How is My Retirement Divided After a Divorce in Dallas, Texas?

Wretirementhen going through a divorce in Dallas, Texas, it is important to gather all the information you can regarding your retirement accounts such as the start date, the most recent statement and the plan administrator’s contact information. Any retirement acquired during the marriage is community property and is thus divisible by the Court.

When it comes to dividing a retirement account such as a 401K or a pension, extra steps are required in addition to the final divorce decree dividing such accounts. In order to divide a 401k or Pension, an additional order called a Qualified Domestic Relations Order needs to be signed by the Court. The Qualified Domestic Relations Order is referred to as a QDRO.

Once the QDRO has been signed by the Judge, it is then sent to the retirement plan administrator for processing. Many plan administrators are not located within Texas and most have their own QDRO that they prefer for participants to use. Some QDROs can be rather complicated and it is recommended that the proposed QDRO be submitted to the plan administrator for approval prior to having the Judge sign the QDRO.

The QDRO essentially divides a retirement account into two separate accounts. The QDRO will state the division of the retirement account shall occur upon a date certain. This means that the retirement account will be divided as of the date of divorce or another date as stated in the QDRO. The QDRO will also assign either a percentage or dollar amount for each spouse being awarded an interest in the retirement as of the date certain stated in the QDRO. If a spouse has taken a loan from their retirement account, the spouse that is to assume responsibility of that loan will need to be specifically stated in the QDRO.

 

Real estate in a Texas divorce – What do you need to know?

This is a reprisal of a blog post I wrote two years ago about real estate valuation and division in a Texas divorce.  The points here still ring true today. Hat tip to Jeff Landers’  (@bedrock_divorce) Personal Finance Column on Forbes.com for his article about real estate in divorce. He had seven points that he believes divorcing women need to know about real estate and real estate appraisals. I actually think that his point is relevant whether you are a man or a woman – anyone going through divorce that has real estate needs to be aware of how real estate is handled, especially in Texas since the rules in Texas are a little different than most other states.

In Texas any asset purchased during the marriage is considered community property and is divisible in the final divorce. (Any property purchased before marriage or received through gift or inheritance is separate property. For a discussion on Texas characterization and division in divorce, click How to Divide Marital Property in a Dallas, Texas Divorce.) In reaching a fair division of the marital estate, first the values of the assets must be determines. For real estate, it is always best to get an appraiser to give an opinion of value under the current market conditions.

Landers’ points are:

  • Most real estate appraisals are based on comparable sales.

A real estate appraiser evaluates a property based on the recent sales of comparable properties in the area, considering whether the features of the real estate in question make it more valuable or less valuable than the other properties considered. Some people try to use the tax appraisal value in divorce, but that value may or may not be related to the actual fair market value of a house.

  • Unique features may be evaluated differently by different appraisers.

How the unique features of a property are valued is a subjective standard that can differ from one appraiser to another. Appraisers won’t consider the extravagant window treatments or fancy paint on the walls. Features that effect value include a swimming pool or a 4-car garage. If one side of the divorce gets an appraisal and the other side disagrees, then a second appraiser can be hired. If there is a substantial difference in the two opinions, then a third appraiser can be appointed by a judge to “break the tie”.

  • One woman’s peaceful Zen garden may be another woman’s backyard eyesore.

Like appraisers view things differently, so may buyers. The seller may be really into fruit trees and think the orchard is of great value to the property. A buyer, on the other hand, may find the falling rotting fruit to be an annoyance that attracts critters to the yard. So, a seller’s viewpoint of the value of costly improvements they performed on the house may not be indicative of the value that an appraiser or a buyer may find.

  • Make sure you use an appraiser who’s knowledgable in the local market.

Realtors like to say, “all real estate is local” – that holds true in valuing real estate in a divorce. The local market conditions drive the prices of real estate. An appraiser in Dallas may not be familiar with the under currents of the housing market in Houston to give a fair assessment of value.

  • Real estate values change over time.

Over the past few years we have seen with great emphasis how the real estate market can change over time. Economic factors – like the availability of mortgages, how high or low mortgage interest rates are, or whether the job market is shrinking or growing – affect housing prices. Just because a house was worth something when it was purchased does not necessarily carry over to the present value. Likewise, some cases need to have a historical value to show what the property was worth in the past.

  • Fair market value is only part of the story.

In considering a division of property in a divorce in Texas , finding the fair market value of the property only provides part of the information needed. The mortgage balance is also important to know, which then provides the equity position in the property.

  • Equity in the property is not the same as money in the bank.

Obviously, you can’t spend home equity at the grocery store or use it to pay the electric bill. So, different spouses may have different priorities in achieving a fair division of property. One spouse may have more interest in spendable cash; where another spouse may be more interested in the long-term equity of the real property. But, even if the house gets sold for more than was paid on it, there are tax considerations to take into account. If the house appreciated in value since it was purchased, there may be capital gains taxes to pay. This will decrease the cash available to spend.

Photo Credit: © Remygerega | Stock Free Images & Dreamstime Stock Photos

Divorce in the New Year Protecting Your Business

new year shutterstock_62795851January is the month of renewal – closing the door on the negativity of the prior year and planning for the challenges of the new year. Many commit to weight loss, exercise, or stopping smoking at the start of a new year as an opportunity to make improvements in their lives. On the other hand, some people use the beginning of a new year to make new personal beginnings, such as ending their marriage.

Planning for a divorce and new life may seem daunting. Not knowing what to expect can be scary and frustrating. In a Texas divorce, specific requirements must be met before someone will even be allowed to file for divorce. For example, a spouse must live in Texas for 6 months and in a particular county for 90 days to qualify to file for divorce in Texas and in that county.

When going through the divorce, marital assets and debts will need to be divided between the parties. Some people enter into a premarital agreement when they get married to ease the divorce process and define the division of assets and debts in the event of divorce. But, some spouses are unable to agree in advance as to the division of marital property upon divorce in Texas, which can lead to contested litigation. Also, some parents are unable to agree regarding each parent’s role with their children after divorce. Child custody issues can become expensive and time-consuming.

For those spouses who own a business as a marital asset, getting divorced and reaching a fair division of the marital estate can be even more complicated. A business entity is a separate marital asset – the individual assets and debts owned by the business are not part of the marital estate, only the entity as a collective whole. The first step in dividing a marital estate that contains a business entity involves establishing when the business was started. If it was formed prior to the marriage, it may not be community property under Texas marital property law. However, any changes to the organization, such as the entity type or owners may alter the initial characterization of the business as separate or community property.

After determining that the business is community property under Texas marital property law, the second step is to figure the business’s monetary value to the community estate. A CPA or business valuation expert will evaluate and establish the value of the business for property division purposes. It is recommended that the CPA be certified by the American Institute of CPAs in Business Valuations. The value will depend on many different factors, including the amount of assets the business has, properties that the business own, current customers, intangible goodwill, as well as other financial information.

Practically speaking, while the divorce works through the process, the business will need to continue to operate. Owner spouses need to know what to do to protect their investments while the divorce process is ongoing. This becomes even more important if both spouses work at the company and agreements need to be in place regarding each spouse’s rights, duties and responsibilities regarding running the business.

Once there is evidence of the assets and debts contained within the community estate as well as the value of each asset and debt, the parties by agreement, or the judge after a trial, will work to achieve a fair division of the assets and debts between the parties. The division does not have to involve a split of each asset and debt, but will contemplate an overall fair division. One spouse will receive certain assets, the other spouse will receive other assets, each spouse will be allocated certain joint debts, and each party will be assessed the debts in their name only.

If you are considering a divorce or have been served with divorce papers, contact an experienced divorce attorney, especially if you own a business. The decisions you make during this process could impact not only your personal financial freedom but also your business’s bottom line. You need to know what will be considered in the final split of the marital assets and debts. 

Reasons not to file a joint tax return during a Texas divorce

tax bagTexas marital property law is different than most other states because it is based on a scheme of community property. In dealing with filing of tax returns, this difference can cause a significant impact on divorcing spouses.

In community property states, each spouse, if filing separately, reports one half of the other spouse’s community income, but the tax liability on each return is still determined separately. Each spouse who files separately pays tax on one half of his or her spouse’s community income. Then, each spouse may have separately property income and deductions as well.

Because of this complicated scheme, some divorce courts may attempt to mandate that divorcing spouses file a joint return for the final complete years of the marriage. In doing so, divorce courts may only weigh the immediate financial gain to the marital estate instead of considering the future risks and liability of filing a joint return.  A spouse may rightly not wish to file jointly for reasons beyond the tax savings that a joint return may provide. Such reasons a spouse may provide to a judge to factor against filing a joint return may include:

  • Spouses share joint liability for the tax due on a joint return.
  • Nonmarital assets of each spouse may be subject to liability for the tax attributed to the income of the other spouse.
  • Obtaining relief from joint liability under the “innocent spouse” laws can be difficult to establish.
  • Indeminfication is an imperfect protection from joint liability because the IRS is not bound to pursue the indemnifying spouse and because collection efforts may be difficult to impossible.
  • A joint return is signed under penalty of perjury with felony consequences.
  • If a spouse has already been deceived in the relationship, distrust weighs against trusting the other spouse’s reporting on a tax return.
  • Questions of a tax preparer’s loyalty to one spouse or the other can create issues regarding filing a joint return.
  • For the spouse with little or no income, signing a joint return may pose considerable liability risk with no appreciable benefit.

Generally speaking, a Texas divorce court lacks jurisdiction to order how spouses will file their federal tax return. This is because a state court lacks jurisdiction to force behavior in the federal realm. Another method of addressing the financial impact on the marital estate from a spouse’s hesitation or refusal to file a joint return is to offset the financial impact in some other manner in the division of the community property.

Hat tip to Robert S. Steinberg and his article “When the Court Orders an Unwilling Spouse to File Jointly” from the Fall 2014 edition of ABA Family Law Section’s Family Advocate magazine.

Strategic Tax Filing During Divorce in Texas

Filing income tax returns while a divorce pends can be an especially contentious issue. When one spouse lacks trust in the other spouse, even filing a joint return can be troublesome. Usually filing jointly results in reduced overall tax burden for the still-married couple. But, sometimes filing jointly may result in a greater benefit to one spouse or the other. This may arise when one spouse has higher earned income than the other spouse, an asset titled in one spouse’s name generated significant income, or a spouse failed to make estimated tax payments throughout the year. The acquiescing spouse may agree to file a joint return in exchange for something of value in return, such as a greater portion of the refund or some other concession in the litigation.

tax timeFor two individuals to file a joint tax return, they must be married as of December 31st of the tax year. If the couple’s divorce was final prior to December 31st of the year, then they are not considered married for the purpose of filing a joint return. Likewise, an individual is not considered married for purposes of filing a joint return if he or she is legally separated. Texas does not have a law regarding legal separation, so this would not apply to a couple seeking a divorce in Texas.  Texas law considers you married until the divorce is final.

When spouses file a joint return, they may not later amend to file a married separate return. If there is a dispute about filing a joint return, instead of failing to file or incurring penalties, the spouses may want to file married separate returns and amend to file jointly later. This is better than incurring a “failure to file” penalty, which can run as much as 25% of the total tax due.

There are circumstances where filing a joint return may not be beneficial based on the extent of the marital estate. It is important to get the advice of a highly qualified tax professional to know what is best for your particular situation.

Head of household status comes into play when the divorcing spouses had dependent children. One or both spouses may qualify to file as head of household. If the spouses have lived apart for more than 6 months and one spouse provides more than half of the cost of maintaining the household for the dependent child for more than half the year, that spouse may file as head of household. Filing head of household provides greater tax advantage than filing as single or as married filing separate, but it is generally not as beneficial as filing jointly.

The requirements for head of household are:
1.  The taxpayer is considered unmarried on the last day of the year.
2.  The taxpayer paid more than half the cost of keeping a home for the year.
3.  A child, dependent parent, or other dependent lived with the taxpayer for more than half the year.

Head of household is based on actual custody and may not be negotiated the way a dependent exemption may be.

Hat tip for the background for this article to Brittany Stephens Pearson and her article “Strategic Use of the Tax Filing Status” from the Fall 2014 issue of the ABA Family Law Section’s Family Advocate Magazine.

Divorce by murder — the Arlington Texas case

domestic violenceWe have all been reading and watching the account of the Arlington, Texas woman who killed her estranged husband this week.  We are just learning that the mother filed for divorce in October and there was a hearing this week over custody of the children.  (See: Domestic dispute led to 2 deaths in Arlington.) The divorce court ruled that the father should have custody of the parties’ children. The mother lost. The mother took matters into her own hands and assured that the children would not be raised by their father.

They won’t be raised by their mother either.  She sits in jail charged with capital murder.

The Tarrant County court records indicate that the divorce was filed by the mother in early October. They were married 8 years and have 4 children ages 18, 8, 6, and 3. The pleadings filed by each party are relatively standard.  Each parent asked for standard shared parenting, although each requested primary custody of the children. Nothing in the pleadings indicates a concern about past domestic violence.

A temporary hearing was held in early December, where the Associate Judge determined that the father should have primary custody of the children, would occupy the marital residence, and have the exclusive right to make decisions about the children’s residence, education, and invasive medical needs. The mother was to see the children according to the Texas Standard Possession schedule. The parties were still sharing the marital residence, but the mother was required to move out by the end of the month.

As a divorce lawyer in Dallas, Texas for 20+ years, I can say with certainty that this scenario is the worst nightmare for any divorce lawyer. Violence is more common in divorce cases than any other type of case.  Emotions are high and some people just can’t take it.  They result to violence against themselves, their spouses, children, or even sometimes the lawyers. Often the violence is hurtful, maybe even scarring, and sometimes it results in death, as it did for the Arlington man.

Statistics show that domestic violence is the reason stated for 1 out of every 5 divorces in the US. Most domestic violence incident reported involve the woman as the victim; men rarely report domestic violence. In a violent relationship, the most dangerous time is the first two weeks after the breakup or filing of the divorce.

If you are in a violent relationship and want out, here are some tips:

  • Create an exit strategy. Make sure you have a safe place to stay for a few weeks after the break up. Stay with a relative or friend that lives in a place the other spouse doesn’t know about.
  • Deliver news about the break up in a public place.  Having witnesses around when the bad news is delivered decreases the likelihood that there will be a violent incident.
  • Be careful going to and from work. Ask security to escort you to your car. Take a different route home or a different form of transportation than usual.
  • Hire a lawyer and get a protective order (the Texas version of an order protecting a person from domestic violence) in place. Protective orders in Texas are enforceable by law enforcement officers.
  • Call 911 if there is an immediate threat to your safety or the safety of the children.

My heart goes out to the children in the Arlington case — may their family be strong for them in this time of heart-wrenching grief.  And, my heart goes out to the lawyers for both parties.  I can’t imagine the struggle they are each going through too.

Who gets to claim the child as a dependent in a Texas divorce

depend exempThe question often arises after a divorce in Texas — which parent gets to claim the child as a dependent for tax purposes? Often this issue is settled by the obvious split of parenting time greatly in favor of one parent, but as we have seen a rise in equal time splits for parents and children we have also seen a rise in arguments over who should be entitled to the dependence exemption.

The IRS provides a special rule for children of divorced or separated parents in IRC 152(e). The custodial parent will have the right to claim the exemption provided that the parents lived apart for at least six months out of the year, the parents together provided for more than half the child’s support, and the child lived with one or both parents for more than half the year. The custodial parent is determined either by the face of the court documents or by physical custody. Physical custody is which parent has the child for the greater number of nights per year. If there is a literal tie, the winner is the parent with the higher adjusted gross income. The custodial parent may release the right to claim the dependency exemption to the noncustodial parent by completing Form 8332 “Release Revocation of Release of Claim to Exemption of Child by Custodial Parent”. This form must be attached to the noncustodial parent’s tax return to claim the dependency exemption.

It is not enough to have the assignment of the dependency exemption contained in the divorce decree. Likewise, the IRS will not accept a dependency release form if the court documents condition the exchange of the dependency exemption upon current payment of child support.

The general requirements for claiming a dependency exemption include

  • The taxpayer cannot be the dependent of another.
  • The dependent must be a US citizen or resident alien or resident of Canada or Mexico  for some part of the year.
  • The dependent cannot claim himself or herself on his or her own return.
  • The dependent must be a qualifying child or qualifying relative.

A qualifying child is one who:

  • is the taxpayer’s child, stepchild, foster child, sibling, or step sibling.
  • either under the age of 19 and younger than the taxpayer and spouse, or under age 24, a full-time student, and younger than the taxpayer and spouse.
  • must have lived with the taxpayer for more than half of the year.
  • must not have provided not more than half of his own support.
  • No joint return is being file during the year.
  • Only one person can claim the dependency exemption for the child.

For 2014, the dependency exemption is $3,950.

A child who is over the age of 18 (and not a full-time student) or has been emancipated cannot be claimed as a dependent.

Hat tip to the ABA Section of Family Law’s Fall 2014 edition of Family Advocate and the article “The Dependency Exemption” for the inspiration for this article.

10 qualities to look for when hiring experts in a Texas divorce case

hired gunIn divorce cases in Dallas or, really anywhere in Texas, it is sometimes necessary to hire a professional to offer expert witness testimony on a subject. An expert is someone who is qualified through education or experience on a subject unknown to lay persons and whose opinion would be helpful to the factfinder (judge or jury). Examples of expert witnesses often used in divorce or family law cases include psychologists, psychiatrists, doctors, CPAs, business valuation professionals, realtors, appraisers, or sometimes lawyers.

So how can a lawyer or litigant know if the expert is a good one? Here’s 10 tips for hiring a good expert:

1.  Does the expert’s experience and training match the topic about which they are to opine?
2.  Has the expert witness given conflicting opinions about the topic in prior cases?
3.  Does the expert have a history of success on the topic?
4.  Does the expert have a history and reputation for integrity?
5.  Does the expert require sufficient time to develop his opinions? Asked another way, did the expert take the case on short notice and hurry through his analysis?
6.  Has the expert followed common procedures, assessments, or protocols in conducting the evaluation to form the opinions?
7.  Do the conclusions reached have strong foundational basis?
8.  Does the expert get hired by many different firms or tend to work for only a few firms exclusively?
9.  Does the expert’s professional affiliations go beyond just membership in relevant organizations?
10. Does the expert’s writings and research show more than just length of time in the profession?

Having an unprofessional expert can cause the factfinder (judge or jury) to view not only the expert’s opinions but also the client’s entire case in a negative light. The purpose of an expert witness is to strengthen the client’s case, so it is worth it to hire a high quality expert witness.

Hat tip to ABA Section of Family Law’s Fall 2014 issue of Family Advocate for their article “Spotting the Hired Gun” by Stanley Clawar as the inspiration for this article.

No same-sex divorce in Texas (yet)

Several years ago, Texas adopted the federal Defense of Marriage Act, which give Texas the right to refuse to acknowledge legal same-sex marriages performed in other states. By not recognizing the marriages as valid, Texas law does not provide for divorce of same-sex married couples. This situation is sure to change at some point soon. But for now it creates a real problem for many couples who live here.  Dallas divorce lawyer Michelle O’Neil explains here:

 

LexBlog