Category Archives: Property Division

Why Is My Spouse Entitled To Any Of My Retirement In A Texas Divorce?

You worked hard at your job. You saved money from the day you started. Lucky for your – your company had a 401(k) or pension plan match program so that 4% you stashed away for retirement was really 8%.

You were responsibly planning for retirement and felt like you were well on your way to a financially secure retirement. Then your spouse filed for divorce. Now he or she wants you to hand over half of your retirement account.

That doesn’t seem fair. How can that be?

Texas Is A Community Property State

Let’s start with the basics – Texas is a community property state. There is a presumption that everything you and your spouse own at the time of divorce is community property that is subject to a just and right division.

This includes retirement accounts regardless of whether it is a defined benefit plan (i.e. a pension) or a defined contribution plan (i.e. a 401(k).

All community property is subject to a just and right division during your divorce.

But You Started Contributing To Your Retirement Account Before You Were Married

In that case, assuming you also contributed during marriage, the retirement account would be a mix of separate and community property.

The good news is that there are specific methods and formulas for determining what portion is community and what portion is separate property.

The bad news is that this process is complicated and requires substantial documentation.

In this case, the community portion of the retirement account is subject to division but the separate portion is not subject to division in your divorce.

You can learn more about the details of dividing a retirement account here.

The Good News

What’s good for the goose is good for the gander. This means that your spouse’s retirement account is subject to these same issues.

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.

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