Undisclosed assets after divorce

What happens if, after the divorce is final, a party discovers that the other party failed to disclose certain assets in the divorce proceedings?

The recent case of In re Ford out of the Texarkana Court of Appeals is instructive in this situation. In Ford, the parties had been married for 31 years and separated for 3 years.  Two months after the divorce was final, the Wife filed a new lawsuit complaining that Husband failed to disclose certain retirement income received while the divorce was pending.  Wife sought division of the undisclosed income. Husband testified that the money was spent on community expenses during the divorce, including support of the Wife.  Wife failed to show the existence of the money at the time of divorce. The trial court denied Wife's request because she failed to show that the income existed at the time of divorce.

A suit to divide undivided property after divorce is governed by Texas Family Code sections 9.201 and 9.203.  The only assets divisible upon divorce are those in existence at that time. Assets that have been disposed of at a time prior to the divorce are not divisible unless a spouse is found to have committed fraud is the disposition of the assets and the marital estate is "reconstituted" to fictionally include the disposed assets. Thus, it is critical to a suit to divide undivided assets post-divorce to prove that the assets were in existence at the time of divorce.

The Texarkana Court of Appeals in Ford found that the Wife made allegations about the receipt of money by Husband, but she failed to carry her proof forward to the final step in the analysis -- where was the money at the time of the divorce? She could have shown the existence of the money by tracing it to an undisclosed account that existed at the time of divorce, for that matter, undisclosed cash in the mattress. Because Wife failed to show the required proof, the Texarkana Court of Appeals affirmed the trial court's denial of Wife's lawsuit.

Most of the time in divorce lawsuits the parties exchange sworn inventories which detail each party's position under oath regarding the existence and value of the marital assets, including each person's position as to the characterization of the asset as community property or separate property. The point of preparing these sworn inventories is to have proof of the assets being divided in the divorce.  This would also be a good starting point in looking at the viability of a case for undisclosed assets post-divorce.  Was the asset listed in the party's inventory during the divorce?

The second place to look in evaluating a post-divorce claim for undivided assets would be in the divorce decree entered by the Judge.  Are there general division provisions contained in the decree? It is common to use general language for the award of money on hand, bank accounts, retirement accounts, and even bonuses not yet received, such that a party is awarded "the accounts in his or her name".  This type of general language can block a lawsuit for post-divorce division of assets.

A third consideration in looking at a post-divorce division of undisclosed assets is to look at the discovery that was completed during the divorce.  Was a request for production sent seeking copies of all documents pertaining to the assets? If one was sent, did the opposing party respond fully to the request? If not, did the party seeking discovery seek enforcement remedies from the divorce judge to compel the document production? If the party failed to exhaust all available discovery options, it could cause waiver of the post-divorce suit claiming undisclosed assets. If the assets could have been discovered through diligence but the party complaining about the failure of disclosure did not exercise such diligence, then the post-divorce suit is waived.

Overall, it is very difficult to maintain a suit for post-divorce division of undisclosed assets and the Ford case is one example illustrating the difficulties.

Reimbursement for using inheritance on community obligations

What happens when a spouse contributes or loans separate property to the community estate during marriage, then seeks reimbursement of those contributions/loans at divorce?

The recent case of Hinton v. Burns out of the Dallas Court of Appeals sheds light on how this is handled. In Hinton, Husband and Wife both brought separate property assets into the marriage.  Husband had a separate property business and inheritance, and Wife had a separate property residence.  During the marriage, Husband contributed all of his inheritance to the community estate and it was spent on community expenses.  Additionally, Husband's separate property business made a loan to the community estate. Husband sought reimbursement to his separate property estate from the community estate during the divorce for these contributions. Meanwhile, during the divorce, Wife moved into her separate property residence and established it as her homestead. This residence was confirmed as her separate property during the divorce.

The trial judge found in favor of Husband in his reimbursement claims and awarded judgment in favor of the separate estate and against the community estate for the reimbursement claim.  The trial judge then split the reimbursement judgment in half and ordered half of the claim to be borne by Wife in the division of the marital estate.  Unfortunately, the trial judge also ordered that the judgment be secured against "all of Wife's property" including her separate property homestead residence.

Wife appealed, complaining that the trial court erred by imposing the lien against her separate property, and especially against her homestead.  

The Dallas Court of Appeals agreed with Wife for two reasons.  First, Wife's separate estate did not benefit from the contributions made by Husband's separate estate to the community estate so a lien against Wife's separate estate was improper.  Texas Family Code Section 3.406(a) provides that “[o]n dissolution of a marriage, the court may impose an equitable lien on the property of a benefited marital estate to secure a claim for reimbursement against that property by a contributing marital estate.” Thus, the lien was only proper against the community estate which benefited, and not against the Wife's separate estate. Second, the Texas Constitution prohibits imposing a lien against a homestead except under certain, limited circumstances.  This situation failed to come within the exceptions and so the lien was constitutionally prohibited. Thus, the only lien permissible here was the lien imposed against Wife's portion of the community estate. 

 

Becoming a Partner -- Ownership Interest in Divorce

I was asked recently about whether becoming a partner in a professional company creates community or separate property.  The Husband worked for a firm prior to marriage and shortly before the marriage was offered a partnership interest in the firm.  He and the firm signed the partnership agreement a few months prior to the marriage.  After the marriage, he began receiving the benefits of the partnership agreement.  Now, he and his wife are headed for divorce and he wonders if she is going to be entitled to part of his partnership interest.

Starting at the beginning of the analysis, community property is anything that the spouses gathered together during the marriage.  It is presumed that everything the spouses own at the time of divorce is community property.  Community property is divisible upon divorce. 

On the other hand, separate property are those assets that were acquired before the marriage or through gift or inheritance.  Separate property assets are not divisible upon divorce. 


The inception of title doctrine governs the timing of whether an asset is separate or community property.  In other words, when was the first moment that the spouse was entitled to claim ownership of the asset? Was that moment during the marriage (community) or before (separate)? It is the origin of the right to title, not the actual acquisition of final title that determines the character as either community or separate.


Here, the documents securing the interest in the partnership were signed prior to the marriage.  Thus, the right to the ownership interest accrued before the marriage, making the partnership interest separate property and not subject to division upon divorce.

 

Trust distributions - community or separate property?

Another complex issue that can arise in family law cases involves the characterization of trust distributions received by a spouse during the marriage. The San Antonio court of appeals recently considered a case regarding the characterization of trust distributions.  Husband receives monthly distributions from a family trust that was established before the beginning of the marriage. Wife demanded to receive one-half of the distributions based on the notion that such distributions were community property. The trial court held the distributions were husband’s separate property and denied wife’s claim to one-half of the money.  The court of appeals affirmed, relying on the case of Sharma v. Routh. Trust distributions to a married beneficiary are separate property if the beneficiary has no present, possessory right to the trust corpus. Here, the trust was irrevocable and the terms that allowed for its amendment did not in fact then make it revocable.  Further, husband had no present, possessory rights to the corpus because the terms of the trust entitled him only to income distributions.

Benavides v. Mathis , ___ S.W.3d ___ 2014 WL 547904, 04-13-00186-CV (Tex. App.—San Antonio 2014, no pet. h.) (02-12-14)

 

Division of retirement benefits can't be changed in QDRO - QDRO must comply with the decree

The Dallas Court of Appeals recently decided a case regarding the provisions of a retirement award and entry of a QDRO. In that case, husband worked for his employer for 20 years, all of which occurred during the marriage. The divorce decree provided that wife received % award of the retirement benefits.  QDRO was entered concurrently with the divorce decree, specifying that the wife was to be named as and treated as the surviving spouse of husband for purposes of the retirement benefits, giving her a surviving spouse annuity.

When husband approached retirement, he learned from his company that, because wife was named as his surviving spouse in the prior QDRO, he was required to choose an annuity option that provided for Wife to receive a benefit after his death. The cost of the survivor benefit reduced the monthly benefit husband would otherwise receive. Husband also could not name his current spouse as his surviving spouse for purposes of receiving a benefit after his death.

Husband filed a motion to vacate the prior QDRO because it failed to comply with the terms of the decree.  The divorce decree was silent as to the survivor benefits, so husband argued that the QDRO improperly included it. The trial court agreed with husband and entered a new QDRO stating that wife was not husband’s surviving spouse etc. The Dallas Court of Appeals affirmed the trial court because the QDRO must comply with the terms of the decree.  Because the decree did not award wife the surviving spouse annuity specifically, the prior QDRO’s award was improper and must be vacated. The new QDRO entered by the trial court was proper.

Beshears v. Beshears, ___ S.W.3d ___, 2014 WL 345651 (Tex. App.—Dallas 2014, no pet. h.) (1/30/14).

 

The disposition of business assets in a Texas divorce

Within the property division process, the Texas family law distinguishes community property from separate property. The analysis is necessary for the purpose of allocating property to parties pursuant to a divorce. This is because community property is treated different from separate property. Assuming there is not a

property division agreement

, under Texas law, all jointly held community property is divided by the family law court and distributed to divorcing spouses. However, some property can be variable and difficult to characterize. This is often the case when one spouse to an ending marriage holds ownership in a business.

Whether one is a company owner or spouse of the business owner, he or she should integrate corporate law principles into the assessment of the property division process. One could be entitled to a fair share of business-related community property; however, this could be overlooked if the assets are disguised in what appears to be a separate business. If this is the case, one spouse could walk away with the businesses’ assets, which were supposed to be divided equitably in the divorce within the community estate.

Property division of business assets

A corporation is generally considered its own entity, meaning it is characterized as separate property. In most divorce cases, a spouse’s interest in a corporation is subject to division by a family law court; the remainder of the corporate property is off limits and not pushed into the community property portion. However, there is an exception to this rule when an “alter ego” exists.

The “alter ego”

If a business is an “alter ego” of a divorcing spouse, courts may transfer assets out of the separate company and divide them among litigants in the property division process. A business is an alter ego of spouse if the corporate veil of the business is “pierced,” changing the disposition of company property. The corporate veil will be “pierced” if a family law court finds that there is essentially no distinction between the business and a divorcing spouse (as if the business no longer exists and the two are one in the same). Furthermore, the divorcing spouse will be considered the alter ego of the company if a spouse’s use of the business damaged the community estate (the couple’s marital assets) beyond repair to the point where it would be fraudulent or unfair to separate the spouse from the entity. This might happen, for example, when a personal business completely funds a family’s income.

When the property division process begins, courts will look at all jointly held property. It is important to ensure that all assets subject to property division are included in the community property estate. Likewise, it is just as important to protect separate business assets, if necessary. To make sure that your property division resolution is equitable, retain the assistance of a qualified family law attorney in your area. A lawyer can explain business principles and how they apply to your particular situation.

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

I read with interest Jeff Landers’ (@bedrock_divorce) Personal Finance Column on Forbes.com 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

Happy Birthday Recently Divorced Buzz Aldrin

Yesterday was Buzz Aldrin’s 83rd birthday and what better time than now to discuss his recent divorce from his third wife, Lois Driggs Cannon.  According to numerous reports including the Huffington Post article Buzz Aldrin And Ex-Wife Lois Driggs Cannon Settle Their Divorce, Lois is receiving one-half of Buzz Aldrin’s fortune. 

After 23 years of marriage, the parties signed their settlement agreement on December 28, 2012.  Lois is reportedly receiving one-half of their bank accounts, $9,500.00 per month in spousal support, her automobile, and 30% of Buzz Aldrin’s annual income.  

In a divorce in Texas, property division can be quite complicated when you have an estate the size of the Aldrins as well as the length of their 23 year marriage.  Texas does have spousal maintenance.  The laws changed recently with regards to the amount of monthly spousal maintenance as well as the length of time for the spousal support payments.  

There are numerous factors the Court considers when deciding if to award spousal maintenance to a spouse as well as the amount and duration of court ordered spousal maintenance.  Factors include the length of the marriage, the age of the spouses, the education of the spouses, the employability of the spouses, the size of the estate, the monthly reasonable and necessary expenses of the person requesting spousal maintenance, marital misconduct, and family violence. 

The following is a break-down of Texas’ Spousal Maintenance amount and duration:

The amount of Texas Spousal Maintenance is the lesser of the following:

a)         $5,000.00 or

b)         20% of the spouse’s monthly gross income

 The duration of Texas Spousal Maintenance is as follows:

a)         5 years if the parties were married 10 – 20 years

b)         7 years if the parties were married 20 – 30 years

c)         10 years if the parties were married over 30 years.

This is not meant to be a complete discussion of Texas Spousal Maintenance and if you believe you qualify to receive spousal maintenance, you should consult with an attorney.

 

Do Kanye West and Chris Humphries Share More Than Kim Kardashian?

As reported by NBC News, Kim Kardashian and Kanye West (named “Kimye” by the press) entered into a contract over the weekend to purchase a home together in Bel-Air, California reportedly worth $10.75 million. The question discussed amongst the legal community is “What effect does this purchase have on the Kim Kardashian and Kris Humphries divorce?”

As discussed in my blog last week, What if Kim Kardashian Was Pregnant and Going Through a Divorce in Texas?, Kim Kardashian and Kris Humphries are in the midst of a divorce in California. If Kim Kardashian and Kris Humphries were going through a divorce in Texas, Kris Humphries would have an interest in the home purchased this past weekend by Kim Kardashian and Kanye West.

Texas is a community property state. This means that any property acquired during marriage is presumed to be community property and is thus divisible by a Court. Kim Kardashian has entered into a contract to purchase a home. Because this contract was entered into during her marriage to Kris Humphries, even though they are in the process of a divorce, the Bel-Air mansion would be community property in Texas. This means that Kris Humphries would have a legal claim to the Kimye Bel-Air mansion.

It is interesting to see what additional legal issues will arise as a result of the “Kimye” relationship and pending divorce. I doubt this will be the last one.
 

Supreme Court Clarifies Requirements for Property Owner's Testimony as to Value

In a divorce, which party gets the marital residence and what value will be placed upon it is often a point of great contention. At trial, each party must offer evidence supporting the value that they believe should be assigned. This testimony can come from qualified real estate appraisers or, under some circumstances from the home owner themselves.

Last week the Supreme Court of Texas issued an opinion clarifying the standards by which a homeowner can offer an opinion on the value of real property. Natural Gas Pipeline Co. of Am. v. Justiss, 10-0451, 2012 WL 6214635 (Tex. Dec. 14, 2012). According to the opinion, property owners can testify as to the value of their property, but such testimony must have a valid basis and may not be mere conclusions:

“Because property owner testimony is the functional equivalent of expert testimony, it must be judged by the same standards. Thus, as with expert testimony, property valuations may not be based solely on a property owner's ipse dixit. An owner may not simply echo the phrase “market value” and state a number to substantiate his diminished value claim; he must provide the factual basis on which his opinion rests. This burden is not onerous, particularly in light of the resources available today. Evidence of price paid, nearby sales, tax valuations, appraisals, online resources, and any other relevant factors may be offered to support the claim. But the valuation must be substantiated; a naked assertion of “market value” is not enough. Of course, the owner's testimony may be challenged on cross-examination or refuted with independent evidence. But even if unchallenged, the testimony must support a verdict, and conclusory or speculative statements do not.”

Though not a family law case, this opinion is of great importance in many divorce cases. For many people, their home is their most valuable marital asset. Family law attorneys and litigants alike should make sure they are familiar with this opinion in any case where value of real property is disputed.

Click here to read the entire Supreme Court opinion
 

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

 

When 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.

 

Property Division in Dallas, TX - Dividing Assets for Unmarried Clients: Suits of Partition

In our practice we help clients who face the end of their relationship and need a way to divide property that they have purchased with their partner, spouse, or significant other.  While the Texas Family Code provides the frame work for dividing property in a divorce, it is silent when it comes to dividing joint assets of unmarried people.  For these clients, we turn suits for partition in civil court according to the Texas Property Code and  the Rules of Civil Procedure.

The Texas Property Code and the Rules of Civil Procedure provide that a joint owner or claimant of real property or an interest in real property or a joint owner of personal property may compel a partition of the interest or the property among the joint owners.  Unlike a divorce where the court can consider various factors such as fault in the break-up of the marriage, age, and earning capacity of the spouses, a suit for partition the financial situation of the parties and other factors not relating to the property cannot be considered.

With real and personal property subject to partition these suits provide the increasing number of individuals who do not meet the Texas definition of “married” with a viable means of dividing joint property and moving forward with their lives.  For more information on suits for partition contact an attorney for a consultation

 

Is My Bonus Community Property?

 

It is beginning to be that time of the year where end of the year bonuses and holiday bonuses are being calculated and given by employers. Knowing whether or not your bonus is something that can be divided by the Court in a divorce in Dallas, Texas will aid you in your property settlement and plans for the immediate future.

What differentiates bonuses and whether or not the bonus is considered community property and thus divisible by the Court or your separate property and awarded solely to you is the purpose for the bonus. If you are being paid a bonus for work that you performed during the marriage, that bonus is community property and thus divisible by the Court. Even if you receive the bonus a few months into the next calendar year and/or after your divorce has been finalized, it is still community property if the bonus was for work performed during the course of the marriage.

If your bonus is conditioned only upon work in the future and your work in the future occurs after your divorce, then your bonus will be considered separate property and thus solely yours. 

Employers usually provide documentation as to the benefits they provide to their employees. If your spouse is entitled to receive a bonus, it is important to receive your spouse’s employer’s benefits information during the divorce process so that you can anticipate whether a bonus will be received as well as the purpose for the bonus.

 

Texas Retirement and Divorce: Part 2

 

In Part II of our series on Texas Retirements and Divorce, we will discuss Defined-Benefit Plans.

Defined-Benefit Plans: The best known defined-benefit plan is a pension, where the employer pays a certain amount to the employee for life upon retirement. The monthly benefit is often calculated by a formula based on the employee’s length of employment and salary. These plans also allow the employee to elect to protect a spouse in case of untimely death. Because there is no set value to the plan, it can be much more complicated to divide a defined-plan during divorce. 

Community Property Interest in Defined-Benefit Plans: Formulas from two Texas cases govern the valuation of defined-benefit plans on divorce, based on whether the employee is retired and receiving benefits, or still working. The Taggart case governs retired employees. Under Taggert, the community portion of benefits = number of months of marriage during employment / total number months employed at the time of retirement. If the employee is not retired, the Berry formula applies: The community portion of benefits = the number of months the parties were married during employment / the total number of months employed at the time of divorce. 

Value of the Community’s Interest in the Plan:  If an employee is not retired, valuing the community’s interest in a plan will involve some calculations. First, the employee’s monthly benefit must be determined based on plan information. Next, the Berry formula is applied to determine the community’s interest in the benefit. Next, the employee’s earliest retirement age must be determined, which will also be listed in the plan documents. After that, we determine number of payments. This will be the difference between the employee’s earliest retirement age and his life expectancy according to government life tables. A discount rate will also need to be determined to offset inflation and the risk of default. Once you have a value at retirement, number of payments, and a discount rate, you can determine a lump sum value at retirement. That value is then reduced based on the number of months remaining before retirement and the discount rate. A matured plan is similarly valued, except the Tagger formula is applied and there is no need to reduce its value by the number of months before retirement since the employee would already be retired. 

Dividing the Community’s Interest in the Plan: Much like a defined-contribution plan, a percentage share can be assigned to divide the community’s interest in the plan. Most pension plans allow the participant to buyout the divorcing spouse by borrowing against the value of the plan. The non-participant spouse can also wait until retirement and receive monthly benefits as if she had her own pension.

Read Texas Retirement and Divorce: Part 1 here

 

Texas Retirement and Divorce: Part 1

 Because there are many retirement plans available to Dallas employees, we will discuss the various plans, and how they are divided in divorce, over a series of posts. We will begin with plans that qualify under a federal law called ERISA.

Part 1: Defined-Contribution Plans - Under this type of retirement plan, the employee, or both the employee and employer contribute money or stock to a retirement account. The contribution is usually based on a percentage of the employee’s salary. The value of the account will depend on the success of the stock, value of the contributions, and the costs of the plan. At retirement the employee receives the value of the account. The employee will usually “roll over” their retirement account into an annuity or IRA to create income over time and gain tax benefits. Today, Defined-Contribution plans are most common amongst private employers, and include:

  • 401(k) plans where the employee deposits a portion of their pretax income into a tax deferred account. Many times employers match
  • Employee stock ownership plans (ESOPs) where employees invest in their employer’s stock.
  • Profit Sharing plan where the employer contributes some portion of profits to the employee based on formulae that can be modified each year.
    • Thrift plans: same as profit sharing plan except employee can contribute too
  • Keogh: Retirement plans for people who are self-employed. 

Community v. Separate - All property a divorcing couple owns is presumed to be community, but a spouse can overcome that presumption with evidence that the property was owned before marriage. In a Defined-Contribution Plan this evidence can be readily available. The employee can contact his plan administrator and request the value of his retirement account on the day of marriage, and the current value; the difference will be community property.   This may get more complicated if stock is involved. The increase in the value of separate property, like stock owned before marriage, stays separate, but new stock contributed during marriage would be community property. 

Partitioning the account - Once the value of the community’s interest in the retirement account is determined, it is subject to “just and right” division by the divorce court. The court will often assign a fraction of the value of the account to each spouse. The court will then sign an order called a Qualified Domestic Relations Order or QDRO, directing the plan administrator to divide the retirement account and distribute the value to the non-employee spouse. The non-employee spouse can then roll over her share of the plan into an IRA to avoid tax penalties.

 

Texas divorce FAQ: I have some cash that I don't want to tell my spouse about. Can my lawyer help me hide it?

You and your lawyer have an ethical responsibility to be honest, truthful, and fully disclose issues related to the case.  In fact, at some point during your divorce, you will likely have to swear under oath as to all of the assets and debts that you are aware of. If you knowingly hide assets and your attorney finds out, the attorney will be obligated to withdraw from representing you if you refuse to tell the truth.

 

Divorce & Stock Options: Valuations, Exercised Options and Taxes Oh My!

 

Property distribution in divorce is difficult even in simple estates, but complications abound for those with more complex mixes of assets. These high-asset divorce cases often require review of financial portfolios, including stock options.

Stock options are often used to lure key employees into high-level positions. A stock option is a contract that allows the holder to purchase a specified amount of stock for a certain price within a set time period. Stock options can be provided as an additional form of compensation and offer an incentive not only to continue working for the company, but also to remain loyal, according to Forbes.

This type of asset is present in many upper-level employees’ portfolios, is usually considered property within divorce determinations and often comes into play in high-asset divorce proceedings.

Knowing Your Assets: Types of Stock Options and Associated Tax Implications

If a stock option is vested, or belongs to the spouse, and is forfeited only when the option expires, it is subject to property-division determinations in divorce. Within this category there are two broad types of stock options: nonqualified and qualified. Qualified or incentive stock options — known as ISOs — receive special tax treatment, often not taxed until the stock is sold and taxed at a lower rate. This option is usually offered to those holding upper-level management positions.

Nonqualified plans are often given to employees and generally do not require the holders to pay taxes when granted. Income taxes are required, however, after stock is purchased pursuant to the option on the difference between the grant price and the stock market value.

One difficult decision is determining when to exercise the stock option. Conventional wisdom often guides the holder to wait until the option is about to expire to maximize potential gain. However, valid reasons to exercise earlier include:

Click here read the entire article

 

When Business Owners Divorce: The Importance of Business Valuations

 

A few years back, many individuals found themselves searching for new careers after the economy plummeted. Some took jobs similar to those they left behind while others chose to make their own paths and open small businesses.

Both the Wall Street Journal and Forbes report that some entrepreneurial businessmen and women with new startups were recently hiring at “a red hot pace.” In fact, Forbes notes hiring for entrepreneurial companies rose over 13 percent compared to last year, a much stronger increase than that of established companies, which reported hiring growth levels at 3 percent.

As these new businesses thrive, owners may have to address other concerns. Although there is no evidence to support the notion that divorce rates are higher for business owners than other couples, it is hard to ignore the high level of stress and long hours required to run a successful business. Unfortunately, these factors can play roles in the breakdown of a marriage.

This can lead owners and their spouses to wonder: what happens to the business in a divorce?

Please click here to read the article in its entirety

 

Texas divorce FAQ: How do I prove that my spouse is hiding money?

 

Allegations of hidden assets occur often in divorce proceedings. It is standard procedure in a contested Texas divorce for spouses to each be required to file a sworn disclosure of the assets and debts, including financial accounts, of the marriage. Additionally, bank statements and other written documentation can be requested from the spouse or obtained from the bank or other company, that may shed light on the existence of the assets. A forensic CPA can be hired to analyze the financial transactions to search for irregularities that would indicate hidden assets.

 

What's Ours Is Mine: Signs Your Spouse Might Be Hiding Money

 

Divorce can bring out the worst in people or uncover bad behavior that has been there all along. Unfortunately, some people try to hide money from their spouse in a divorce. Other people have hidden money throughout the entire marriage. Clients often sense that something is just not right. This is the time to take action and seek legal advice. 

Often it is hard for people to put their finger on exactly what sets off the alarm bells for them. To help, here are the top 5 signs that your spouse is hiding money from Nancy Van Tine of Burns & Levinson, LLP:

1. No transparency.  This can be a problem from the beginning of the marriage.  You don't have joint accounts.  There is no openness about finances and no real economic partnership.  This makes it super easy to hide money!  Every spouse should understand the family finances and be aware of what you have and how it is held, always.  It just makes it too easy for a spouse to transfer funds and hide cash if you don't know how it all fits together.

2.  A change in behavior.  Instead of mail coming to the house, it goes to a spouse's office or he/she gets a post office box.  The spouse opens new bank accounts and you don't see the statements.  He/she gets new credit cards, and the bills don't come to the home.  He/she has more than one cell phone, and you don't see the bills.  The extra phone can indicate a lover, and that often means money is leaving the marriage.

3. A sudden decrease in income.  One of my favorite quotes (and I have used it for so long I can't remember the source, other than it was another divorce lawyer) is, "once again, the magic alchemy of divorce turns yet another prince into a pauper." This can happen more often with the self-employed, as it is much easier to finagle finances in your own business than if you are a W-2 employee. If it occurs in conjunction with #2 above, watch out!

4. New and unusual economic behavior. This tends to be more on the spending side.  The spouse is buying stuff which depreciates, i.e. a fancy car, a new motorcycle, boat or jet ski -- basically wild spending on toys.  If your spouse starts running up large debts or cleaning out accounts to pay for new acquisitions, watch out!

5. Rushed and controlling. When tax returns need to be signed, you get the return on the day due and there is no time to read it, nor is there a copy for you to keep.  Estate planning is rushed and/or unexpected, and you don't get to discuss the plans and their meaning with the lawyer.  These and other areas where speed and lack of clarity can really hurt you are considerable.”

If any of these five signs set off alarm bells in your own relationship, or more importantly if your instinct tells you that something is just not right about your spouse’s behavior lately, consult a good divorce attorney immediately. An experienced divorce attorney can inform you of your legal rights and can explain the steps you need to take to better understand your financial situation. 

Above all else, the most important thing you can do is to become knowledgeable about your finances – review your tax returns, meet with your CPA, learn about your spouse’s business. This investment will pay off for you by allowing you to be an engaged and active participant in your divorce and empowering you to manage your own finances once your divorce is final.

 

 

Doggie Damages Possible in Divorce?

 

Court of Appeals permits suit for damages for dead dog.

The Fort Worth Court of Appeals has issued a ruling permitting a dog-owner to sue for damages against the animal control employee who negligently euthanized their dog. The dog escaped from its yard and was picked up by animal control. The owner went to reclaim the dog but did not have enough money with him to pay the fees. The animal control officer told him the dog would be tagged and held and would not be euthanized. The employee put the dog on the euthanize list anyway. The dog was killed before the owner could go back and claim it. The dog owner sued the employee for negligently killing the dog. The Fort Worth Court of Appeals held that case law determining that dogs are items of property is outdated. The Texas Supreme Court has held that damages may be recovered for damage to items of sentimental value. So, based on the sentimental value that a family pet has, damages can be recovered for loss of the pet.

So, it would seem that this case opens the possibility for a family pet to be considered as more than just an item of personal property. Maybe the case doesn’t go so far as to support an order for split access to the pet, but it would seem that the spouse who doesn’t get awarded the pet might could request compensation for loss of the sentimental value.

Plowing new ground as Texas divorce lawyers is what O’Neil & Attorneys does best.

 

More Innocent Spouses Qualify For Relief Under IRS Guidelines

 

The IRS released new guidelines this month designed to provide relief to more innocent spouses seeking relief from tax liability.

A Notice proposing a new revenue procedure, posted today on IRS.gov, revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests.

"The IRS is significantly changing the way we determine innocent spouse relief," said IRS Commissioner Doug Shulman. "These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”

This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

To watch a video made by the IRS on this topic click here: Innocent Spouse Relief.

 

Debt in Divorce

   An excerpt from my book, Basics of Texas Divorce Law on debt division in divorce:

     To determine liability for a debt as between spouses, there are two inquiries - which person may be liable and which assets may be liable.

     A debt incurred by a spouse during the marriage is presumed to be a community property debt.  A debt incurred before the marriage is presumed to be separate property debt.  If a debt is incurred during the marriage, but the creditor agreed to look solely to the separate property of the spouse for satisfaction of the debt, then the debt may be a separate property debt.  Characterization of the debt as in the nature of community property does not determine the question of liability.  The designation of a debt as community property has no effect on which spouse may actually be liable for the repayment of the debt.  The fact that spouses are married, does not, by itself, create liability by one spouse for the debts of the other spouse.  The mere fact of marriage does not create joint liability on all debts.  If one spouse incurs a debt as the agent for the other spouse, or if the debt is for basic living necessities, then both spouses may be help jointly liable, together with the jointly help community assets.

     To determine which spouse's properties may be liable, the marital property needs to be classified as to which spouse has the right to manage it - each spouse may have separate and community sole management property and there may be joint management property of both spouses.  A spouse's separate property is not generally subject to the other spouse's debt liability.  Further, each spouse has sole management and control over his or her community property that each would have owned except for being married, such as personal earnings.  This sole management community property may only be used to satisfy the debts of the spouse that manages the property or the joint debts.  Jointly managed property, such as a jointly titled asset, may be used to satisfy either spouses' community or separate liabilities.

     When looking at borrowed funds, the examination goes further into the intent of the spouses in incurring the debt.  If the money is borrowed to benefit a spouse's separate property, and the intent is to repay the funds using separate property, then the borrowed funds will likely be separate in nature.

     Most credit cards are opened with an account agreement.  From a contract law perspective, only the parties to the contract are bound to the terms of the agreement.  Therefore, it is simple to determine who is contractually liable if one has a copy of the account agreement - which hardly ever happens in practice.  If that is the case, the practitioner can utilize the credit report to determine if the spouse is contractually responsible, or just an authorized user.  Arguably, if a spouse is designated as an authorized user then that may create agency as defined above.  Alternately, if the purchases were for necessities, liability could be present regardless of whether one was an authorized user or not.

     Nevertheless, an authorized user should probably not seek to assume this unsecured liability in the decree.  If this is done, the authorized user will have a difficult time in restricting the future access of the other spouse to that account.  While an in junction may assist in protecting the authorized user, it would still be advisable to not seek responsibility for the payment of this debt.  Alternatively, the spouse who is the primary card holder should (as soon as legally possible) revoke the authorized user status of the ex-spouse to avoid problems.

     In determining the division of the overall estate, and debt in particular, it is important to determine which spouse and/ or assets may be liable for the debt and divide the debt according to liability.  Otherwise, if a debt is allocated in a divorce to a spouse who is not legally liable, then the spouse has little motivation to pay and there are few legal remedies available in the court system to force payment against a non-willing spouse.  Further, the credit of the spouse incurring the debt can be damaged by relying on the nonliable spouse to make payment.

     The division of debts between the spouses has no effect on the creditor's ability to collect the debt.  Even if one spouse is allocated the debt in the divorce, if the debt is one for which the other spouse is liable, the creditor can seek payment from the other spouse regardless of the wording of the divorce decree.  The only recourse that a spouse has in such a situation is to sue the spouse that was supposed to pay and seek reimbursement.

     One way to conclusively address debt and liability in a divorce is to allocate other assets to pay the community debts of each spouse, leaving fewer assets but no debts to divide.  When possible, the system allows both spouses to leave the marriage with a "clean slate."

Divorce and the Small Business Owner

Deborah L. Cohen writes for Reuters about Divorce and the impact on small businesses.  Ms. Cohen points out that when small business owners go through a divorce, their attention is distracted from their business, causing financial impact on the business which may already be distressed due to the downturn in the economy. Cohen points business owners to four ways to protect themselves: 1) a will, 2) a premarital agreement, 3) buy/sell agreement, and 4)  an entity to hold the business in trust.

Although Ms. Cohen's points are valid -- divorce does have a significant impact upon small businesses, I disagree with her points for protection.  To me, the biggest impact of a divorce on a small business is the distraction the divorce and personal problems in general cause on the business owner.  When a business owner's focus is diverted, the business can dwindle.  To counteract this problem, the business owner should work very hard to find an attorney to handle his divorce who has experience with small businesses and who he feels comfortable with.  That way, the business owner can focus on running his business and allow the divorce lawyer to focus on the divorce as much as possible. 

Although it is a good idea for anyone to have a will, a will has no effect in a divorce.   A buy/sell agreement is also of questionable effect in a divorce in Texas since such agreements usually only bind the business owners and not the spouses.  Such agreements, to be enforceable, would need to comply with the rules regarding post-marital agreements.  LIkewise, placing a business into a trust could be frowned upon in divorce court and considered fraudulent to the marital estate by depriving the marital estate of a very valuable asset.

Divorce Business Valuation Article

 

Proper Evaluation of "Goodwill" of a Business During Divorce
Posted by Michelle May O’Neil on May 23, 2011

 

This article deals with people who own a service business and are the focal point in their business. In most states the assets owned by an individual going through a divorce must be valued. This includes a business that one spouse may own. The value of the business may include both tangible assets and intangible assets. The majority of the value of the intangible assets may be related to "goodwill". Goodwill is defined as the characteristics of a business or individual that cause customers to return to that business or person.

 

In many cases, the value of the business or practice is determined based on the earning stream of the business. The concern to the spouse who owns the business, and who also has a spousal support obligation is that the earning stream used to value the business is also used to pay the spousal support obligation. This is what is called the "Double Dip Theory".

In many states, this situation is avoided when the portion of the business that is related to "Personal Goodwill" is excluded from the value of the business, or "Enterprise Goodwill". Thus, it is very important to identify and differentiate Personal Goodwill from Enterprise Goodwill.

 

These two types of goodwill can be defined as follows:

  • Enterprise Goodwill is associated with the entity itself. It takes into consideration issues such as location, qualified workforce, required licenses, name, etc. The key is that the value of the business is separate from the individual owner.
  • Personal Goodwill is associated with the individual. It takes into consideration the individual's age, health, personal reputation, training and effort. Customers return to the business because of the individual. The value of the business does not exist absent the individual.

The key is whether the Goodwill can be sold or transferred independent of the individual. Generally, Enterprise Goodwill is considered to be "saleable", but Personal Goodwill is not. Here is a simple check list to determine Personal Goodwill or Enterprise Goodwill:

  • Is the value of the business or professional practice inseparable from the actions, skill, the expertise and reputation of the individual owner?
  • Is the value of the company, other than the hard assets, such that it cannot be Transferred without the individual?
  • Can the economic benefits of the company to be transferred be realized only through the performance of post-divorce services of the individual?
  • Is the revenue or the ability to acquire future income tied directly to the efforts of the individual?
  • Is the ability of the entity to attract referrals separate and apart from the persona of the individual?
  • In summary, make sure that your divorce attorney is aware of the key aspects of your business and the importance of you, individually, to the success of the business in an effort to avoid the perils of the Double Dip.

Hat tip for this article to Bruce Richman (CPA/ABV, CVA, CDFA™), author of the book Guide to Tax and Financial Issues in Divorce.

 

For more articles on assistance regarding business valuation, visit http://www.divorcemag.com/articles/Business_Valuation/.

Converting Separate Property to Community Property in Divorce

In any Dallas Texas divorce proceeding, the issue of how to divide assets and debts must be resolved. Not every asset is obviously "separate" or obviously of the "community." Basically, community property will be divided between the spouses because it is marital property. Separate property will not be divided because it is not marital property. The challenge is in characterizing each item, one at a time.

This may be disappointing news for some but, in general, assets acquired during the marriage will likely be characterized as community property. Of course, there are always exceptions to that. These "exceptions" are usually limited to assets owned before the marriage, or acquired by gift or inheritance during the marriage.

What is transmutation of property?

Transmute means to convert. The transmutation of separate property, then, means converting what started as separate property into either community property or the separate property of the other spouse.

Under Texas divorce law, transmutation may occur by agreement, by gift, or by commingling.

When one spouse places their separate real property into a joint ownership, for example, we presume that a gift occurred. This seemingly simple act has significant consequences for spouses who do not understand this when they transfer title from their own name to both names. For example, when a party owns a home prior to the marriage, then refinances the home during the marriage and the home gets retitled into both spouses names, they have just "gifted" the value of the home to the marriage - it's now an asset of the other spouse as well.

In a divorce, the division of property and debt settlement can be quite complex and very confusing. When you need to protect your financial future, contact the Dallas family law attorneys at the O'Neil Attorneys Family Law. Our attorneys possess the legal knowledge and financial tools to ensure that you are not taken advantage of in your divorce.

Hat tip to Scott David Stewart of the Phoenix Arizona divorce law blog for  this article.

Divorce in the New Year Protecting Your Business

January 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.

Contact the Dallas firm of O’Neil Attorneys Family Law for your family law needs, including dividing your business assets upon divorce. Michelle May O’Neil and Ashley Bowline Russell are well-acquainted with the special concerns for complex property divisions in a divorce in Dallas Texas or the surrounding areas. O’Neil and Russell released their new book The Basics of Texas Divorce Law in December 2010. Find them online at www.themayfirm.com or www.oneilattorneys.com.

 

Prenups on the Rise

CNBC says prenups are on the rise... and Dallas Texas family law attorneys agree. A whopping 73 percent of divorce attorneys say they’ve seen an increase in the pre-marital documents, according to a recent survey by the American Academy of Matrimonial Lawyers. What’s more, 52 percent of them said they’ve seen an increase in women initiating the requests.

"Prenuptial agreements are becoming more generally accepted as an effective way to protect assets.  Interestingly, these requests are no longer just limited to a specific gender or age group," said Marlene Eskind Moses, president of the AAML. 

Part of it can be attributed to the recession.  People are generally paying more attention to their finances and future-planning these days. And, more women are wanting to protect their future too.  These days, more women are working and may be earning more than their husband-to-be, so they want to protect what will be their's.  Other women may want to make sure they are not thrown out on the street with nothing if the marriage ends.

Pensions and retirement accounts are increasingly being included in prenups, the survey showed. Thirty-six percent of the lawyers surveyed said they’re seeing an increase in retirement savings being a part of the prenup. Part of that is people marrying later in life, though it’s also the fact that many have watched their retirement accounts dwindle in the past few years.  They do not want to divide their retirement accounts twice -- once in the market declines and again in divorce.

Many people feel prenups are distasteful and against the grain of marriage.  But, marriage is a partnership -- a business deal in some respects -- and any good partnership has a written agreement defining the relationship and addressing potential eventualities like death or break-up.  Marriage should be no different.

 

Does Fiduciary Duty Between Spouses Mean Suit for Mismanagement?

In a Texas family law case, the question arises as to whether there is a fiduciary relationship between the husband and wife that raises the bar for treatment of decisions made and how to account for a breach of this duty upon divorce.

From the American Bar Association Journal:  A Maryland appeals court has handed a victory to a partner and former managing principal of Beveridge & Diamond embroiled in a battle with his ex-wife over alleged financial malfeasance during their marriage.

The ruling (PDF) affirms the dismissal of Nancy Lasater’s tort suit against her former husband, Beveridge & Diamond partner John Guttmann Jr. Lasater had claimed that Guttman ran up large debts during their marriage, spending money on ill-advised real estate projects, exotic merchandise, personal adventures and a huge collection of compact discs. Her suit, filed after 25 years of marriage, had claimed conversion, intentional infliction of emotional distress, breach of fiduciary duty and fraud, according to the ruling by the Maryland Court of Special Appeals.

“We decline to open the door to tort suits arising from disagreements over allocation of marital resources when these grievances properly can be remedied in the divorce setting,” the appeals court said an opinion issued on Monday.

Lasater had claimed that Guttmann blamed their dire financial situation on her decision to stop working to stay at home with the kids and that he lied about his status at the law firm, claiming he had become of-counsel. Lasater had worked for 20 years as a lawyer before she left law practice.

The appeals court said the alleged behavior, even if true, does not rise to the level of extreme or outrageous conduct justifying the count of intentional infliction of emotional distress. And a husband and wife are not true fiduciaries, the court said, absent an agreement establishing that relationship.

A Texas divorce court would reach the same result as the case outlined in Maryland, taking consideration for the bad conduct out in the division of the marital estate, but Texas takes a different route to get there.

In Texas, there is unquestionably a fiduciary relationship owed by the spouses to each other and to the management of the community estate.  Schlueter v. Schlueter, 975 S.W.2d 584 (Tex. 1998), adopting the opinion of In re Marriage of Moore, 890 S.W.2d 821 (Tex. App -- Amarillo 1994, no writ), which underscored the fiduciary relationship owed between spouses and the community estate.  Where a spouse mismanages property to the extent that such mismanagement rises to the level of fraud, the fraud is against the community estate and is, therefore, considered a part of the overall just and right division of the community estate between the spouses incident to divorce.  The divorce court does not have to divide the community estate equally, but may consider the competing equities in determining a just and right division, even if unequal.  Fraud may be one of those equitable considerations.  Loaiza v. Loaiza, 130 S.W.3d 895 (Tex. App. -- Fort Worth 2004, no pet.).

Thsu, in Maryland, the court determined that there was no independent claim for fraud and the improper actions could be accounted for within the divorce, Texas would reach the same result, just a different route.

Why do we have to value my business to get divorced?

Frequently clients ask about their Dallas Texas divorce why we have to get a forensic CPA expert to value their closely-held business to get them divorced.

In Texas, there are three parts to dividing property in a divorce:

  1. Characterization -- is the asset community property (property obtained during the marriage) or separate property (property owned before the marriage or through gift or inheritance)
  2. Valuation -- assessing the value or net worth of each asset to assist in determining what is a fair division of property
  3. Division -- the physical aspects of sorting assets to each party

In order to dispense a "just and right division" of community property in a Texas divorce, the judge has to know how much each asset is worth.  In other words, until each asset has a dollar value, neither the judge nor the parties can know whether the division awards 50% of the assets to each party or some other figure. 

In a divorce with a business interest, the first step is to decide whether the business entity is community property.  This can be more complicated than just whether the business was started during the marriage.  Important questions include what was the source of funds used to start the business, did the business change formations during the marriage, and whether any community funds were put into the business during the marriage if the business was started before the marriage.  Also, consider whether the customers of the business come to the business due to the reputation of the business or the reputation of the spouse/owner.

Then the business must be valued according to appropriate principles to be used during a divorce.   In the market valuation approach, the CPA estimates your business’s value by comparing it to a similar business that has been sold recently. The income approach estimates the value of the business by converting profits or cash flows into value. The asset approach estimates the value based on the values of the assets and liabilities of the business. Note: the "book value" of a business, which is the assets minus the liabilities on the balance sheet, is not a valuation method used by professional business valuators.

Not just any CPA is qualified to conduct a business valuation in a Texas divorce.  The expert should be certified by the American Institute of CPAs in Business Valuations.  The letters after the CPA's name should read "ABV".  This accreditaion assures the divorcing spouse that the CPA has a minimum level of expertise in the relevant principles of valuation. If an expert is under-qualified to give an opinion on valuation of a business, the expert may not be allowed to testify at trial.

Every Dog Has Its Day -- In Divorce Court

Case Law Friday:

The Austin Texas Court of Appeals clarified the law related to possession of pooches after a divorce in case of Calder v. Calder. The question was who had the right to the dog after the divorce. The dog was bought before the marriage, but by who, asked the Chief Austin Appellate Judge “Woodie” Jones?

Wife Brooke  emailed with the dog owner about buying the dog, Chihuahua Clementine, and negotiated the purchase price of $500. Husband Daniel admitted there was never any question that the dog was being purchased by Wife Brookee and for  Wife Brooke. Wife Brooke routinely gave Husband Daniel her paychecks to be deposited in Husband Daniel’s bank account and Husband Daniel gave her money when she needed it. Wife Brooke gave Husband Daniel money a few days before Chihuahua Clementine was purchased totaling $948. Around the same time, he withdrew $600 in cash, paying $400 of it to the dog owner. The Austin Court reviewed the law that puppies are items of property in Texas. Because the funds used to purchase Chihuahua Clementine were Wife Brooke’s money before the marriage, the dog belongs to her.

Separate property in Texas is that which was owned before the date of the marriage, or received during the marriage through gift or inheritance.

When asked how much money the husband spent appealing the issues regarding ownership of the dog, the husband’s attorney replied, “Too much.”  Um... No kidding.

My grandmother always said, "You know the best way to get over losing a puppy? Get a new puppy!" Of course, she meant that in the context of dating advice, not actually puppies, but still….

See the full opinion in Calder v. Calder.

The Inception of Title Rule - A Primer.

Frequently I receive a lot of questions regarding how to prove the character of a certain piece of property.  Recall that community property in Texas is defined in the negative as all property acquired during the marriage except through gift, devise or descent.  Thus, community property is pretty much every piece of property obtained during the marriage what wasn't gifted or inherited to one particular spouse.  Separate property is property that does not owe its existence to the marriage.  Put another way, everything that is not community property is defined as separate property, including property which was owned prior to the marriage. 

Under the Texas Family Code there is a statutory presumption that all property owned by either spouse during or upon dissolution of marriage is community property.  See Tex. Fam. Code Sect. 3.003(a).  Once it is established that property is in the possession of either spouse, there is a presumption that the property is community property and belongs to the community estate.  In order to over come this presumption, a spouse is required to show through clear and convincing evidence that the property is not community property. 

One of the ways spouses frequently show that property is not community property is to rely on the inception of title rule.  Under the inception of title rule, a property's character is based on the time and manner in which a person first acquires an interest in the property.  Generally, if a person first acquires an interest in the property before marriage, the property is considered separate property; if a person first acquires an ownership interest in the property during marriage, the property is considered to be community property.  Once the character of the property is established under the inception of title rule, that character will not change because of mutations in the property's form.  For example, if the property was sole or exchanged for other property. 

By way of example, the inception of title rule provides that the day the interest is earned in an bank account is the crucial date which decides whether the property was owned prior to marriage.  Therefore, if the interest in the bank account was earned prior to the date of marriage, then under the inception of title rule, the bank account interest earned (as of that date) would be considered separate property.  Another example might also be helpful.  Assume a car was purchased on the eve of marriage.  Under the inception of title rule, the car would be characterized as separate property because its title pre-dated the marriage. 

Where things can get a little tricky is what happens when the separate property goes through mutations during the marriage.  Here, we have to apply the concepts of tracing to the inception of title rule in order to determine the correct characterization of the property.  Although the concepts of tracing could encompass volumes of other posts, simply put tracing follows the changes of the original property to its current state.  So, if the bank account that was opened prior to marriage was closed out to purchase a car during the marriage, and the tracing concepts are satisfied, then the care would remain separate property under the inception of title rule and tracing concepts.

 

 

Credit Rating and Divorce

Divorce can be a trying time on your credit as well as your finances and emotions.  A vindictive or spendthrift ex-spouse can incur debt on your joint accounts and destroy your credit rating during hte divorce process.  I fyou are not able to pay a joint account in full, inquire as to whether you can maintain a balance on the account after it is closed to prevent the situation from gettng worse. 

Tips for dealing with your credit during a divorce:

  • Get a copy of your credit report and familiarize yourself with everything in it.
  • Close all accounts that you do not need or use.
  • If you don't already have one, apply for a credit card in your name while you can.
  • Close all joint accounts and credit cards as soon as possible.

Keep in mind that many of the courts in Texas have orders that prohibit accounts from being closed or limited while the divorce is pending.  So, either take these actions before the divorce is filed or you may need to seek court approval to do so. For example, see the Collin County Standing Order that applies to all pending divorces and my prior post on this topic: Collin County Texas Divorce Standing Order

Your credit report shoudl help you discover any outstanding debts that need to be addressed as part of the divorce process.  Consider using marital assets or funds to pay off joint debts so each spouse can start over with a clean slate.

Once the divorce is finalized, use credit cards sparingly.  To establish or maintain a good credit score, pay off balances on time every month. 

If you need to use credit for short-term liquidity, then you may be better off refinancing your home and avoiding balances on credit cards.  Benfits of home financing include deductibility of the mortgage interest and a lower interest rate.

 

Divorce Business Valuation Approach

Calculating the value of a business can be one of the most important parts of a divorce because a closely-held business may be one of the most significant assets of the marital estate.  The best approach to such valuation is to hire an independent business appraiser—a CPA with an Accredited in Business Valuation (ABV) credential or a certified professional, like a Certified Business Appraiser (CBA) or someone recognized by the American Society of Appraisers (ASA).  Such expert will begin by obtaining all business books and records, tax returns, and financial statements and reports for at least the last five years.

Using this data, the appraiser will determine the company’s intangible and tangible net assets, an appropriate rate of return for them, and will calculate excess earnings in accordance with various accepted methods.

After finding a proper capitalization rate for the excess earnings (that which remains after taking into account normal costs, return on assets and salaries), the appraiser can place a value on the most contentious aspect of business valuation, the intangible asset known as “goodwill.”

"Commercial goodwill” is the capacity of a business to attract new customers, or keep old ones due to great locations, a reputation for superior service or skill, or anything else that influences a person, supplier or other business to continue a commercial or professional relationship. “Personal goodwill” describes the nontransferable ability of an individual to attract and maintain customers or clients due to his or her skill or reputation for honesty, intelligence, craftsmanship.

 

 

Question to Dallas Divorce Lawyer: My spouse got in a car wreck, can they take my separate property?

Recently I had a potential Dallas divorce client present the following scenario to me.  Wife was involved in an at-fault car accident.  Wife is sued by the other driver.  Husband is concerned that the person his wife was in an accident with will go after "all" the property they own, even husband's prized baseball card collection he had before marriage.  The question then became, can they take my separate property for my wife's negligence?

There are two steps for determining what marital property can be seized and sold to satisfy a liability created during marriage.  First, determine whether the property in question (to be seized) falls within an overall class of marital property that would be liable for or exempt from seizure under the Texas Family Code

For a debt arising out of a tort (in this case negligence in a car wreck) the at-fault spouse's separate property can be seized to satisfy the debt.  In contrast, the separate property of the not-at-fault spouse (in this case, Husband's beloved baseball card collection he owned prior to marriage) is not subject to seizure to satisfy the debt arising out of the tort.

So, bottom line, the answer is NO.  The separate property of a not-at-fault spouse is not subject to seizure for a liability arising out of a tort committed by the other spouse. 

Business Valuation in Divorce -- List of Documents Needed

In any divorce where one of the spouses owns a business interest, that interest must be valued.  Usually in Dallas County Texas divorces, the attorneys will hire a forensic business valuation expert with ABV accreditation to perform such valuation services.  That expert will need certain documents in order to perform his valuation, including:

Financial Statements for Typical Corporation

  • Balance sheets, income statements of changes in financial position, and statements of stockholders’ equity for the last five fiscal years.
  • Income tax returns for the same years
  • Latest interim statements and interim statements for comparable period(s) of previous year

Other Financial Data

  • Summary property, plant, and equipment list and depreciation schedule
  • Aged accounts receivable summary
  • Aged accounts payable summary
  • List of marketable securities and prepaid expenses
  • Inventory summary, with any necessary information on inventory accounting policies
  • Synopsis of leases for facilities or equipment
  • Any other existing contracts (employment agreements, covenants not to compete, supplier agreements, customer agreements, royalty agreements, equipment lease or rental contracts, loan agreements, labor contracts, employee benefit plans, and so on)
  • List of stockholders, with number of shares owned by each
  • Schedule of insurance in force (key person life, property and casualty, liability)
  • Budgets or projections, for a minimum of five years (if management prepares)
  • List of subsidiaries and/or financial interests in other companies
  • Key personnel compensation schedule, including benefits and personal expenses

Company Documents

  • Articles of incorporation, bylaws, and any amendments to either
  • Any existing buy-sell agreements, options to purchase stock, shareholder agreements, restrictions on transfer, or rights of first refusal
  • Franchise or operating agreements, if any

Other Information

  • Brief history, including how long in business and details of any changes in ownership and/or any bona fide offers recently received
  • Brief description of the business, including position relative to competition and any factors that make the business unique
  • Marketing literature (catalogs, brochures, advertisements, and so on)
  • List of locations where company operates, with size and recent appraisals
  • List of competitors, with location, relative size, and any relevant factors
  • Organization chart
  • Résumés of key personnel, with age, position, compensation, length of service, education, and prior experience
  • Personnel profile: number of employees by functional groupings, such as production, sales, engineering/R&D, personnel and accounting, customer service/field support, and so forth
  • Trade associations to which the company belongs or would be eligible for membership
  • Relevant trade or government publication (specially market forecasts)
  • Any existing indicators of asset values, including latest property tax assessments and any appraisals that have been performed
  • List of customer relationships, supplier relationships, contracts, patents, copyrights, trademarks, and other intangible assets
  • Any contingent or off-balance sheet liabilities (pending lawsuits, compliance requirements, warranty or other product liabilities, estimate of medical benefits for retirees, and so on)
  • Any filings or correspondence with regulatory agencies

Download pdf here: Preliminary Documents and Information Checklist for Business Valuation of Typical Corporation or Business Entity

View online here:  Preliminary Documents and Information Checklist for Business Valuation of Typical Corporation or Business Entity

Minimizing Your Business Value in Divorce

When spouses own a business and they are getting divorced, the value of the business becomes a major focus of the division of property.  Dallas Texas Board Certified Divorce Lawyer Michelle May O'Neil explains the concepts of valuation of a closely-held business entity that affect and even minimize the value of a closely-held business entity:

Valuing a business is a complex, and often expensive part of a divorce.  A business consists not only of tangible assets like buildings, bank accounts, inventory, tools, fixtures, furniture and machinery; but also, intangible ones such as mortgages, leases, patents, trademarks, unlisted stock, skilled labor, accounts receivable and most notably, “goodwill.” A business is valued usually based on the fictional assumption of a sale between a willing buyer and willing seller.

The most common legal concept that affects the value of a closely-held business is the distinction between the personal goodwill and commercial goodwill of the business.  The personal goodwill is that goodwill attributable to the person of the business owner.  Take a small bookkeeping firm, for example, owned by a wife.  Most of her clients do business with her company because they like her and trust her work.  her business has no reputation separate from her.  That value of the business attributable to her presence is personal goodwill.  The value of a business attributable to personal goodwill is the spouse's separate property.

Commercial goodwill, on the other hand, is that  goodwill that exists independent of the business owner.  It is the independent reputation of the ABC Company that exists separate from the business owner.  The value of a business attributable to the commercial goodwill is community property if the business would otherwise be community property.

Also diminishing the value of a business is the frequent occurance where a business remains subject to the control of multiple owners.  This discounts the value to any one of the owners for lack of control.

Another factor that decreases the value of a business involves marketability, which is defined as the ability to convert an investment into cash quickly at a known price and with minimal transaction costs. The more difficult a business would be to sell, the greater the discount for marketability.

Many businesses have "Buy/Sell Agreements".  These cannot be relied upon to calculate a business' value.  Such agreements typically protect the majority partner interests and rarely reflect actual value.

The best way to approach valuation of a business entity in a divorce is to hire an independent business appraiser—a CPA with an Accredited in Business Valuation (ABV) credential or a certified professional, like a Certified Business Appraiser (CBA) or someone recognized by the American Society of Appraisers (ASA).

Keeping Business Alive During Divorce

Divorce is a hard enough time but when you own your own business, managing your divorce and keeping your business alive can be extra challenging.  Here are some tips from Board Certified Dallas Family Lawyer Michelle May O'Neil of O'Neil Anderson:

  • Be an open book.  Don't try to hide anything from your spouse.  When discovered, the divorce judge may very well impose greater punishment than the value hidden.
  • Hire a good forenic accountant to evaluate the business.  If the business is community property, the value of the business to the community estate will be an essential question in the divorce.
  • Know the difference in personal goodwill and commercial goodwill and how that difference may affect the consideration of your busines sin the division of your community estate and divorce.
  • The declining economy may have removed much of the liquidity from your business, which may affect the cash available to pay the increased expenses of separating and paying divorce lawyers.
  • If both spouses work in the business, it is best to pick one who will stay in the business and one who will exist.  Rarely can people who cannot stay married to each other remain business partners.

How to get the property you want and help keep costs down.

As a Dallas divorce lawyer, one of the most frequently asked questions I receive is how can a client control the costs of his or her divorce.  Understandably, clients expect top notch service in a cost effective manner.  One of the more costly aspects of any divorce involves dividing up the community estate.  I recently came across a great blog post that offered some practical ways to help keep costs down in dividing the community estate.  Although the focus of the post dealt with dividing personal property contained in the home, a lot of the suggestions are applicable to dividing other parts of the community estate.  Here are the tips:

1.  One spouse makes two lists of the personal property.  The lists should contain property roughly of equal value and the spouse who didn't make the list gets to pick which list of property they want.  Because the spouse who didn't make the list gets to pick first, there is an incentive to make the lists as equal as possible --- otherwise the drafting spouse will get burned in the process. 

2.  Hold a silent auction.  This creative method allows the parties to ensure they get the property that they really want.  In the silent auction approach, each party blindly puts a dollar value next to a piece of property that is listed out on a sheet.  Since the parties don't know what dollar amount the other placed on the property, the process is pretty fair to all involved.  The spouse with the highest "offer" on a certain piece of property gets to keep it.  Once the auction is over, then the parties add up the total winning bids and divide the property accordingly.

3.  Arbitration.  Alternative dispute methods, such as arbitration, are frequently used in divorce cases.  Although there is a cost associated with using alternative dispute methods, couples can use an arbitrator to divide the community estate which is typically less expensive than presenting the matter to a judge.

4.  Rotating lists.  In this method, the parties simply make a master list of all their property and then take turns selecting one item at a time that they want to keep.  Spouses can simply flip a coin to see who gets to go first. 

Bottom line is that there are many creative ways to divide up property fairly, and in a cost effective manner.  Hat tip to the Minnesota Divorce and Family Law Blog for the idea behind this post.

 

 

Can the Divorce Judge Make Me Turn Over My Business' Cash to My Spouse?

A Dallas Divorce client raised an important question this week.  She owns a small professional practice that is an S-corporation.  Her business has some cash flow that allows her to pay the business expenses and payroll, but not much extra.  Her husband requested the Dallas Divorce Judge to make the wife turn over the cash she presently had in her business to help pay the husband's marital debts.

In a Texas divorce, a judge may only award shares of corporate stock in a divorce, and may not invade the corporate assets. Moreover, a judge may not divest a spouse of separate property corporate stock and award it to the other spouse. Retained earnings (cash) of a company are a corporate asset and are not marital property, either separate or community. The fact that the corporation is a Subchapter S corporation does not determine who owns the corporation’s earnings. A corporation may, in its discretion, distribute its income to its shareholders, but it is not required to do so. Further, it cannot be compelled to do so by a divorce court that lacks jurisdiction over the corporate entity. The shareholder in a Subchapter S Corporation has no greater rights over corporate property than a shareholder in any other corporation.

See  McKnight v. Mcknight, 543 S.W.2d 863 (Tex. 1976); Thomas v. Thomas, 738 S.W.2d 342, 343 (Tex. App. – Houston [1st Dist.] 1987, writ denied).

Alter Ego and Piercing the Corporate Veil in the Context of Divorce

Businesses can pose special challenges upon divorce. As Dallas divorce attorneys, we deal with these issues in many of our cases, with businesses acquired during the marriage and also businesses owned by one spouse before marriage.

Texas law typically treats corporations, partnerships, and other types of businesses as a separate legal entity – existing apart from shareholders and partners. Because these businesses are separate legal entities, only the spouse’s interest in the corporation, partnership or other business is up for division by the divorce court. This means that specific corporate assets are often off-limits in a divorce action. But, there is an exception to this rule when alter ego can be established.

If the business is found to be the “alter ego” of a spouse, divorce courts can “pierce the corporate veil” to move assets out of the corporation and divide them between the parties as part of the shareholder's community estate. A finding of alter ego sufficient to justify piercing in the divorce context requires the trial court to find:

 

 (1)       unity between the corporation and the spouse such that the separateness of the corporation has ceased to exist, and

 

(2)        the spouse's improper use of the corporation damaged the community estate beyond that which might be remedied by a claim for reimbursement.

 

The concepts of alter ego and piercing are applied in divorce cases to achieve an equitable result, that is, a just and right division of the marital estate. Generally, the divorce court will pierce to avoid leaving the community estate with virtually no property.

 

Whether you are a business owner, spouse of the business owner, or the attorney representing either party, when a business interest is part of the community estate, or owned by one spouse during the marriage, keep the equitable principles of alter ego and piercing the corporate veil in mind when evaluating the strategy for a divorce proceeding.

Sweating the Small Stuff

In some cases, dividing the small stuff in a divorce can be at least as costly and time consuming as dealing with the big stuff.  People often have an emotional attachment to the small stuff even though the items may not have monetary value. 

The small stuff, called "personal property", includes items such as dishes, linens, clothing, knick-knacks, furniture, art, computers, and even the family pets. The personal property divisible during divorce only includes those items purchased during the marriage that are not gifts or inheritance.  Items received as a gift, such as jewelry, would be considered the separate property of the person and not subject to division in the divorce.

The first step in dividing the personal property is to make a list of all of the "stuff" the spouses have and assess a value for each item.  Usually the value is what the item could actually sell for (like at a garage sale) . Then, the spouses should identify the "stuff" that each person wants.  For items desired only by one person, the division should be easy. 

If there are items that each person wants, several methods of negotiation can be used.  For example, one judge in Collin County often orders the parties to participate in the "coin flip" method.  So, one spouse flips the coin, the other spouse "calls it" heads or tails to pick a disputed item on the list.  Then the spouses take turns picking an item until all of the items are gone.

If the spouses are unable to reach an agreement on how to divide personal property, the issues can be presented to the judge in a trial for the judge to divide.  When this becomes necessary, I advise clients to think about division of personal property from a cost-effectiveness standpoint.  Often, the cost incurred in attorneys fees to argue over division of the personal property may very well exceed the value of the property or even the cost that a spouse might incur to replace the item or items.

See our prior article Custody Suit Over Pet Gets Expensive.

Hat tip to Daniel Margolin of The Oregon Divorce Blog for his post entitled How to divide personal property in a divorce for the idea for this article.

How to Divide Marital Property in a Dallas, Texas Divorce

Part of any divorce in Dallas Texas is dividing the marital estate. A marital estate includes both the assets and debts that are considered community property and does not include any separate property assets of either spouse.

1.  Identify the property.

The first step in dividing the marital estate in a divorce is to identify all of the property that either spouse owns, without regard to when or how the property was acquired.

2.  Characterize the property.

The second step in dividing the marital estate involves characterizing the marital property as either community property or separate property. Community property includes any asset that was obtained during the marriage. For example, a person's earnings received during the marriage are community property so anything purchased with those earnings would also be community property. Any asset owned before the marriage or acquired through gift or inheritance would be that spouse's separate property and would not be subject to division by the divorce court. Likewise, any debt incurred during the marriage based on the spouse's credit would be a community debt. Any debt that was obtained prior to the marriage or during the marriage but where the creditor agreed to look only to the spouse's separate property for satisfaction, the debt would be separate.

3.  Value the community property.

Before a court -- or the parties in negotiations -- can assess whether a division of the marital estate is "just and right" under the law, a value must be assessed to each asset. For example, a residence or antique collection may need to be appraised. Often the marital estate will own an interest in a business entity, so the business entity will need to be valued. Pension plans can be troublesome to value because of the future time value of money. Debt values also need to be obtained.

4.  Undertake a just and right division of the community estate.

The legal standard for division of property in Texas is that the division must be "just and right". The courts are required to begin with a 50/50 division of the entire estate (assets and debts) and adjust from there based on whatever equities exist in a particular situation. Such equities may include that one spouse has a disability, or the other spouse has much greater earning capacity. Custody of children and the size of a spouse's separate estate can also be considered. The division does not have to be half of each asset. Much like a balance sheet in the business context, one asset can be awarded to one spouse and another asset can be awarded in its entirety to the other spouse with an adjustment for the value of each asset. Also, one asset may not be worth the same to a particular spouse as another asset. One spouse may value cash in the bank more highly and the other spouse may value maintaining retirement assets. All of these factors must be considered in the division.
 

Am I still entitled to my ex's social security benefits after our divorce?

I recently came across an excellent article on the Wall Street Journal's website entitled, How Divorce Affects Your Social Security (Or Not).  As a Dallas divorce lawyer, I am frequently asked about post-divorce entitlement to social security benefits.  From the outset, it should be noted that unlike most other areas of martial property law, benefits arising from the Social Security Act are preempted by Federal Law from being characterized as community property.  Because of this preemption, we have to look to federal law to determine what affect divorce plays on social security benefits.

In general, in order to be permitted to collect benefits under your ex-spouse's earnings all five of the following must be true:

  1. You marriage was at least ten years in length;
  2. You cannot have remarried since your divorce;
  3. You are at least 62 years old;
  4. Your ex-spouse is entitled to social security benefits; and
  5. The benefits you would be entitled to based on your own work history are less than the benefits you would receive based on your ex-spouse's work history.

So, if you meet all five of these requirements, then you'll likely be entitled to up to 50% of your ex's social security benefits.  Note that the amount your ex is entitled to as the divorced spouse does not have any impact on the benefit amount the other spouse receives.  For an "official" explanation of the above, check out the Social Security Administration's website

Hat tip to Kelly Greene at the Wall Street Journal for the idea behind this post.

Fair market value vs. Intrinsic value: Which one to use?

I received a question from a client today asking how the court would determine the value of the piece of property in the community estate.  Often times, the parties will litigate over the value of a piece of property, so it is important to know how, in the absence of an agreement, the court will determine a property's value.

As a general rule, property is valued according to its fair market value as of the date the marriage is dissolved.  Texas courts have routinely defined fair market value as the price the property will bring when it is offered for sale for one who desires, but does not need to, sell, and is bought by a person who desires, but is not required to, buy.

If a piece of property doesn't have a fair market value, the property can be valued using its intrinsic value.  The intrinsic value of property is the actual monetary value of the property's use to the owner, excluding any fanciful or sentimental consideration.  In determining intrinsic value, the fact finder cannot consider any evidence of the property's fair market value, but can consider the property's original purchase price, its replacement cost, its uses, and any other facts that might shed light on its intrinsic value.

In sum, the majority of the time the court will determine value by using the fair market value approach at the time the divorce is granted.  Obviously parties frequently have differing opinions as to property values, but using the fair market value approach is a relatively objective means to obtaining a value.

Will it be held against me if I get another woman pregnant before my divorce is final?

I frequently get questions from potential clients about what are the effects of adultery in the outcome of a divorce.  Recently I was asked: "Will it be held against me if I get another woman pregnant before my divorce is final?"  This post will be one of several where I'll answer questions I receive from the trenches.

Texas is a no fault divorce state which essentially means that neither party necessarily has to prove the other did something "wrong" causing the divorce.  However, fault grounds often arise in divorce proceedings and the court will consider them in dividing the community property. The division of property under the Texas Family Code has to be "just and right" - not necessarily a 50/50 split.  A man and wife are still considered married until the court enters a final decree of divorce, therefore getting another woman pregnant before your divorce is final is considered adultery.  So, what is the effect?

The court will take the adultery in consideration when dividing up the community property. Certain counties consider adultery more heavily than others when dividing up the community estate.  Some counties take a "what's the big deal" approach and others are more conservative.  So, if you get another woman pregnant while waiting on your divorce to be final, its possible the court will award a disproportionate share of the community estate to the other spouse (or quite possibly, stick the adulterer with more debt).

 

 

File Breach of Contract Suit In Any District Court

Houston Court of Appeals holds that any district court has jurisdiction to hear breach of contract actions based on provisions in a divorce decree. Chavez v. McNeely ___ S.W.3d ___, 2009 WL 1331854 (Tex. App.—Houston [1st Dist.] 2009, no pet. h.) (5/14/09)

Facts: In 6/01, husband and wife divorced. On 6/29/01, district court entered an “Agreed Final Decree of Divorce.” That agreement required wife to provide as much “as possible” for her husband’s needs, “limited only by her personal financial situation.” In 7/03, husband sued wife for breaching that provision in same district court. In 4/09, husband nonsuited his case and re-filed in Waller County. Trial court rendered judgment for husband on breach of contract. Wife appealed, claiming that trial court lacked jurisdiction and that the agreement was unenforceable.

Held: Reversed and rendered.

Court of Appeals Opinion: Trial court is a court of general jurisdiction under Art. 5, § 8 of Texas Constitution. Therefore, there is a presumption that it has jurisdiction unless exclusive jurisdiction had been conferred to the district court that rendered the decree. Under TFC § 9.001, a party “may request enforcement” of a divorce by filing suit in the court that rendered the decree. “May” is permissive, not mandatory. Therefore, the original district court did not have exclusive jurisdiction. Contracts are enforceable only if they are definite enough that a court can understand the parties’ obligations. Courts have held terms such as “as much as needed” and “fair market value” to be too indefinite to enforce. A requirement that wife provide as much as possible is also too indefinite to enforce. Accordingly, trial court erred in rendering judgment for husband.

Interesting distinction in Chapter 9 – that you can file a breach of contract action for enforcement of the divorce decree in a court other than the court that rendered the decree. I, a board certified family law specialist in Texas, wonder if this case will have the effect of encouraging forum shopping?

This commentary originally appeared in the June 2009 Section Report of the State Bar of Texas Family Law Section, where I serve as guest editor.
 

Divorce Recession -- Cold as Ice or Hot as Ever?

It seems like its everywhere.... reports that divorce rates are down.  Is it the great divorce recession of 2009?  Are spouses everywhere deciding that they'd rather stick out their lukewarm marriages rather than divide in half the what's-left-half of what they used to have before the economy went down the tube?  (And, did that even make sense?)

The Wall Street Journal today (July 13, 2009) heralds "What God Has Joined Together, Recession Makes Hard to Put Asunder".  Reporter Jennifer Levitz cites to spouses having to live together in the same house while getting a divorce.  One couple discussed how they work out mommy upstairs and daddy in the basement arrangements, including discussing their new dating woes, scheduling dates at different places so the spouses don't run into each other, and deciding how to handle babysitting so both spouses can go out with their new paramours on the same night.

The LA Times posits today (July 13, 2009), "Divorce and hard times: Economic woes often cause marital splits, right? Well, not so fast."   This recession is so bad that you can count divorce lawyers among those professions that have taken a hit, cites reporter Gregory Rodriguez. "Can't stand your boring husband? Thinking of calling it quits? Well, you should have mustered the nerve to leave him well before this economic crisis. Now you might not be able to afford to live without him, literally."

Ond on July 4, 2009, Newsday wondered whether the Recession Adds To the Financial Burden of Divorce, pointing to a couple who wanted to divorce and split the $1.5 million in equity in their home until their house value plummeted, making the couple question whether divorce was the best option or whether they should stay in the marriage for the (lack of) money.  Falling pension values also present a problem in providing property to divide in a divorce.

The Miami Herald questions "Is divorce rate a leading economic indicator?"  Michael Gilden says,

The depths to which our country's economy has sunk over the past year may have a correlation with this recent downward divorce trend. Many divorce lawyers had always maintained the opinion that divorce law is a recession-proof specialty. In good economic times, people tend to seek freedom from bad marriages so as to enjoy their wealth without the ties that bound them. In bad economic times, couples fought about having less money, which is also one of the leading causes of divorce.

The current economic climate, however, is like nothing anyone has seen in this country for generations. With the decline of the housing market, divorcing couples are no longer assured of a division of equity in what was most people's most valuable asset, their home. Without the proceeds from the sale of a marital residence, many people did not know where they would acquire funds to purchase a new home for themselves. The situation only became worse as the stock market plummeted and peoples 401(k)'s became 201(k)'s and as securing loans and credit became nearly impossible. At some point, there essentially became an economic disincentive to seek a divorce.

So, is it really true that people get divorced when times are good and more people get divorced when times are bad?  Or, are people waiting out the tidal wave of the recession in their lukewarm marriages, waiting for the first glimmer of hope in the economy to kick their spouse to the curb nad leave with half-of-what's-left in the dawn following the storm?

As a board certified divorce specialist for 18 years and a Dallas Divorce Lawyer, I see the 2009 divorce trends as being abnormal, but not necessarily down from prior years.  For example, usually Janaury is a big month for filing new divorces because folks usually make new year's resolutions to "finally do something".  This year, January was a lackluster month. But, for the first half of the year, my practice is only off by about 10% from last year.

I think some of the analysis of whether the economy is affecting divorce depends on the economic status of the couple.  For high income/asset couples, the issues becomes one of prioritizing where they spend their less-than-before decreased discretionary spending.  They might rather spend their income on a vacation, new car, or fine piece of jewelry.  But, if they want it badly enough, they can shift those funds to accommodate a divorce.

On the other hand, folks who live close to their means, with little in the way of a rainy-day-fund, may not have the luxury to reprioritize their finances to add an additional residence for the spouses leaving the residence and two divorce lawyers to the budget.  Those folks may be sitting still until the economy glimmers hope.

If you are the high earning spouse who can afford to take the house or stocks (or other devalued asset) and hang on to it until after the economy recovers.  Where, for the housewife or lower earner spouse who might rely on the division of assets for survival post-divorce, this is definately not the time to get divorced.

It may hold true, as Gilden states, that you can just the beginnings of recovery by watching for divorce rates to go back up, when people finally say they've had enough of this economy to wait on getting a divorce.

For more on this discussion, see my post April 30, 2009: Is Divorce A Good Idea in This Recession? 

See my other blog posts on the economy and divorce:

January 12, 2009: Increase in Child Support Modifications Seen in Dallas Divorce Courts

December 30, 2008: Divorce and Real Estate Market

Now is a good time for a Dallas Divorce

October 21, 2008: Financial Infidelity: Money and Marriage

October 8, 2008: Dallas Couples Shirking Divorce Amid Economic Woes

September 29, 2008: Bad Economy Makes Divorces Tougher

 

'Til death do us part, or until I sue you.

On July 8, 2009, the Tyler Court of Appeals affirmed a judgment for monetary damages in favor of one spouse against the other.  In Colvin v. Colvin, the husband sued his wife for personal injury damages caused by his wife in an automobile collision.  Wife was the driver of a car and the husband was the passenger.  Wife and a third party were in a collision, third party sued wife, and then husband intervened in the lawsuit and sued third party and wife (husband and wife were married at the time and are still so). 

The trial court awarded damages to husband against wife, and wife appealed.  On appeal, the Tyler Court Appeals affirmed the trial court's ruling.  Interestingly, the Colvin opinion does not mention whether or not husband and wife are still married. 

The Colvin opinion presents an interesting situation.  Under Texas law, community property is divided into two types: (1) joint management; and (2) sole management.  The community property characterization is important because if one spouse is held liable for a tort (i.e. negligence) during marriage, then the court may satisfy the judgment by looking to the community property jointly managed by the spouses as well as the sole management community property of the non-culpable spouse.  In result in Colvin is that in a sense the trial court could look to the community property jointly managed by the husband and wife, and the husband's sole management community property, to satisfy the judgment.  

As a Dallas divorce lawyer, our clients frequenltly are unaware of the concepts of joint and sole management community property.  In a nutshell, if either spouse is held liable for tortious conduct during marriage, then all property other than the non-culpable spouse's separate property may be used to satisfy the judgment. 

No Debtors Prison for Failing to Make Car Payment

A new case out of the Tyler Court of Appeals hold that a contempt order ordering imprisonment for failure to make car payments required by a divorce decree is void as imprisonment for debt. Also, the court holds that  a contempt order may not be used to make substantive changes to divorce decree. In re White, ___ S.W.3d ___, 2009 WL 1153396 (Tex. App.—Tyler 2009, orig. proceeding) (4/30/09)

Facts: Father and mother divorced on 12/29/05. Trial court appointed both JMC but gave father exclusive right to choose child’s primary residence. Trial court required both parties to give 60 days’ notice of intended residence change and father to make payments on wife’s car. Trial court ordered that the father make child available at his residence for mother to pick up. In 2006, mother filed a motion for enforcement. Trial court found that father had fraudulently notified mother that he was moving, had not surrendered child to mother at court-scheduled times and had failed to make car payments. Trial court held father in contempt and ordered him confined for 30 days. It suspended based on father paying attorney’s fees and mother’s loss resulting from repossession of car. It also required that the delivery of the child be limited to Anderson County. Father paid funds into trial court’s registry and petitioned for mandamus for district court to vacate contempt finding.

Held: Mandamus granted as to the car payments and methods of access to child and denied for the other findings of contempt.

Tyler Court of Appeals Opinion: A court cannot order confinement on the basis of a debt. The car payments are part of a division of property; they are not assets held in trust. Therefore, the obligation to make payments is a debt even though a divorce decree created it. Since it is not enforceable by confinement, the trial court abused its discretion in the contempt order. The only way to make substantive changes to a divorce decree is under TFC §156.001. As limiting delivery to Anderson County was a substantive change, trial court abused its discretion in its probation order. The contempt finding for husband fraudulently claiming a change of address was justified.

Any Dallas family law attorney knows that our country was formed based on the concept that a party could not be imprisoned for failure to pay a debt. We do not have debtor's prison in America! Just because a debt obligation is listed in a divorce decree makes it no less a debt. Family law attorneys should counsel their clients about the seeming lack of enforceability of the division of debts and structure the settlement of the estate in such a way that protects the enforceability of the court’s orders. For example, if the decree had left the car payment as wife’s obligation and ordered husband to pay maintenance in the amount of the car payment to wife, the wife would have had better enforceability options. Or, the car payment could have been awarded as additional child support. But, simply putting a debt pay-ment in the division of assets is insufficient to protect the client on whose behalf the payment is to be made.

This commentary originally appeared in the June 2009 Section Report of the State Bar of Texas Family Law section, where I serve as guest editor.
 

Economic Contribution Statute Repealed Hooray!

The Texas Legislature repealed the economic contribution statute, which has been a bane to Texas Family Law Attorneys since it was originally passed.  Instead, Senate Bill 866 replaces economic contribution with a system of reimbursement and offset based on equitable principles.  Further, it clarifies that the party seeking the offset has the burden of proof. 

Click here to see the text of SB 866.  This law is effective on September 1, 2009 to any  newly filed case.

A claim for reimbursement under the new section 3.402 of the Texas Family Code includes:

  1. payment by one marital estate of the unsecured liabilities of another marital estate;
  2. inadequate compensation for the time, toil, talent, and effort of a spouse by a business entity under the control and direction of that spouse;
  3. the reduction of the principal amount of a debt secured by a lien on property owned before marriage, to the extent the debt existed at the time of marriage;
  4. the reduction of the principal amount of a debt secured by a lien on property received by a spouse by gift, devise, or descent during a marriage, to the extent the debt existed at the time the property was received;
  5. the reduction of the principal amount of that part of a debt, including a home equity loan:
    1. incurred during a marriage;
    2. secured by a lien on property; and
    3. incurred for the acquisition of, or for capital improvements to, property;
  6. the reduction of the principal amount of that part of a debt:
    1. incurred during a marriage;
    2. secured by a lien on property owned by a spouse;
    3. for which the creditor agreed to look for repayment solely to the separate marital estate of the spouse on whose property the lien attached; and
    4. incurred for the acquisition of, or for capital improvements to, property;
  7. the refinancing of the principal amount described by Subdivisions (3)-(6), to the extent the refinancing reduces that principal amount in a manner described by the applicable subdivision;
  8. capital improvements to property other than by incurring debt; and
  9. the reduction by the community property estate of an unsecured debt incurred by the separate estate of one of the spouses.

The new law further allows for offset of competing reimbursement claims against each other when appropriate.  Any benefit for the use and enjoyment of property may be offsent against a claim for reimbursement for expenditures to benefit a marital estate, except a separate estate of a spouse may not claim an offset for use and enjoyment of a primary or secondary residence owned wholly or partly by the separate estate against contributions made by the community estate to the separate estate.

Where funds are sought to be reimbursed for improvements to another marital estate, the court is to use the standard of enhancement of value.

 

Tips to Surviving a Divorce

Recently I came across a blog discussing tips to surviving a divorce.  Interestingly, the blog wasn't written by an attorney but the divorce survival tips all come back to one thing - the importance of hiring a good lawyer.  The blog has some good tips that apply to a divorce in Dallas Texas which I will outline in the order they were presented.

  1. Hire a good divorce lawyer.  Hiring an attorney that is compatible with your personality is absolutely critical in protecting your rights and best interests during such a troubling time.  The right attorney serves not only as a mediator but also as an advocate of your interests.
  2. Keep written records of everything.  Keeping a journal of who said what and when often shows which of the parties is more organized.  Also, written records of conversations are helpful during the division of community property.
  3. Keep your cool.  Although this is a stressful time, keep in mind that everything you say or do is going to be looked at under a microscope.  If you lose your cool, you can stand to lose a lot.  Not only in terms of property, but also in custody determinations. 
  4. Read everything.  Obviously, a good attorney will ensure that you understand everything relating to the division of property and custody issues.  However, never assume that just because your attorney reads everything that you are not responsible for doing the same.
  5. No guilt trips.  This ties in closely with number three.  Remember, nobody likes a sneaky, passive aggressive person.  Communicate your concerns to your attorney in a direct manner.  Address any problems as they arise - not after everything has built up and is coming to a head.
  6. Never use children as leverage.  All to often we see clients who put their interests (i.e. revenge) before those of their kids.  Remember that the divorce is not their fault, and that you have absolutely nothing to gain (but very much to lose) by using your children as a bargaining tool.

Although these may seem like common sense, it is easy to forget them during a divorce proceeding.  A good divorce attorney who clicks with your personality will help you remember them.

Our firm would like to help you with your divorce.  We represent people getting a divorce in Dallas, Collin, Denton, and Tarrant Counties in Texas.

 

 

Hidden Assets in Divorce

Frequently we are asked what recourse is available when one spouse attempts to hide assets of the marital estate during a divorce.  Not only is such conduct highly unethical, it is fraudulent as well.  Typically a forensic accountant is called in to help search for hidden assets.  In our experiences, here are some reoccurring methods used to hide assets:

  • Purchasing lavish antiques, artwork or hobby equipment.  Often times property such as this is overlooked and undervalued;
  • Collusion with an employer to delay the payment of bonuses, stock options or raises;
  • Setting up a custodial account in the name of a child;
  • Repaying a "debt" to a family member or friend when such payments were no previously made;
  • Salary paid to a non-existent employee if the spouse is a business owner;
  • Money paid to close friends or family members for "business" services not actually rendered; and
  • Investment in municipal bonds or Series EE Savings Bonds for which no interest is reported on tax returns.

If you suspect you spouse is hiding assets it is a good idea to review all financial records prior to filing for divorce.  If you are responding to a divorce we suggest you retain the services of a qualified forensic accountant.

Is Divorce a Good Idea in this Recession?

I have been asked several times lately about whether it is a financially good idea or a bad idea to get a divorce during this recession.  Luckily, Texas and specifically the Dallas area, has not been hit as hard by the recession as other parts of the country.

Determining whether divorce is the right option for you requires weighing many different factors, including the financial impact of this decision on you and your family. It is no surprise that with the current state of our economy, the portion of the community estate most people leave their marriage with today is worth less now than it was in the very recent past. Whether it is a bad idea to get a divorce in the current economic climate depends, in part, on the types of assets that make up the community estate and the financial positions of the parties, namely, their immediate need for cash and liquid assets.

Often in a divorce, it is necessary to sell the marital residence and/or cash out an investment or retirement accounts. Now, with the current economy, these assets are worth less than they were in the past and will be again in the future. Frequently, in these tough financial times, people must sell their marital residence upon divorce because neither of them can afford it on their own. Cashing out retirement and other investment accounts upon divorce is also common due to increasing unemployment and the immediate need for cash. If selling or cashing out these assets at their current value is unavoidable, there are some definite economic disadvantages to getting a divorce right now.

 On the other hand, for those people in the financial position to hold on to these assets until the economy improves, it can give them more “bang for their buck” in the final property division. Since community assets are valued as of the date of divorce, these assets represent a smaller portion of the community estate now than they would have before the current economic downturn. The current economy enables people who can afford it the opportunity to obtain community assets in the final property division, like the marital residence or their entire 401(k) plan, at what is effectively a discount.
 

What Is a Forensic Accountant and Why is He Involved In My Divorce?

There are four issues involved in considering any division of property in a divorce.  First, the characteization of each asset must be established.  In other words, is the item community property -- something obtained during the marriage -- versus separate property -- something had before the mnarriage or through gift or inheritance?  Only community property items are divisible by the judge in a divorce. 

Second, what is the value of each item of property?  In order to determine whether a division of property in a divorce is "just and right" (the Texas standard) the judge must be able to compare the total value of the property awarded to each spouse. 

Third, are there any issues that would allow for a disproportionate division of property? Generally, Texas law requires a division of assets to start at 50/50, but allows for deviation from that standard based on various equitable factors.

The fourth factor is actually dividing the property.

In looking at the first and second factors -- characterization and valuation -- sometimes it is helpful to have a forensic accountant assist on the divorce team to evaluate various property division issues.

Consider the post from Alexis Dow on The Oregon Divorce Blog on When and How to Use a Forensic Accountant in Your Divorce:

A Forensic Accountant can be a great help to you and your attorney to assist in communication and explanation by creating, using and explaining visual displays for financial details.

Communication is fundamental to any human interaction. The ability to communicate clearly, concisely and in a way one’s audience can readily understand is an extremely important skill.

During a divorce, there is a need to communicate with opposing parties, attorneys, judges, and people in general. The stress and distractions of divorce can make communicating effectively a challenge. This is particularly true when trying to communicate the significance of property, income, and other information needed in divorce proceedings to attorneys, soon-to-be former spouses and possibly a mediator or judge.

Clearly laying out key ideas and arguments supporting divorce matters can be critical to successful negotiation or convincing the judge. Visual tools such as tables, charts and graphs can help make and emphasize key points. They can also be particularly helpful for laying out financial information. Clear communication can help achieve a satisfactory solution as soon as possible as both sides can clearly see the facts and figures.

Some of the areas where a CPA and forensic accountant can help develop and illustrate financial matters in a divorce include:
• Preparing a Marital Balance Sheet: Developing and presenting in tabular form a listing of assets and liabilities of each spouse before, during and after marriage and apportion assets and liabilities to each spouse based on the date and nature of property acquisition
• Determining Spousal interest in Marital Assets: Calculating the percentage owned by each spouse based on the timing of acquisition, use of joint funds to add to assets or to fund costs of assets and showing this information in a table or on a graph. For example, a 401(k) has a value at marriage, marital assets are used for additional investment, and then, after separation, individual funds add to the 401(k). During the period of ownership there are price fluctuations. The total marital value would need to be apportioned to reflect all the inputs. A second example, a home is owned by a spouse at date of marriage, it is rented during the marriage, but marital assets are used to pay shortfalls. Both the original owning spouse and the married couple now have an interest in the home. A third example is when spouses have separate checking accounts and each pays certain expenses related to a marital asset with one spouse paying more (possibly because that spouse earns more or has greater assets than the other spouse) creating a disproportionate interest in the asset.
• Calculating Controllable Cash Flow: Determining the total value of compensation, including perks and payment of personal items with business funds when a spouse owns a business and illustrating that information using a bar chart, pie chart, table or graph.
• Performing a Needs/Lifestyle Analysis: Calculating monthly needs for alimony payments and presenting this information in tabular form.

Other related services a forensic accountant can provide include:
• Valuing Spousal Interests in Businesses
• Analyzing personal expenses of business owner who denies income and available cash flow. Analyzing the personal expenses of a business owner who states there is little or no income to assist in proving the existence of positive cash flow.
• Tracing Assets: 1. Tracing the source of funds used to purchase assets during marriage; for example, one spouse owns a house at marriage, it is deemed separate property. That house is sold and the proceeds are used to buy stock, it would remain separate; 2. Following assets/income to determine if additional marital assets exist.
• Searching for Undisclosed Assets

When you want to communicate core financial issues in any dispute, contact a forensic CPA to help improve communication and facilitate resolution by providing clear visual displays of financial matters.

We have several forensic accountants that we routinely use as part of our divorce team.