Dallas Divorce Law Blog by The May Firm

In dividing assets in a divorce, a dollar is not always a dollar.  For example, in a typical divorce, a couple will have a house, retirement accounts, cash accounts, personal property.  In dividing a house, typically the equity in a  house for purposes of the division of assets in a divorce, is calculated by subtracting the mortgage balance from the fair market value, leaving an equity balance that is used in negotiating a fair division.  However, a dollar in equity is not necessarily equal to a dollar of cash.  Equity can never really be determined until a house sells.  Equity is invisible money, not available to buy groceries.  Equity can only be converted to cash through a sale of the property or a loan repaid with interest.  Further, since in Texas a homeowner/borrower cannot get access to the top 20% of home value, the cash is only available if the asset is sold.

Declining property values in this economy means that the party who receives the house in the division of assets needs to think about how to assign value to the equity.  The possibility of future sale , including realtor fees andseller costs, should be considered in reaching the equitable settlement.

Hat tip to Noel Cookman of The Mortgage Institute for this information.

In a July 31, 2009 opinion by the Dallas Court of Appeals, it was confirmed that Federal law trumps Texas law when it comes to income tax issues.  In In re S.L.M., the mother brought child custody proceedings against father.  The district court appointed mother and father as joint managing conservators and awarded mother the right to claim the children as exemptions on her federal income tax return. On appeal, father contended the district court erred in awarding mother the right to claim the two children as tax exemptions.  In re S.L.M., ___ S.W.3d ___, No. 05-08-01277-CV, 2009 WL 2343264 (Tex. App. – Dallas July 31, 2009, no pet. h.).

The Dallas Court of Appeals held the district court erred in awarding mother the exemption rights and examined tax exemptions under the United States Internal Revenue Code.  In computing taxable income, a taxpayer is permitted to claim dependents as exemptions and the exemption is awarded to the custodial parent as the parent having custody of the child for the greater portion of the calendar year.  Id. at Sect. 152(e)(4).

When applying the pertinent provisions of the tax code to the facts, the court determined that father had greater periods of possession that mother and as such, should have the right to count the children as exemptions on his tax return.  As a Dallas divorce lawyer it is important to stay on top of not only family law developments but developments in other areas that impact family law.

The State Bar of Texas Family Law section plans to ask lawmakers to repeal a portion of the Texas Family Code governing reimbursement to a spouse for community property spent on the separate real property of the other spouse.  Critics of the law say it leaves too little discretion to trial judges to decide redistribution of assets in divorces.  Most agree that the 2002 law was a good idea that proved too difficult in practice.

For high net worth clients, now may be an optimum time to get a divorce, especially in the Dallas Texas area.  A down economy and devalued assets benefits the monied-spouse in a divorce.  The decline in house values means that the ratio of equity to debt is lower and the asset division is lower as well.  The same goes with division of retirement or brokerage accounts that hold stock or bonds.   The overall value of those accounts is lower, resulting in a smaller overall division of the estate.  Where once a monied spouse might offer the other spouse a cash buyout, more frequently Dallas divorce attorneys are seeing divisions in-kind, where the spouses share equally in the losses.

On the other hand, now may not be so good to get divorced if you are the non-monied spouse.  Frequently the non-monied spouse will suffer a decrease in overall economic stability as a result of a divorce, even in a good economy.  Now, in this bad economy, keeping the marriage together until the economy recovers might be a good financial plan.

Once the extent of the community versus separate marital estates is established, the next step is to determine the value of the assets and debts.  Various procedures are used depending on the nature of the asset.  For cash assets, like bank accounts, brokerage accounts, and most types of retirement accounts, the value is obviously the balance of the account.  Some retirement accounts such as pension plans have to be valued by a forensic accountant in combination with an actuarial to determine life expectancy.  For a real property valuation, the tax value can be used or a realtor may be consulted to give an opinion on value.  

For closely-held business interests, a forensic business valuation expert, usually an accountant that specializes in business valuations, will be hired by each party to examine the different approaches to business valuation and give an opinion as to the values of the business. In any closely-held business interest, there must be a distinction made between personal goodwill and professional goodwill.  Personal goodwill is that value to the business that is unique to the individual; whereas, professional goodwill is that goodwill separate and apart from the individual.

Personal property, like furniture, clothing, dishes, etc., will be valued at sales value – what the item can be sold for, usually garage sale value.

Before the wedding, the couple may make a pre-marital agreement (commonly known as a “prenuptial agreement” or an “antenuptial agreement”) that spells out who owns specific property in the event of a death or divorce.

The spouses may also create a post-marital agreement any time during the course of the marriage, as long as the agreement was not created in an attempt to defraud current creditors. A post-marital agreement might also change the status of property acquired in the future.

Both pre- and post-marital agreements must be in writing and signed willingly by both spouses. It is difficult to change the terms of these agreements when enforced at the time of divorce.

PROVING SEPARATE PROPERTY

If a spouse wants to keep certain property after the divorce, it must be proven in court that it should be considered separate property. That determination (also referred to as the “inception of title” rule) is usually made according to when the item was purchased. The simplest way to prove this is to produce a title or receipt that shows the purchase date was prior to the marriage.

Also, if clear and convincing evidence is presented, assets purchased during the marriage using separate property funds can also be considered as separate property. The courts refer to this as “tracing.”

Don’t just take for granted that your spouse “knows” that such-and-such was your’s before the marriage.  If you do not prove the separate property nature of the asset, it will be presumed to be community property and subject to division in the divorce.  This is where a document trail is very valuable.  Show, for example, where your house was purchased before the marriage using deed record.  Or, provide a will and transfer documents to prove that a bank account holds only money received as inheritance when your mother died.  If you got a piece of jewelry as a Christmas gift, show a picture of opening the gift Christmas morning.

More than likely, each spouse entered into the marriage with personal assets. Just as likely, once married, the spouses accumulated joint assets including money, real estate, personal property such as cars and investments, and even debt. How to properly and fairly divide this property can turn even the most amicable divorce into a bitter battle.

Texas, along with California, Louisiana and a handful of other states, use a “community property” system of property division, which was derived from Spanish law. Other states follow an English law tradition.

So what does it mean when we say Texas is a community property state? It means that a court can divide the community property between the spouses, but cannot divide separate property.

Separate property is something one person (1) owned before the marriage; (2) individually received during the marriage by gift or inheritance; or (3) in some circumstances, money received in a personal injuries lawsuit during the marriage (except for lost earning capacity.) Community property is everything other than separate property.

There is a presumption that all property owned at the time of divorce is community property. If either spouse insists that certain property is separate property, it is up to that person to prove their claim in court.

However, not every case has to go before a judge for asset division. After filing for divorce, the spouses are free to agree to divide their assets any way they see fit. They can even split their personal property or agree to pay alimony on their own.

Whether or not the couple has children, the legal procedure for a divorce is similar to the procedure for other lawsuits.

The first step should be to hire an attorney. Although, it is possible to get a divorce without the assistance of an attorney, the process will be incredibly difficult, and it will be virtually impossible to know if your rights are being protected. An attorney will be able to guide you and make sure you have full knowledge about the applicable statutes. But, perhaps most importantly, an attorney will be able to approach the issues objectively, without succumbing to the emotion of the divorce.

Like many states, Texas has a no-fault divorce system, which simplifies the divorce procedure. Under a no-fault system, the spouse seeking the divorce merely files a petition with the court saying that the marriage has failed due to conflict of personalities, with no reasonable expectation of reconciliation. Under a no-fault system, a divorce can be granted without either spouse being forced to prove that the other was at fault in breaking up the marriage.  Under a no-fault divorce, usually the property and debts gathered during the marriage will be split evenly (50/50).

That does not mean that fault is never considered in a Texas divorce.

A spouse may still note in the petition for divorce that the other person was at fault in breaking up the marriage. If a court agrees that one spouse’s actions created fault, a bigger share of the property may be awarded to the spouse who is not at fault. Under Texas law, “fault” is defined as (1) adultery, (2) cruelty, (3) conviction of a felony and/or (4) abandonment.

The effect of claiming fault in the break-up of the marriage depends in large part of which county your case is filed in and which Judge will hear your case.  Some judges apply less “penalty” for fault to the division of property than others.  For example,  some judges feel very strongly against adultery and will penalize a party heavily if he or she has engaged in extramarital activities.  Other judges believe that an affair doesn’t break up a marriage — it was probably broken before the affair — so they don’t change the percentage of the division of property very much based on adultery.

No matter the fault in the break-up of the marriage, there is rarely a case where a spouse is so much at fault that one spouse will “get everything” and the other spouse will get nothing.

The current economic crisis may be putting a strain on some couples.  According to the American Psychological Association, 83% of women and 78% of men are currently stressed out about money.  But what happens when one spouse lies to the other about money.  Take, for example, the Muniz couple interviewed on Good Morning America this morning.  When the wife was pregnant and due with their child, the husband changed insurance, resulting in no coverage for the wife and child at birth.  This caused the couple to incur significant medical bills for the hospital stay and some complications.

What is financial infidelity?  It is a subtle form of cheating — disloyalty to your spouse.  Many people think it is benign because you just leave out some information — like you bought a new dress and told your husband it was on sale when it really wasn’t.  Or, your spouse gets a credit card that you don’t know anything about and hides it, with the purchases, from you.  But, any lie can be damaging to the trust relationship in a marriage and can cause cracks in the foundation.

As a Dallas divorce lawyer, I see many couples who have issues of infidelity or lying about finances.  It is too common to see a wife who has zero information about the finances.  This causes such disparity in the divorce process.  The divorce lawyer for one spouse cannot get vital information from that spouse, so the information must come, unreliably, from the other spouse.  That can also raise the expense of the divorce because the other spouse may not be forthcoming in turning over the information.  This can leave the spouse without the information, usually the wife, in a vulnerable position, subject to the dictatorial demands in negotiations of the other spouse, usually the husband.

So, if you are married, encourage your spouse to be forthcoming about the finances.  If you find out that your spouse is withholding information or lying about the finances, carefully examine the relationship for other cracks in the foundation. 

If you are contemplating divorce in Dallas, Collin, Tarrant, or Denton Counties in Tx or anywhere else for that matter, gather information about your finances and educate yourself on your marital estate before you get taken advantage of!