The Do’s and Don’ts of Asset Protection in Divorce – Part II

Here are some steps to take to protect assets during divorce…

DO identify your property

Due to Texas being a community property state, this will require an examination of all property owned at the time of the filing of any divorce by a qualified divorce lawyer. The lawyer will help you determine

whether the property is community property or separate property;

  1. whether the property is community property or separate property;
  2. how much that property is worth in order to determine the net value of the community estate; and
  3. what are the best options available to divide all of the community property between the spouses.

Both spouses have an ownership interest in all community property regardless of how title is taken. The presumption in Texas is that everything owned by either spouse at the time a divorce proceeding is filed is community property, unless it can be proven by clear and convincing evidence that it is, in fact, property owned by one of the spouses as his or her separate property.

This presumption will also apply to any debt or other obligations that the spouses have as of the date a divorce proceeding is filed. Furthermore, it will not matter whose name is on the asset or liability. If it was acquired or occurred during the marriage, it will be rebuttably presumed to be community property or an obligation of the community estate. Spouses do have an option to sign a post-marital agreement if they want to partition and exchange community property between themselves in effect converting community property to the separately owned property of each spouse.

Separate property is property owned by either spouse before marriage, family inheritances, gifts, and personal injury damages (except for loss in wages). Once separate property is filtered from the spouses’ estate, the community property is to be divided between the spouses depending upon the circumstances of the spouses at the time of the divorce. Essentially, the Texas Courts will divide all community property in an equitable manner – which does not always mean equally. In fact, the standard in Texas for the division of the community property estate is “just and right.”

DO keep records

Property division becomes complicated in Texas because high-net worth individuals typically have many different ways to hold their money and sometimes commingle community funds with separate property and vice versa. Trusts, LLCs, retirement accounts, stocks and bonds, corporations, closely held business interests, real estate, mineral interests and oil royalties – there are many forms in which property may be held, and knowing what and where everything is can be an arduous task.

An interesting example of how finances can become commingled is to imagine someone who establishes a 401(K) or other type of retirement account (Qualified Domestic Relations Order) at the age of 30, a few months before he marries. Any income on that 401(K) after he marries is community property. Unless clear records are kept, the commingling of funds may make it difficult to segregate the community portion from the separate portion.

Additionally, once you and your spouse agree on how to split any retirement accounts, you will likely need a QDRO (Qualified Domestic Relations Order) so that your plan administrator knows how to divide the interest between the spouses when the divorce is finalized.

DON’T get just one appraisal

Property valuation is imperative in a divorce proceeding. It is difficult, if not impossible, to negotiate a just and right property division without knowing what all of the community property is worth. This is like buying real estate – would you just trust the other side’s valuation of their property? Absolutely not. This is the time to hire an independent real estate appraiser.

The same logic applies to valuating professional practices, partnerships or family businesses. If the business is community property, in order for negotiations to proceed, both parties need a realistic idea of how much it is worth. Closely held business interests are complex and can fluctuate in value. Therefore, obtaining one or more appraisals allows everyone to gain a clearer understanding of the value of this particular marital asset.

DON’T assume you know your spouse

In all marriages, one spouse normally earns more than the other. If there is a large disparity in earning capacity, this can cause intense friction during the divorce process. One cannot assume to know the other’s thoughts, plans or secrets. Even if the marriage is dissolved simply because of waning affection as opposed to outright betrayal, there is no guarantee that you will be informed of your wife’s offshore bank account or your husband’s foreign assets.

Assume that your spouse has for some time been planning for the worst and proceed accordingly. This does not require distrust of everything said or being hostile during divorce negotiations; just be prepared to learn something new and potentially unpleasant about your former partner.

Hiring an independent investigator or a forensic accountant can help level the playing field. Each spouse is supposed to prepare a financial statement (in Texas it is called an Inventory and Appraisement) that will be exchanged with the other side as a part of the discovery process in a divorce proceeding. However, you can’t always know who is being entirely forthcoming. A forensic accountant can help reveal hidden assets. By reviewing financial records and pursuing legal options to require your spouse to disclose assets, you will protect your financial future and keep your interests intact going forward.

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