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. To effectively divide property, all debts and assets owned by the parties must be assigned values, identified, and characterized.
In a divorce, debts and assets are categorized as either community property or separate property for ownership interest. 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.
Separate property belongs to one spouse, usually because this 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. Texas Family Code Sec. 3.001 defines a spouse’s separate property as:
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, 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.
If a spouse gifts their separate property to their spouse during the marriage, that becomes the separate property of the receiving spouse. 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.
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.
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.
If you have a prenuptial agreement or a postnuptial agreement you may have questions about how that impacts your divorce and the characterization of your estate. Both agreements are contracts for the future division of property between a married couple. These agreements are particularly relevant to divorces occurring in Texas because the state does not recognize legal separation. It is not uncommon for one party to contest the validity of a prenuptial or postnuptial agreement and our firm is experienced in litigating these issues in terms of contesting and enforcement of these contracts. More information about these agreements can be found here.
Stock options (a grant of company stock) awarded as employee benefits are an asset that will need to be valued. You might be wondering if your spouse will have any claim to your stock options in a divorce. To determine characterization of your portfolio, you will want to gather the following information/documentation:
In Texas, there are several options for the division of restricted stock in a divorce:
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.
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. 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 and 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 withdraw 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).
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.