In today’s Divorce Academy video, Kevin discusses how marital assets or community property is divided in Texas.
Video Transcript:
Hi everyone! Welcome to Divorce Academy. I’m Kevin Handy. I’m one of the divorce mediators here at SnapDivorce. In today’s video we’re going to talk about how marital or community property is divided in Texas.
In Texas, like pretty much everywhere else, there’s going to be three steps to figure out how to divide marital property. Those steps are (1) identify the marital or community property, (2) value the marital or community property, and then (3) divide the marital or community property. And I’m using marital and community property kind of interchangeably. In Texas property that’s acquired during the marriage is called community property and that’s what’s divided in Texas.
Alright, let’s start with Step #1, which is identifying the marital or community property. Like I said just a moment ago, Texas is a community property state. What that really means in terms of Texas is that any assets or debts acquired during the course of the marriage are deemed to be community property. And that’s with very few exceptions. So you’re talking about accounts – bank accounts, retirement accounts, such as 401(k)s, credit card debt – that would be an account, real property, so your marital residence or if you’ve got rental real estate, again acquired during the marriage, it’s going to be determined to be community property in Texas.
Another thing that’s determined to be community property in Texas is an increase in value on separate property. In just a moment I’ll talk about what is separate property versus community property in Texas. But if you have separate premarital property — maybe you had 401(k) from a job you had before you got married — that’s something that’s going to be determined to be separate property. But if that 401(k) goes up in value as a result of, say, market experience during the marriage, then the part of the 401(k) — the increase in value is going to be determined to be community property subject to distribution in Texas. It’s really basically anything that’s acquired from the date you’re married until the date the divorce decree is issued. Again, so, anything acquired during the marriage.
Now, separate or non-community property . . .again I said there are a few exceptions to property acquired during the marriage. So separate or non-community property is going to be property acquired prior to the marriage, and that includes debts as well, so property or debts, acquired prior to the marriage, or property acquired during the marriage by gift, inheritance, or personal injury settlement. The biggest one that that most people are worried about that comes up often is gifts from parents or inheritances. People are worried . . . hey I’m getting . . . you know my parents want to give me a big gift, but they don’t want my spouse to get it in case we get divorced. Well, under Texas law, that’s not the case. That’s going to be determined to be separate property. Again, step one is identify the property. So you have to identify what is community property and what is separate property in Texas before you can go on to figuring out what’s the value and how to divide it.
So, some things that do come up that kind of blur the lines between community property and separate property are, for example, co-mingling. What happens if you buy a house during the marriage and it’s in joint names but the down payment came from someone’s premarital separate property bank account? That’s an example of co-mingling. You take separate property and mingle it with what we deem to be marital property. As long as the premarital assets that were put into the marital property can be traced, then the person whose assets they were they can get those back. So that’s an example. Or perhaps maybe you used a premarital bank account to help pay down a mortgage or other or marital debt during the marriage. Again, if you can trace that back to the premarital asset then you can argue to get that back during the property distribution stage.
The other one that comes up is conversion. Conversion is the idea of if you take a premarital or separate asset, Can you convert that into becoming a marital asset? Well, in Texas the rules are pretty specific. There has to be a written agreement. So if you have a premarital house, for example, and you decide to put it in joint names, that doesn’t convert the asset into a marital asset. You would actually have to have a written agreement that says, hey we agree that this house is going to become a marital or community property asset, and that’s pretty unusual.
So those are kind of the two issues that come up that kind of blur the line between what is community property and what’s separate property in Texas.
We’re going to take a quick break here and when we come back and talk about how to value the community property and then how to divide the community property. So, we’ll be right back.
OK we’re back.
So, we’re going to move on to “how do you how do you value the marital or community property in Texas?”
In general, it’s pretty straightforward. For accounts you generally take the balance. So, if you have a bank account what’s the balance in the bank account? Now, if someone, after you kind of separate, someone takes out a lot of money and spends it on themselves, you can argue that that’s going to come back in or that they should be assessed with having received that asset. But, in general, you’re going to look at the balance. So, you look at the balance of 401(k) accounts, other retirement accounts, bank accounts, and credit cards. What’s the balance on the credit card, etc.?
Pensions or defined, well really, I’m talking about defined benefit pensions, a lot of times one person is going to receive those, so you have to kind of figure out what is the current value of the defined benefit pension. And by defined benefit pension, I’m talking about a pension that you might get that says, hey when you retire you’re going to get $1000 a month for the rest of your life. Well, if that pension was earned during the marriage, it obviously has value and you have to say, OK what’s the current value? How much money would I need now to enable to invest and get that benefit in the future? Generally, there’s experts that will come up with the present value of a defined benefit pension.
Real property — generally the equity in the property. What would the property sell for minus the outstanding debt, and then you get the equity. That’s how you value real property.
Businesses, this comes up not infrequently. One of the parties in the marriage has a business. They’re going to keep it. So you have to figure out is there a value to it? What is that business worth? A lot of times people will just agree it’s worth X dollars. But a lot of times you really need an expert to come in and value the business. What’s the goodwill worth? What could you sell it for? Etcetera.
Increases in value on separate property – so earlier remember I talked about co-mingling property. If you have a premarital that increase in value during the marriage, that’s going to be marital property. So, you have to tease that out. Generally, the main example is going to be a 401(k) account. This comes up all the time. Someone comes in, they’re working at a job and they have a 401(k) account with a balance in it of, say, $100,000. And then the parties are married for 10 years. The spouse with the account is contributing to it during the marriage. Maybe their employers is matching it. And, you know, say at the end of the marriage it’s worth, you know, $210,000. So then you have to tease that out, say, OK, well $100,000 was marital $110,000 . . . sorry . . . $100,000 was premarital. $110,000 is marital. So, the marital portion is going to be distributed.
I mentioned earlier, in valuing what is community or marital property, you have to go back to the tracing. So, again, frequently people will use separate premarital assets to buy a house or pay for things, stuff like that. Then there’s always going to be a process of tracing. Hey, what can we figure out? I put in this money. Can I trace it? Can I get it back? Can I figure out where it went? So you have to look at you know old bank statements – hey did I cash this out? Here it went into this checking account then it went from that checking account into the down payment on a house. You have to go back and trace all that. So, that can get fairly complicated. Once you tease out the values of what what’s marital or community property and what separate property then you can move on to dividing marital property.
We’re going to take one more quick break and when we come back we’re going to talk about how the marital property is actually then divided in Texas.
OK, we’re back. So, let’s talk about how marital property or community property is divided in Texas. So, I know I’ve mentioned this several times, Texas is a community property state. Well, sort of I’m going to say. Generally when you think of a community property state you think, hey once we determine what’s the community property, it is going to be straight out 50/50 distribution. In Texas that’s not the case. Texas is actually an equitable distribution state. Because in Texas the way that the community property is divided is by what’s called a “just and right” standard. The court doesn’t have to divide it 50/50. They can look at a variety of factors to determine how it’s going to be divided. Now, the presumption really is it’s probably, in your standard case, going to be 50/50. But like I said there are factors you can look at.
Those factors are kind of the things that make common sense. I’m not going to go through every factor, but I’m going to list the major ones. So, you have the incomes of the parties, the ages of the parties, whether one party has separate property. They’re going to be the major ones. So, if one party way out earns another party and maybe that party has a lot of separate assets, then, you know, you can come in and argue for an uneven distribution. “Hey, I don’t have as much money. I need more money to get back on my feet. I should get a bigger portion of the community property estate.” And the factors are “just and right.” So it really gets into equity; what’s fair. So, really Texas is an equitable distribution state.
Once you’ve identified the assets, you value the assets and then you’re looking at dividing them. You know, what’s going to be “just and right”? Are you going to argue for uneven distribution?
The final issue that always comes up is who gets what. So you’ve got a house, you’ve got retirement accounts, you’ve got bank accounts . . you know how is that going to be teased out? Who gets what asset?
Generally, what the lawyers or the mediator, whoever is doing it, will do is take an overall birds eye view of the estate. There’s so much retirement assets. There’s so much cash in the bank or investment accounts. And there’s so much real estate. And then you start looking at what makes sense for who to get what.
So, generally, someone will say, like, “you know I’m interested in keeping the house.” Then, if the other person doesn’t also want the house, then the person who’s going to keep the house, alright we’ll put the equity on their side. Then the question comes up can they afford to refinance the mortgage? Is there enough other assets that the party that’s not getting the house, it can result in a fair distribution? Sometimes if there’s a lot of equity in house, the person getting the house is going to have to refinance and give cash to the person that’s not getting the house.
You do the same thing with retirement accounts. How much retirement assets are there? Sometimes you’ve got hardly anything and maybe the parties just keep their own retirement accounts. But a lot of times one party will have huge amount of retirement, and the other party won’t have any retirement at all. So then, in the scheme of things, you’re going to look at transferring some of the retirement accounts from the person with the accounts the person without the accounts.
Again, you’re going to say, OK maybe this party is getting the house and there’s only a limited amount equity in the house, and there’s a lot of retirement account on the other side, so we’re going to have to transfer $100,000 from a 401(k) over to the party getting the house.
Anyway, you kind of look at balancing and you basically should do it like a spreadsheet. This party is got $200,000 in retirement accounts, $50,000 in cash, a car that’s worth $20,000, so they have whatever that would be, say $250,000. Let’s say this person is getting the house and there’s $150,000 in equity and they’re going to get $100,000 from retirement accounts. So they also have $250,000. And then it’s a 50/50 distribution. So, in theory it’s pretty simple. And once you get to the stage of who gets what it can be simple unless there’s a lot of argument about who gets which asset.
The things that will come up often is both people will want that house. And then, how do you figure out who gets the house? I’ve seen courts say, well “Let’s have each side bid against each other. Whoever is willing to offer the most money for the house gets it.” Other times the court will say, “Well this spouse they’re going to be the primary custody of the kids and we want the children to stay in the school district, so it makes sense for them to get the house.”
Other things that will come up often, often one person doesn’t want all the retirement accounts. You can’t have one person get the house and the cash and the other person get all the retirement accounts, because that’s tied up until they retire and it’s going to have tax consequences, and maybe that person also wants some cash so they can put a down payment on a new house. So those are all the kind of factors that have to go in to figuring out which party gets which asset. Usually it’s not that complicated, but that said, fights do come up about certain assets and what makes sense from time to time.
So that’s pretty much it. That is how marital or community property is divided in Texas. I hope this video was helpful. We’ll see you next time on Divorce Academy. Thank you.
