In a divorce, all of the marital property in existence at the time of the divorce needs to be identified, characterized (e.g., separate property or community property), valued and divided. Without clear and convincing evidence as to the separate property character of an asset, the asset will be presumed to be community property and subject to a just and right division, as agreed to by the parties or decided by the court.
When the parties involved are retired or close to retirement, the options as to how to divide the property may be more challenging as a result of the status of certain assets (e.g., whether a pension plan has started paying), the overall time horizon and value associated with the specific asset (e.g., a family owned business), and the fact that people are usually depleting the assets they accumulated during their life time and not necessarily creating new assets.
Typical assets divided in divorce as part of the marital estate include:
- retirement funds (pension plans, 401(k) accounts, IRAs),
- investment accounts (bonds, mutual funds, annuities),
- residences (marital home, vacation homes)
- collections (art, jewelry, etc.)
- rental properties (residential or commercial)
- business or private practice
- vehicles (including recreational vehicles such as boats or RVs)
- separate property (inheritance, gifts)
- Insurance policies (annuities, whole life and long term insurance)
It is wise for retirees considering divorce to develop an overall divorce strategy to ensure that they do not end up squandering their hard-earned assets on unnecessary conflict, in order to preserve as much as possible.
Below we will discuss the basics of the asset division process in Dallas, and then continue with how this process tends to impact retirees specifically. There are multiple things you can do to enhance the chances of placing yourself on the best possible financial foundation after the asset division phase of divorce.
Marital versus Separate Property
The asset division phase of divorce first begins with the identification and characterization of all property owned by the parties as either community or separate.
- Community property is generally all property acquired during marriage, tangible or intangible, real or personal, and all income (including income from separate property), and employee benefits (including stock options and retirement funds) received during marriage.
- Separate property is property acquired as a gift, inheritance, or any property that can be proven it was owned by a spouse prior to the marriage; this includes investment and retirement funds up to the date of the marriage.
- It is important to note that in order to prove the separate property character of an asset, you will need provide clear and convincing evidence that the property is separate property. In practice, this means you will need to have account statements going back to the date of marriage, or the date you received the separate property by gift or through inheritance. If you have commingled your separate property assets with your community property, that will increase the complexity of establishing your separate property claim, in which case the asset will be considered community property.
The characterization of the asset is important because a court will divide community property between the spouses, but cannot divest a party of his or her separate property (that has been proven to be separate property). It is possible for parties to reach agreements regarding the characterization of property, but often a party in a divorce is not going to simply “agree” that the value you are claiming as separate property is removed from the overall division of the marital estate.
The bottom line is that if you have separate property, it will be critical that you preserve documentation to prove an asset is separate property: bank records, account statements, trust records, a will, correspondence, cancelled checks, etc.
Asset Distribution in Texas
Importantly, you have the power to privately resolve the asset division phase between you and your soon to be ex-spouse. The good news is that in most Texas divorces, the division of assets are reached by agreement, either through informal settlement negotiations, the Collaborative Divorce process, or at mediation. Once the parties have reached an agreement with regards to the property division, that agreement will be incorporated into a Final Decree of Divorce, and will be approved by the judge. Through confidential settlement negotiations, you and your ex-spouse will have a lot more flexibility to come up with creative options that specifically address your unique financial situation.
When disputes cannot be resolved by agreement, then the parties will prepare to present their case in court either to a judge or a jury, and the judge or the jury will make decisions based on the admissible evidence presented at trial. The process of preparing a case for trial is referred to as litigation. Litigation will dictate deadlines, discovery (the process of gathering information from the parties and third-parties like banks or employers), presentation of the case to the trier of fact, and pre-trial and post-trial motions. It is important to note that the trier of fact in a Texas divorce is constrained by the Texas Family Code as to the power the judge has in dividing property. In other words, the judge (or jury) does not have the same options that you and your spouse have when it comes to dividing your marital estate. Also, the trier of fact will be constrained by the time limitations and rules of evidence when it comes to considering information in the making his or her ruling.
In Texas, the judge is required to divide the property in a manner that is just and right, taking into consideration the types of assets that are being divided, fault in the break up of the marriage, whether one party has separate property, the ability of the parties to earn money after the divorce, and any disabilities of either party.
Practically speaking, in most Texas courts, judges start with the goal of dividing the community property estate equally. Judges do have discretion to award a disproportionate division in certain instances, such as fault in the breakup of the marriage or wasteful spending, but these circumstances are exceptions to the rule. This is especially true in places like Dallas and Fort Worth, where we have family court judges who are assigned to hearing only family law matters like divorce. In other smaller counties, like Collin County, Rockwall County, Ellis County or Denton County, the judges are assigned to courts of general jurisdiction and will hear a variety of matters from general civil litigation to personal injury suits, and criminal cases. A judge who hears nothing but divorce and related family law matters may be less likely to deviate from dividing the estate equally, simply because that’s all they hear every day and they are not specifically interested influenced in their decision-making by bad facts, such as adultery or wasteful spending. Of course, this varies from judge to judge, and that’s why it is helpful to have a legal team who regularly appears in the court of your specific counties.
A note: Social Security is not divisible by a state Court since it is a federal program, and as such, is not an asset that gets divided by the court in Texas. However, parties necessarily consider their Social Security income when assessing your future financial needs and how they will be met.
Retirees Have Unique Financial Concerns Compared to Non-Retirees
Care should be taken when dividing a couple’s assets in order to minimize the effect of taxation, and evaluating the anticipated longevity of the funds throughout a person’s lifetime in retirement. Regardless of whether you create a private settlement agreement or litigate your disputes, it is important to be cognizant of your unique future financial needs in this stage of life, such as increased medical expenses and planning for eventual long-term care, as well as how well those future needs will be met by the assets you are awarded in the final property division. Creating a realistic budget is crucial, ensuring you identify your required living expenses, anticipated medical expenses, long-term care plans, and your current and future liabilities.
Retirees tend to have relatively consistent, often fixed, income streams, as well as funding from other assets, creating income from multiple sources such as real estate, annuities, retirement benefits, Social Security, and so forth. Creating a budget with all anticipated income streams allows you to be aware of any gaps in resources that need to be filled by marital assets in order to meet your needs. Start by asking yourself:
- Is it important more important for me to maintain the marital house, or have resources available for spending?
- Is it more important for me to have liquid assets (e.g., cash or sellable securities)?
- Is it more important for me to have funds set aside for medical expenses and long-term care needs?
- Will I be contributing to my adult children’s living expenses?
- Will I be claiming my own Social Security or my spouse’s?
These are important questions to be answered in order for you to decide which types of marital assets are necessary and more desirable to you as you plan this next chapter.
Consult with a Qualified Financial and/or Tax Professional
Not every marital asset is equal when you look at the ultimate financial benefit you will derive from it, and neither is how the asset’s value is determined or how income from different types of assets will be taxed. One step that may help you in planning for your financial future is to consult with a qualified financial professional and/or tax professional prior to the asset division phase of divorce. Consulting with a financial expert – CPA, certified financial planner, etc. – and a tax professional will give you the clarity you need to navigate the asset division stage of divorce.
A well-trained financial analyst will be able to assess your current financial situation in relation to your goals, and help evaluate which assets fill in missing pieces. They can also walk you through the determination of whether it is more advantageous for you to make a claim on your spouse’s Social Security rather than your own. A tax professional will explain how withdrawals from the various asset sources will be taxed, and help you determine which will ultimately be worth more to you to fulfill your future needs.
As an example, a financial planner and/or tax professional can help you evaluate the advantage of asking for investment funds over retirement funds. Likewise, they can guide you in evaluating whether getting the house and setting up a reverse mortgage makes financial sense for you. They are important tools in your toolbox to prepare you to negotiate your property division.
Consult with an Experienced Dallas Divorce Attorney:
Consulting with your divorce attorney to develop a strategic property division plan is also vital. At Hargrave Family Law, we help our clients identify and characterize their assets, creating a master plan for dividing their assets taking into consideration possible liabilities, including possible costs of sale and tax consequences to provide a more strategic approach to dividing property. We work with our clients and their financial advisors to develop a solution that best suits your short and long term goals for the future. We also help our clients implement the plan, from preparing specialized documents such as a Qualified Domestic Relations Order to divide a retirement account without creating a taxable distribution during divorce.
Walking through various options with your attorney is crucial to structuring a property division that will meet your future needs. This empowers you to make informed decisions during negotiations, knowing you are building the foundation for the next stage of your life.
Connect with Hargrave Family Law for More Information
Most mediations are highly successful in resolving all or part of a divorce case and doing so at a reduced cost. Mediation will continue to remain an increasingly popular option for those looking to resolve divorce related disputes. The preparation described here is not a guarantee of any specific outcome, but will give you the best chances of success, especially with a skilled legal advocate right by your side throughout the process.
To recap, here are ways you can prepare yourself for mediation:
- Learn what the mediation process is and what it isn’t
- Gather the right evidence and documentation prior to mediation
- Develop strategies for goals prior to mediation, including the strategy of being flexible
- Go in with the right mindset, one that’s laser-focused on your future
For more information on mediation or the divorce process, reach out to us at Hargrave Family Law today. Learn about your options to start writing your next chapter with hope. We’re here to help.
