Alex Hunt:
Welcome back to the Texas Family Lawyer podcast. I'm Alex Hunt of Hunt Law Firm. We are a family law firm that serves the greater Houston area. And today I am very happy to be joined by our newest attorney at Hunt Law Firm, Victoria Chapman. Welcome.
Victoria Chapman:
Thank you so much for having me today.
Alex Hunt:
So, today we're going to be talking about really a topic that encompasses everything within the financial aspects of a divorce and that's community property. We're going to talk about multiple different components.
We're going to talk about what is community property, what happens to your house in a Texas divorce since that's usually people's largest asset. And then, how do you protect your 401k in a Texas divorce, which is usually either number one or number two.
So, let's jump right in. All right, Victoria, our first question is what is community property in a Texas divorce? And this is a really important question because really everything else as it relates to property and division of property in a Texas divorce emanates from community property and separate property.
We're one of only nine states that's a community property state. And tell us a little bit about in Texas, what is community property?
Victoria Chapman:
So, community property is any property that is acquired during the marriage. It's any wages from either of the spouses, any real property that they purchase together, cars, retirement funds, bank accounts. And in Texas all of this property is presumed community whenever it is purchased during the marriage.
Alex Hunt:
And so that can include everything, real estate, vehicles, furniture, cash, income. And a lot of times in our practice we will get one spouse that says, "Well, my spouse earned that money as a result of his or her income."
But just because it was earned as a result of somebody's income doesn't mean it's not community property. It all goes into kind of the same bucket and it's owned jointly during the marriage by both of the spouses.
So, if that's community property, it's important to differentiate out what is separate property. Tell us a little bit about separate property and what qualifies.
Victoria Chapman:
Separate property is property that the spouses owned before they got married. Or during marriage it's any gifts or inheritances that they might've received. And it could also be personal injury settlements, as well.
Alex Hunt:
And so, I use an example when I talk with my clients. You have one big bucket that all of your income and everything that you acquired during the marriage, it all goes into the largest bucket you probably have, that's your community property bucket.
And then each of the parties has their own separate property bucket. And that is, like you mentioned, anything that they had before the marriage, or anything they got a result of a personal injury settlement, or anything that they got as a gift or as part of an inheritance.
And one thing clients might not realize is that it's even if it's a gift from the other party. So, if they gift them a diamond ring for Christmas, that would be a community property.
So, Victoria, the next thing we've talked a little bit about what separate property is. How do you prove it?
Victoria Chapman:
So to prove that something is separate property, you need to show the court with clear and convincing evidence that it was something that you owned prior to the marriage, or that it was a gift or inheritance. Because, otherwise, the court is going to assume that it is community property.
Alex Hunt:
Yeah, you start off with everything being community property and then you've got the burden, clear and convincing evidence. And usually in civil law, which is civil courts, which divorces are part of, you have things by preponderance of the evidence, which means that a certain fact is more likely than not.
In the criminal courts you have beyond a reasonable doubt, which is the highest burden of proof that we have. And just right below beyond a reasonable doubt, you have clear and convincing evidence. So, the bottom line there is that it is a very high burden to prove that something is separate property and you need to make sure that all your ducks in a row, all at your T's are crossed and your I's are dotted.
And if you've got something like a retirement account that has separate property and it's stuff that you had before the marriage, you might have to bring on board somebody like a forensic accountant that can help you trace the source and the inception of that money.
And, in order to do that it's very helpful to have a family lawyer on board that has connections and resources with those types of professionals and that can help guide you through that process.
So, let's shift gears a bit to the division upon divorce. So, a misnomer is that Texas courts will divide everything 50/50. That's not necessarily true.
Victoria Chapman:
No, it's not. The court divides property on what they believe is just and right. So, it might not be 50/50. They can divide property based on different circumstances.
For example, if one spouse's earning capacity is much lower than the other, or there are children involved, they will take into account their needs and also fault of the marriage breaking up.
So, there are different ways that the court looks at how they should separate property and what is just and right in the situation.
Alex Hunt:
And an important piece of this discussion is that community property will be divided by the court just and right division, separate property will not. So while it's a higher burden to prove that something is separate property, once you get your burden met, the court cannot and will not divide it. It is that person that owned it before the marriage or inherited it or was gifted it and the court cannot mess with that.
So, another common issue or misunderstanding that the clients come to us with is that the title or the name on an asset is irrelevant. The community character is determined by when and how it was acquired.
So, I'll give you an example. Client comes to me and says, "Well, yes, we acquired this piece of property during the marriage," maybe it's a house, "but it's only got my name on it and my spouse's name is not on it."
So I'll ask them, "Well, how did you get the money to purchase this?" And they'll say, "Well, I got it from my income."
"Well, when did you earn that income?"
"Well, I earned it over the last five years while I was married."
Just because it has one party's name on the asset doesn't necessarily mean that it's just that party's property. That might be true in some other states, but in community property states it really is irrelevant to actually who owns that. It's more important to say when was it acquired, when was, what we call, the inception of title?
The next misconception would be just about a piece of property is either all community or all separate, but sometimes it can be a little bit of both. Tell us about that.
Victoria Chapman:
So, if you are combining or co-mingling assets, then it can turn separate property into community property because you are putting in money earned during the marriage, which is community property.
In those cases, for example, maybe a retirement account, if there's additional money that's added into it during the marriage and it is co-mingled funds, then you would need an evaluation of that account to show what is separate and what is community property at that point.
Alex Hunt:
Absolutely. And one important note is that if you have a premarital agreement or even a post-marital agreement, this whole analysis that we're doing based on the Texas Family code is kind of blown up because a premarital agreement or post-nup could have very different terms.
And if those terms are conscionable and they were signed off on by both of the parties voluntarily and with knowledge of what it meant, it can completely overrule our community property rules.
And so, if folks have separate property that they want to make sure stays separate, or if they have separate property that they want to make sure any income it creates isn't community property, they can enter into a premarital agreement and it will shift some of these rules around and they can essentially change the entire structure of the way community property works within their marriage relationship.
And one of the ways that that could be important is if you've got a certain amount of separate property. One thing people don't realize, say you've got a separate property house and you're renting it out to somebody and then you get married.
Well, that house is your separate property, but all of the rent that you're receiving for that house, which is income, is your community property. And if you are feeding that back into the house, you're making repairs with it.
You can have a co-mingled asset and really the only way to unravel that puzzle would be to get a forensic accountant that can then testify how much of that property is community and how much of that is separate. And the only way to avoid a situation like that before the marriage would be getting a premarital agreement.
So, overall I would just encourage anybody that is more curious about community property to consult with a qualified Texas family lawyer. We deal with these things every day. Second nature to us, we know the rules, we have the experience dealing with these things in court and in mediation and we can guide our clients through these processes.
And then, just as a reminder that all property acquired during the marriage is presumed to be community property. So, if you want to make sure that you have a separate property claim, you make sure that your documentation is in order.
What advice would you have for folks if they're trying to prove a separate property claim and they need to get their documentation in order? What should they be getting to us to help prove a separate property claim?
Victoria Chapman:
So, to prove that something is separate property, what I would recommend getting to us is any bank statements and any information that you have to trace back to whenever it was separate property so that we can create that chain and show the court that this is separate property and there it never became community property.
Alex Hunt:
Great. Okay. So, for houses in a divorce, what are some of the ways that the house can be disposed of starting with just selling the home?
Victoria Chapman:
That is an option. So the couple can sell the home and they can split the proceeds from the home. Another option is that one spouse keeps the home and they essentially buy out the other spouse by using money from other assets that they have. So maybe a retirement account or something of that nature and they can then keep the home.
Another option would be that one spouse keeps the home and then they pay the other spouse their equity in the home so that they can have it.
Alex Hunt:
So let's take those one at a time. So, the first option would be that the house gets sold and the proceeds get divided upon the sale of the home. That doesn't necessarily need to be 50/50, though. It could be 60/40.
Really, the idea is that if the court has an obligation to do a just and right division doesn't mean it needs to be 50/50. And so, depending on what the other assets are, the court could make that 60/40, or 70/30, or even depending on the other assets, it could be a hundred percent to one party or the other.
The second one that you mention is where one party gets the house and one gets the money elsewhere. If there is a larger state and there's a lot of liquidity, that's an option. But if it's not, then the court may award or the parties might agree to if they reach an agreement out of court, to have an equalization payment.
And one party is going to get the house and then the party that's getting the house is going to pay the other spouse, buy them out. And that could be over time, or they could need to refinance the home and then pay them out.
Or you can have some combination of that where they try to refinance so they can get some cash out, like a cash-out refi, and if they can't do that then they would put the house up for sale and they would determine how the proceeds would get split up.
So, there's more than a few options that are available. The one option that I would not suggest people do, though, and every once in a while people say, "I think this is a good idea," is to co-own that home after the divorce.
I can probably count on one hand the amount of times where people have done that and it has turned out to be a success. You're kind of moving on even if you're co-parents and having your largest asset wrapped up with that person even after the divorce just generally isn't the best idea.
All right, so our next question is how can you protect your 401K in a Texas divorce? Which is an especially important question for a lot of our clients because it's one of their largest assets. And because of it's one of their largest assets, they're often subject to a lot of really precise rules.
Retirement accounts can be ERISA or non-ERISA. They can be defined benefit versus defined contribution and there is a lot of technical knowledge that is required in order to properly both value them and then figure out the best way to equitably split them up.
The first thing I think it's important for viewers to know, though, is that a retirement account could be community property or separate property or both. So, with respect to a retirement account, just give us a brief synopsis of how that community versus separate property works.
Victoria Chapman:
Yes. So, if the retirement account is created prior to the marriage and the spouse is putting money into this account prior to the marriage, then this would be separate property.
So, say they have a 401K and it's worth Twenty-thousand dollars before they get married, then that $20,000 would be separate property of theirs. But if they open this 401K during the marriage, then it is presumed to be community property and then any money that they're putting into it during the marriage is community property, which, because of the commingling could then potentially turn this account into community property.
Alex Hunt:
And you mentioned that term, commingling, which I think is very important and another term would be, mixed characterization. It's possible that you have a retirement account, maybe you started it before the marriage and you put $20,000 in it and that money grew and maybe it got some dividends.
And then you got married and then you kept working at the same company, and then your retirement contributions kept going in, say another $20,000. Well now you have an asset that's neither community property or separate property. It's mixed characterization because that money is co-mingled together.
And there is a very, for us as family law attorneys that a lot of us went to law school because we're not particularly math inclined, a complicated process, but we rely on the expertise of our financial and forensic accountants to help us do that tracing.
One important aspect that I think is important for folks to know is that you can have a 401K or another retirement account and it's got money that you put in there before the marriage. And then you get some dividends on it during the marriage.
Those dividends, that's income, that's community property. So even if you didn't put any money into that retirement account during the marriage, it's possible that you still have some community property in there.
And because your burden is clear and convincing evidence to prove that something's separate property, you need to make sure that all your ducks are in a row. And that requires getting a forensic accountant to do what's called, a tracing.
Give us an overview of what that means to trace a retirement account.
Victoria Chapman:
So to trace a retirement account, what the forensic accountant would do is look back to the beginning of the account and see what was put in the account prior to the marriage, and then would trace any additional money that was put into the account.
They would look at the dividends and how the account has increased in value to show what is community property and what is separate property within that account.
Alex Hunt:
And some of the documentation that they need is pretty extensive usually. And when they trace it, they literally have to create a link between the money going into the account and when, all the way until where we are today.
And so that could become kind of difficult when you've got accounts that are older than seven years old. A lot of times banks and retirement administrators only keep records for seven years and they're not required to do any more than that and they don't keep any more than that.
But what the forensic accountant is going to give you at the end of the day is a tracing report that's going to tell you how much money in there is attributable to community property and how much is separate.
And if you have to go to trial, you put that person on the stand and you've prove up that they're an expert and you go over their credentials. And then the court will either believe or not believe.
But we use credible experts that are tried and true and knowledgeable, and they will prove to the court what is separate and what is community.
So, how do the courts divide these 401Ks? Because many people come in with the assumption that they're splitting everything down the middle 50/50. You have a retirement account, 50/50. I have a retirement account 50/50. But that's not necessarily the way that it works.
Victoria Chapman:
No. And so, the court, again, they use the just and right standard to divide these accounts, which means that it isn't always 50/50 but they consider other factors, as well. They look at the spouse's financial needs, any custody agreements, the length of the marriage, any contributions that they've made to these accounts, and, again, fault in the breakup.
And this helps them to determine what the just and right manner is and how to divide these accounts.
Alex Hunt:
And you don't necessarily have to go to court to get these divided. I would say probably 80 to 90% of our cases eventually end up a mediated settlement agreement or an out-of-court settlement. One of the things that makes our firm different is that folks know that we are ready to go to court and will be prepared to go to court if we need to. And that helps us maximize our settlement outcomes.
But, once you have your 401K or your other retirement account, you've decided who is getting what, let's say you're splitting it down the middle, then you need to use something called a, qualified domestic relations order, to divide it up.
And that is a tool that is utilized by the retirement administrators. If it's an ERISA account like a 401K is, it's another court order that comes after your final decree of divorce. And it is instrument that the retirement account administrator say, "Okay, I've got this court order. Now it qualifies under our rules."
That's why it's called a qualified domestic relations order. And it tells them you are ordered to divide this account in this way.
And there are a lot of different provisions that are not easy for a lay person to understand. They're very technical and we typically utilize lawyers with expertise in employment law and family law in order to make sure that those things are drafted correctly.
But without that QDRO, the plan administrators won't divide your retirement account, and so that's why you need to make sure that that's done correctly. So, tell me a little bit about some strategies for folks to protect your 401K.
Victoria Chapman:
So, some strategies would be to make sure you're gathering and preserving any documents regarding your 401K and the value of it. You want these statements to show what the value of it was before marriage, statements showing the separate property contributions that you made to the account, and any gift or inheritance paperwork as well. It's very important to have this documentation to show that it is separate property and to overcome that burden.
It also is helpful to negotiate for the retention of your retirement assets so that you don't have to split it. And this is helpful if the other spouse is awarded other assets so you can argue for this retention.
And if you're able to, it is also helpful to get a prenup or a post-nup so that those documents show or those agreements show how these assets will be split in the future.
Alex Hunt:
And then, just to wrap up, I think some of the common pitfalls that we see in our practice is folks not doing that legwork to get the separate property traced. And almost a hundred percent of the time, at the end of the day, they regret doing that.
The only time that I would say it's probably not worth it is if it's a small amount of money. And what you would be paying a forensic accountant to actually do the work to trace it would be more than proving your separate property claim.
But that process is very technical and it requires getting on the ball immediately and designating who your expert is, getting them all of the statements that they need, and then allowing them to do their work and then getting that tracing report to the other side so they have enough time if they wanted to do a deposition of your expert, or they wanted to do their own forensic analysis, they could.
We know the ins and outs of how to do that process. And so, whether you call our firm in the greater Houston area or if you're somewhere else in Texas or throughout the United States, get a legal professional that knows how this works.
Because of all of the things related to family law and divorces, this is one of the most technical and most complex. And one of the things that if somebody said, "Can I do this on my own?"
My answer to them is usually, "Well, I could change my own brake pads, but I don't do it because I'm not an expert and I don't want to get it wrong."
Victoria Chapman:
Exactly.
Alex Hunt:
So, I would say get the expert that is going to get it done right. Are there any other pitfalls that you can think of that you see in your practice?
Victoria Chapman:
I think that something important to remember is to also get a QDRO after your divorce decree is finalized so that your accounts can be split properly. Something that is great about a QDRO is that it prevents penalties and taxes from being taken out of the account because it's being split.
And so, we see couples who, or spouses who don't get a QDRO and then it will affect how their accounts are handled after the divorce.
Alex Hunt:
Absolutely. So, in summary, I think it's most especially important if you think that you have separate property as part of your retirement, get a legal professional on board immediately so they can start getting their financial experts involved, and they can trace that money out so that you don't want to be a month away from trial and you don't have an expert, you don't have a report, and you're just starting that process because that could take months to carry out.
And get a legal professional on board so they can try to find offsetting assets. If you want to keep most of your retirement, a legal professional is going to help make sure that we have an inventory and appraisement of all of the other assets and debts that's part of the marital estate.
So, if there's a house that's worth $300,000 or there's an account over here, an account over here, and it's important to you to keep your retirement, we'll help find those offsetting assets and make sure that you can keep your retirement in full.
Victoria, thanks so much for joining me. It was a pleasure. Welcome to Hunt Law Firm, as well.
Victoria Chapman:
Thank you so much.
Alex Hunt:
And if anybody out there is more interested in community property, or how to protect your house, or how to protect your 401K during a divorce, please visit us at Familylawyerkaty.com.
We are Hunt Law Firm. We serve the greater Houston area. We handle more than just divorce, we handle name changes, adoptions, child custody cases.
Please come and visit with us and if you're watching this on YouTube, please like and subscribe. And if you're listening to us on Apple Podcasts or Spotify, please subscribe so you see the next episode. We'll see you next time.