Author Archives: Bryan Willis

Can I Divide My Retirement Account In A Divorce Without Paying Taxes?

Yes, if the transaction is properly structured then you can divide your retirement account in a divorce without paying taxes at the time of division regardless of the type of account.

The process for a tax free division in a divorce depends on the type of retirement account that you are dividing.

But first, let’s discuss when a division would be taxable as part of your divorce.

Withdrawals and Distributions Are Taxable In A Divorce

In some cases it might be tempting to simply take an early withdrawal from your retirement account then cut a check to your spouse as part of your divorce.

Taking the withdrawal or distribution from your retirement account would be a taxable event – meaning that you would owe taxes (and likely a penalty as well) for the amount of the withdrawal.

Since you took the withdrawal, you owe the taxes – even though you gave the money to your spouse as part of the divorce settlement.

Now, if you divided that same account through one of the tax free methods discussed below and your former spouse made the withdrawal after the divorce – then he or she would be liable for the taxes as well as any penalty for an early withdrawal.

Tax Free Division Of An Individual Retirement Account (IRA)

Individual retirement accounts are the easiest type of account to divide tax free in a divorce.

The only requirement to divide the account is that the final decree of divorce award a specific portion of the account, whether as a percentage or specific amount, to your spouse.

You then take the final decree to the financial institution managing your IRA. That institution will setup a new IRA in your former spouse’s name then rollover the specified portion of your IRA account into your former spouse’s IRA.

This rollover is done tax free as it is not a withdrawal or distribution.

Tax Free Division Of A 401(k) or Pension Plan

Achieving a tax free division of your 401(k) or pension type plan requires more effort.

In order to divide these types of retirement accounts tax free as part of your divorce, the division must be done under a Qualified Domestic Relations Order (“QDRO”).

A QDRO is a separate order issued after or at the same time as your final decree. The QDRO provides specific instructions to the plan administrator on how, when, and in what amount your retirement account should be divided.

Each QDRO must be custom drafted to the specific type of plan and in accordance with the specific plan documents and rules adopted by your employer’s retirement plan. This is why the QDRO route is more complicated than dividing an IRA.

Who Will Divide Our Property in a Texas Divorce?

Most Texas divorce cases will end with an agreement reached between the parties. In these cases, the parties decide how and when property will be divided between the spouses.

If the parties reach an agreement on property division, then that agreement will be reduced to writing in the form of an Agreed Final Decree of Divorce.

If the parties are unable to reach an agreement, then a judge will decide the issue of property division in your divorce after a trial.

Methods of Reaching An Agreement on Property Division

There are several different methods by which the spouses may come to an agreement on how they will divide their marital property. Which option is best will depend on the complexity of the estate, the spouses’s relative knowledge and understanding of the property, and the dynamics of the relationship between the spouses at the time of the divorce.

It may be possible for the spouses to reach an agreement on property division merely through informal conversations between their attorneys. In amicable cases where there is broad consensus on the issue of property division, this is often the case.

In other cases, the parties might reach an agreement on property division through an informal settlement conference. An informal settlement conference occurs when the spouses and their attorneys sit down together to try to reach a resolution without the presence of a third party.

Resolving the issue of property division through an informal settlement conference is common when the parties are relatively amicable but there are still significant disagreements on how they each believe property should be divided in the divorce.

If the parties are unable to come to an agreement on property division in their divorce on their own, then another option is to address the issue through mediation.

Mediation involves the use of a neutral third party (the mediator) who will facilitate negotiations between the spouses and attempt to get them to come to an agreement.

If the spouses reach an agreement at mediation, then that agreement will be reduced to writing by the mediator in a Mediated Settlement Agreement that is filed with the court. That agreement is then binding on the spouses.

What Happens If You and Your Spouse Do Not Agree On Property Division In Your Divorce

If you and your spouse cannot reach an agreement through negotiation, an informal settlement conference, or mediation, then a judge will decide how the property will be divided at trial.

The legal standard the judge will use to divide the spouses’s community property is a “just and right” division of property. This is an equitable standard which means that the judge has broad discretion in deciding how to divide the property.

You can read more about the Details of Dividing Property In A Texas Divorce.

If you would like to schedule a consultation to discuss your divorce case, then please send me an e-mail or send a request through my contact page.

Are Texas Teacher’s Retirement System Benefits Subject To Division In Divorce?

The Teacher Retirement System of Texas (“TRS”) provides retirement benefits for teacher’s across the State of Texas. It is one of the State’s largest benefit programs.

But are those retirement benefits subject to division in a divorce? The answer is, yes, they are subject to division to the extent that they are community property.

Note – this article discusses retirement benefits under the TRS system and not disability or death benefits.

TRS Benefits Can Be Community Property

The same community property rules that apply to other types of property apply to TRS benefits.

This means that there is a presumption that TRS benefits are community property. A teacher-spouse claiming that a TRS benefit is separate property during a divorce must show that the benefits were earned prior to marriage or that there was a marital agreement between the parties characterizing the assets as separate property.

To the extent the TRS benefits were earned during marriage, they are community property and subject to division during a divorce.

TRS Benefits Are A Defined Benefit Type of Retirement Account

Defined benefit accounts provide a fixed benefit for a period of time during retirement. The amount of the benefit is usually determined by a formula based on the length of the employee spouse’s employment and the employee spouse’s salary.

TRS retirement benefits are calculated based on a member’s salary during their 5 highest years of compensation. That average is then increased based on the length of service.

You can learn more about how benefits are calculated by visiting the Teacher Retirement System of Texas website.

TRS retirement benefits may be paid through a lump sum at the time of retirement or through installment payments.

What Part of TRS Benefits Are Subject to Division?

The process of dividing TRS benefits can be complicated.

To the extent that all of the teacher-spouse’s credit under the plan was earned through employment during the marriage, the entire benefit is subject to a just and right division during divorce as of the time of divorce. More on that later.

If some of the teacher-spouse’s credit in qualifying for benefits under the plan was earned through employment prior to marriage, then there is a formula to determine what portion of the benefit is community property and subject to division.

You take the total number of months that the teacher-spouse worked and earned credit during the marriage then divide that by the total number of months the teacher-spouse worked and earned credit. This gives you the percentage of the benefit that is subject to a just and right division during divorce as of the time of divorce.

The actual benefit the teacher-spouse is entitled to under this type of plan is usually determined by some formula involving years of service and salary. In addition, at the time of divorce, the teacher-spouse’s right to receive benefits may not be fully vested but the plan is subject to division regardless.

There are other issues that complicate the division of TRS benefits as well.

For example, the divorce may be years before any actual payments are due under the Teacher Retirement System of Texas plan.

In addition, any increase in the benefit’s the teacher-spouse will receive that is attributable to that spouse’s employment after divorce is his or her separate property and not subject to division. This is why the non-employee spouse’s interest is determined at the time of the divorce.

How TRS Benefits Are Divided In A Divorce

The legal mechanism for dividing TRS benefits in a divorce is through a Qualified Domestic Relations Order (“QDRO”).

The QDRO is a court order to the Teacher’s Retirement System of Texas directing them to make alternative payments of the teacher-spouse’s retirement benefits to the non-teacher spouse.

Texas law specifically allows for direct payment of those retirement benefits from the Teacher’s Retirement System of Texas to the non-teacher spouse.

Alternatives To Dividing TRS Benefits

In many cases, if the marital estate permits, it may make more sense to use an alternative to dividing TRS Benefits.

This does not mean that the non-teacher spouse is deprived of the financial value of his or her interest in the TRS Benefits. It merely means that the non-teacher spouse receives the economic benefit of that interest from another source.

For example, the non-teacher spouse could be “bought out” of his or her interest by the teacher-spouse. This could be by payment from separate property funds of the teacher-spouse or periodic payments after the divorce.

Another option is to award the non-teacher spouse offsetting property. In this case the non-teacher spouse receives other community property of equal value to his or her interest in the TRS Benefits rather than going through the process of dividing those benefits.

Divorce Concerns For High Net Worth Couples

When a couple with a high net worth files for divorce in Texas it often involves a number of unique issues and concerns. This articles highlights some of the issues and concerns that frequently arise in a divorce involving high net worth couples. Existence of Martial Property Agreements A divorce involving a high net worth… Continue Reading