Assumptions about community property division could result in an unfair property settlement. This article explains some important basics.
Equitable division of community property is the standard followed in Texas divorces. This does not mean all property is divided equally or 50/50. Business owners, professionals and other high net worth individuals must consider the characterization of property, retirement/investment assets and taxes to safeguard their future finances.
After compiling an inventory of all your property and debts, consider the following questions. Did your parents give you a generous gift, such as a down payment on a home? Did you grandmother leave an inheritance to you during the marriage (i.e. a vacation home or valuable collection)? You may have separate property.
Tip 1: Identify separate property and trace assets
Challenging the community property presumption can be significant, because the court will not divide separate property, including:
It may be possible to trace separate property. For instance, if you can show you bought a car outright with inheritance money, the car could be separate property.
Putting inheritance funds or a gift into a joint account and paying monthly expenses would likely convert the assets into community property.
Tip 2: Correctly value stock options and use a QDRO on retirement accounts
When a spouse is an executive or owner of a privately held business or professional practice, hard to value assets such as stock options and deferred compensation are common. To obtain a fair valuation you may need the assistance of an expert.
To obtain a fair division of valuable retirement and investment accounts, you need to know what you have. Did your spouse vest in a pension at a prior employer or is your spouse entitled to a military pension? Is there a forgotten 401(k) account that never made it over to your IRA?
Recognize the difference between defined contribution (a 401(k) or 403(b) accounts) and defined benefit accounts (pensions). Then ensure you have a proper qualified domestic relations order (QDRO) before finalizing the divorce. One mistake in the language used on this complex form could easily affect your retirement finances.
Tip 3: Do not ignore the taxes
Lastly, be careful that the property division does not leave you with a larger tax bill.
What tax could you own on an investment account? Consider capital gains taxes. Two seemingly similar investments worth $500,000 could carry very different tax burdens. The capital gains taxes would be much higher on the account purchased years ago for $225,000 rather than one purchased more recently for $450,000.
Taxes also vary based on the type of retirement account. The face value of a Roth and a 401(k) could be similar, but one is an after-tax investment account while the other is a tax-deferred retirement account. The taxes you will have to pay on 401(k) disbursements will reduce the actual amount available to fund your retirement.
These tips offer a starting point, but are no substitute for individualized legal advice. When you are considering divorce, speak with a divorce attorney who can explain Texas law in more detail and identify possible issues early on.