Dallas Divorce Law Blog : Dallas Texas Divorce Lawyer & Attorney : O'Neil Attorneys Law Firm : TX Child Support & Custody Issues

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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. 

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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

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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).

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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.

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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.

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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).

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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.

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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.

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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.
 

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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.

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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.

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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).

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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.
 

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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

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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. 

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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.
 

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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.

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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.

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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.

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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.
 

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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. 

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