We live in a community property state of Texas where the “inception of title” rule determines that everything accumulated from the date of marriage until the date of divorce is characterized as community assets … with the exception of gift, devise or descent.
Here is a top-10 list of common questions that clients ask when trying to determine what kind of settlement they will achieve upon divorce. Please note that the information following is general advice, and each case is fact-specific; you need to consult our attorneys about your specific case in order to know the facts about your situation.
- Marital Home: If purchased during the marriage, the home is community. Typically, if one party can afford the mortgage payment, and there is enough cash liquidity in the estate you have options:
- SELL – You can sell it and DIVIDE the proceeds, but you must consider the closing costs, taxes (approximately 8-16% of the cost of the home, depending on broker fees and your own negotiations), and the months left on the market incurring further debt. If the home has been refinanced recently and has little equity, it makes little sense to sell unless neither party can afford the payment alone. Likewise, if there is a large amount of equity, it is important to get a proper appraisement and not simply go by the county appraisal district’s approximation, an interested realtor or by a website. Pay the roughly $250-$500 to get the home appraised; furthermore, if you plan to refinance the house solely in your name after the divorce, ensure that your lender will honor this appraisal so that you don’t have to pay this fee again in the future.
- BUY – If one spouse KEEPS the house home, they must “buy out” the other spouse from their portion of the equity; if there are other sources in the estate to cover this cost, you can potentially “buy out” the other spouse without actually paying cash, which is ideal.
- 401k: The question here is simply whether to DIVIDE it or KEEP it; the answer is also simple — if there is enough in the estate to equalize (make 50%/50%) both sides without DIVIDING the 401k assets, then it is easier and cheaper to KEEP the 401k in the name of the party who it is titled. However, often this is not the case.
- For example, if the wife has a 401k of $100,000 and the husband does not have a 401k, then the only answer is DIVIDE the 401k with a Qualified Domestic Relations Order so that each party gets $50,000 (assuming a 50-50% split).
- Conversely, if husband has a significantly larger 401k accrued during the marriage of $1 million, and wife has $250,000, then it looks like husband may need to DIVIDE his 401k to make up the difference.
- ****There is a common myth about 401k’s — that they provide instant cash. Beware of the tax consequences and know your effective tax rate if you try to cash out of a 401k prior to the qualifying age of the plan (the age starts for example, at 59 ½ and upwards depending on the plan). You don’t want your $50,000 to become a distribution of $25,000 due to tax consequences from a premature withdrawal.
- Cars: The general rule is that each party KEEPS the car in their possession. Exceptions include cars that are gifted (separate property), cars that the party cannot afford payments for, and situations when families have multiple vehicles; in such cases, the court may order SELLING to create more cash for the estate. However, remember that DEBT FOLLOWS THE ASSET. If you are awarded an asset, you will also have the privilege of the monthly car payment and the insurance payment. So, if you love your new 2012 Lexus, you better love that $1,000+ monthly payment (and be able to afford it).
- Family Businesses: If started during the marriage, a family business is community property and a business valuation will likely be required to determine its impact on the division of the estate. However, if one party is less involved (i.e., silent partner, not involved in day-to-day operations), then the other spouse may attempt to claim that it is separate. Further, both parties must come to an agreement about who owns the business, or the Court might order the parties to SELL the business and DIVIDE assets and debts after the net proceeds. It is critical that you consult a business attorney or one of our complex estate divorce attorneys before embarking on a divorce involving businesses in the estate.
- 529 funds: College funds for the children should stay intact (depending on how they were funded- gift or inheritance from one spouse’s family is an exception); you should consult a financial advisor in all instances. Ultimately, one party KEEPS the custodial accounts for the benefit of the children’s education; this may be done by agreement or by court order, depending on the level of effective co-parenting (see also, “What are the Effects of Divorce on Kids?“).
- Investment accounts: Typically, investment vehicles such as stocks, bonds, CD’s and mutual funds can be divided easily with court order, but always consult your CPA and/or tax lawyerto see whether it is more advantageous to KEEP certain investments titled in one party’s name. If this is the case, both parties need to agree to effectuate a just and equitable division of the rest of the estate to accommodate this transfer of ownership.
- For example, if the wife retains sole ownership of $100,000 in stocks and the husband receives $0, then the wife may need to relinquish $100,000 in equity in the house (in a 50%/50% division).
- Understand that valuations are determined at a single point in time; if the stock plummets after you have agreed to the division, it could negatively impact your portion of the estate and lead to prolonged (and expensive!) litigation. The court is not equipped to determine the volatility of the assets that you receive, only their worth; be sure to factor in the stability of your portion of the estate alongside its worth at the time of your divorce. Here, consulting a qualified expert will be to your advantage; it is better to invest a comparatively small amount up-front in such services than to risk losing a significant portion of your estate over the long-term.
- Debt:A common myth is that you can DIVIDE or “award” debt and that the other party will always pay. I suggest that all clients in mediation or informal settlement, conservatively try to pay off debt through the assets of the estate or have the higher income earner, lower risk spouse assume the debt with an offset of assets to make up the difference. Creditors are ruthless and will go after whomever the card, mortgage, note, loan has as security. Also, student loans and IRS debt are the iron-clad collectors who will garnish payment and attach to assets so beware.
- For example, if the wife takes on $25,000 consumer debt from a joint credit card, she gets an offset from the husband’s 401k to do so, and thus takes a greater share of 401k monies in exchange for taking the debt.
- Inheritance: The party who inherits KEEPS the inheritance. It is separate property.
- Gifts: The party who receives the gift KEEPS the gift. This goes for engagement rings, art, pets, and expensive cars. (Happy 40th Birthday baby!) . And yes, this also goes for plastic surgery that one spouse buys for another (see “Man’s Breast Friend: The Valuation of Plastic Surgery in Divorce and Post-Divorce Surgery“).
- Pre-marriage possessions, accounts, investments, real estate: If you owned it before marriage, you KEEP it. So long as you did not co-mingle accounts or re-title (re-characterize the property) during the marriage, it will remain separate property.
The aforementioned items are general advice and do not constitute legal advice. You need to contact one of our attorneys to gain legal advice that is specific to your case. Please call me if I can be of service.
The Law Office of Natalie Gregg
(972) 829 – 3923