorship for children.

Postnuptial Agreements

Texas Family Code Sec. 4.102 allows “at any time, the spouses may agree that the income or property arising from the separate property that is then owned by one of them, or that may thereafter be acquired, shall be the separate property of the owner.”

Challenging a Prenup or Postnup

Texas Family Code section 4.002 requires that a prenuptial agreement be in writing and signed by both parties. Furthermore, the two contracting parties do not need to exchange money or property for a valid prenuptial agreement to take place.

What Can Be Agreed to in a Prenuptial Agreement?
Texas Family Code section 4.003(a) specifies what can be in the contract:

  • The rights and obligations of each of the parties in any of their property of either or both of them whenever and wherever acquired or located;
  • The right to buy, sell, use, transfer, exchange, abandon, lease, consume, expend, assign, create a security interest in, mortgage, encumber, dispose of, or otherwise manage and control property;
  • The disposition of property on separation, marital dissolution, death, or the occurrence or nonoccurrence of any other event;
  • The modification or elimination of spousal support;
  • The making of a will, trust, or other arrangement to carry out the provisions of the agreement;
  • The ownership rights in and disposition of the death benefit from a life insurance policy;
  • The choice of law governing the construction of the agreement; and
  • Any other matter, including their personal rights and obligations, not in violation of public policy or a statute imposing a criminal penalty.

What Cannot Be Included in a Premarital Agreement?
A premarital agreement cannot adversely affect a right of child support. In other words, the parents cannot agree through a premarital agreement to a reduced amount of child support. Additionally, a prenup can’t contemplate possession and access or conservatorship for children.

Are Premartial and Postmartial Agreements Enforceable?

A court will enforce a premarital or postmarital agreement unless it is proven that the party did not sign the agreement voluntarily, or the agreement was unreasonable. If the contract was unconscionable, one must also prove that, before signing the agreement, the signing party:

  • Was not provided a fair and reasonable disclosure of the property or financial obligations of the other party;
  • Did not voluntarily and expressly waive, in writing, any right to disclosure of the property or financial obligations of the other party beyond the disclosure provided; and
  • Did not have—or reasonably could not have had—adequate knowledge of the property or financial obligations of the other party.      

Proving that an agreement was not signed voluntarily requires a skilled lawyer who understands the details of the case, the current case law on these issues, and how to present those details to a judge or jury. Our attorneys have experience not only in analyzing cases but also in effectively advocating for our clients in court.