For many people divorce is about the emotional issues and sorting out the children. There is a very important financial aspect to a divorce. The property division of a divorce is about more than fighting over who gets the house and cars. These are important property issues but they may not be the most important issues.
Often the most important financial issue in a divorce is how the spouses will survive financially after the divorce. The parties no longer share living expenses so there in an increase by both parties in their respective living expenses. One party may owe the other child support. There may be credit card debts, mortgages, student loans and other debts.
Bankruptcy may be a concern for one or both parties. These financial considerations may not resolve merely by dividing the stuff owned by the parties. A financial analysis of the assets and the financial needs of each party is often helpful.
Today’s post will address seven key financial issues to consider when dividing property in a Texas divorce.
1. Community property versus separate property in a Texas divorce
Texas follows community property rules which divide property in the marital estate between community property owned jointly by the spouses as a function of the marriage and separate property owned individually by the respective parties. Community property rules can be complex although they can appear simple on the surface.
Over the course of a marriage the spouses may commingle community property and separate property, making it difficult to determine the proper classification. Some separate property generates income that is community property.
The crossover of money from the community estate to the separate estate of each party through the marriage can create a complex web of property that has to be untangled and proven. It is not always financially beneficial for the parties to hire financial experts to untangle that web but the greater the financial assets of the parties, particularly when financial investments and business interests are involved, the more appropriate it may be in your particular situation.
2. Retirement accounts, QDROs and 401ks
Retirement accounts are frequently divided in a divorce for many reasons. They often represent a significant portion of the financial resources owned by the parties and in most marriages the retirement assets accrued during the marriage are community property and subject to division. Retirement accounts are typically in a beneficial tax status that can make them attractive for both parties.
Retirement accounts, like 401ks and IRAs, are available for both property division and for child support which makes them good options for dealing with financial issues.
However, they are not without drawbacks. Many employer retirement plans require special orders known as QDROs to divide accounts. QDROs are complicated orders that involve federal law in your divorce and the plan administrators are particular about the language in the order.
Sometimes retirement accounts are divided in a divorce because they can provide immediate access to cash that one of the parties needs for living expenses or payment of debts after the divorce.
This path comes with its own dangers. Not all employer plans permit distributions immediately upon receipt of a valid QDRO and that may prevent much needed funds from becoming available. When the plan rules permit an immediate distribution, the QDRO must also order the distribution as soon as possible.
There are also usually tax consequences of taking the funds out of a retirement account. Most retirement assets are pre-tax assets so the distribution will require the recipient to pay income tax on the funds. In certain circumstances the recipient may incorrectly process a distribution and end up incurring an early withdrawal penalty along with the income taxes.
3. Debts in your Texas divorce
A wide range of debts may be incurred during a divorce and the spouses may have created complicated debt arrangements during the marriage. Debts may be in the name of one or both spouses. One spouse may have the majority of the debts in his or her name to obtain better interest rates or to shield assets from certain creditors.
Debts in one spouse’s name could have financed things for the other spouse. The parties may contest the resulting web of debts during the divorce.
Unlike property, there are no community debts in Texas. Both spouses may be on the hook for a debt because they each signed on to a debt but Texas law does not make spouses jointly liable for a debt by virtue of the marriage.
However, the community property rules can come into play with debts when community property or the separate property of one spouse financed the debts of the other spouse. For certain debts one spouse can seek reimbursement from the other.
In a divorce the debt issue is more than just figuring out who owes what. The divorce also must deal with how to pay debts after the marriage ends. Texas family courts can order the parties to pay on debts held in the name of either or both parties. Creditors can only pursue the party named on the debt for payment.
So the challenge in devising the obligations in the divorce decree is to maximize the probability that debts are paid and parties avoid financial repercussions from non-payment. Sometimes the debt load is simply too much for one party or the other. As a result bankruptcy befalls one or both parties after the divorce.
4. Prior litigation and settlements
A complicated problem in sorting out the community property and separate property in the divorce is dealing with prior legal claims each spouse had against other parties. Parts of the settlement may be community property while other parts are separate property. Car accident settlements can be substantial and can significantly affect the division of property. Similarly, an employment law claim against a prior employer may also have community property and separate property components.
5. Claims against your spouse during the Texas divorce
In a Texas divorce you can sue your spouse for claims related to your marriage. These claims may range from contracts to personal injury claims for assault or transmission of diseases. These claims may be in the petition for divorce and seek judgment out of the property division in the divorce. They cannot give a party duplicate recovery in the divorce. The divorce often creates the best opportunity to ensure payment of the judgment.
6. Life planning and estate planning after your Texas divorce
Divorce will affect estate and life planning. In some cases, the divorce invalidates beneficiary designations. Other life and estate planning documents must change to remove the former spouse. With the rise of living wills and trusts it is vital to review who will be in charge of medical and financial decisions. Living trusts often contain property owned by the spouses. The contents of the trusts must rearrange during the property division. It may be necessary to make trust to trust transfers or dissolve the living trusts to properly transfer the property.
7. Surviving the divorce process with your Texas divorce attorney
In between the time the spouses separate and when the judge grants the divorce the two parties can be stuck in a strange purgatory where they need access to community funds that have not been made available to the spouses due to the pending divorce. A contested divorce often takes months and sometimes years. That can be a long time to wait for the release of funds. During the divorce process the court may issue temporary orders governing access and use of funds. That can make the financial situation during that period more difficult. Structuring temporary orders and agreements during the divorce can be an important part of financial stability after the divorce.
These financial issues go beyond wealthy families with exotic financial resources or those with complicated divorces. Many of these issues arise among middle class families even in uncontested divorces.