Understanding Separate and Marital Property
Texas is a community property state. That means that couples equally (50/50) divide marital property when they divorce.
- Community property generally refers to property acquired during the marriage. That includes houses, cars, bank accounts, furniture, and even collectibles such as art, guns, and furniture. Community property is presumed to be equally owned by each spouse and will need to be equitably divided by a court before a divorce can be finalized.
- Separate property refers to specific assets acquired before or during the marriage that are excluded from the community estate. Typically, this includes trusts, inheritances, or payments received from the settlement of personal injury lawsuits. However, because Texas is a community property state, all property is presumed to be community until any separate property is affirmatively proven to be separate by a preponderance of the evidence.
It's important to know that separate property can transform into community property over time depending on how it's handled.
For example, let's say that you buy a house by yourself before you get married, and only your name is on the deed. Now, suppose that, post-marriage, your new spouse pays for an add-on to the house. If the add-on contributes to the house's value, the judge may decide the home is marital property that you and your partner should split during property division, even if their name isn't on the deed.
However, courts usually try to split property as equitably as possible. If the add-on raised the home's value by 10%, for example, the judge might ask you to pay your soon-to-be-ex 10% of the home's value (if you want to keep it) or give them 10% of the profits (if you want to sell it).
Given this example, you can probably imagine how complicated high-asset divorce gets when a couple communally owns several pieces of high-value property or runs a business together. Prenuptial agreements can help make dividing property less of a hassle, but obviously, not everyone gets a prenup.
How Texas Courts Value Assets in a Divorce
High-net-worth divorces often involve valuable assets that are a lightning rod for disagreement during divorce. The value that a court assigns to a home, car, or collectible can mean the difference of hundreds of thousands of dollars in equity value assigned to one spouse or another when a divorce is finalized.
So, how do Texas courts value assets in a divorce?
Generally, Texas courts rely on fair market value to assign a value to property in divorces. For assets such as publicly traded stock or bank accounts, the fair market value is easy to establish because the fair market value is publicly associated with the asset.
For other property such as real estate, art, cars, collectibles, and antiques, additional evidence may be necessary to prove fair market value.
In high-net-worth divorces, an expert witness is often necessary to provide the appropriate testimony that proves the fair market value of otherwise difficult-to-value assets. These experts will consider an array of evaluation methods and work with attorneys to testify as to their expert opinion on tricky valuation questions.
Alternatively, a third-party appraisal report may suffice to prove asset value where the appraisal can be proven to reflect the fair market value of the property.
When no fair market value can be assigned, Texas courts rely on the intrinsic value of property. The intrinsic value is useful when the property is one-of-a-kind or otherwise lacks a secondary market for resale. Evidence of the intrinsic value does not include the sentimental value but does include the original purchase price of the property.
Determining the accurate value of assets in a divorce is a tedious process, and high-net-worth individuals face additional hurdles due to the unique composition their estates can take. When considering a divorce that will involve rare, expensive, and otherwise niche assets, the risks from proceeding without the advice of an attorney can be costly.
To minimize the risk of those circumstances, hiring an attorney that will fight for a fair valuation is critical to avoid the problems that otherwise arise when a court improperly values and divides community assets. Our high-net-worth divorce attorneys in Austin have the experience necessary to advise you on complex assets and valuation questions.
Common Issues in a High-Asset Divorce
Proving the Existence and Value of Separate Property
Generally, spouses enter a marriage with some amount of preexisting property or assets. Furthermore, throughout a marriage, one or both spouses may receive property and assets as gifts, inheritances, or lawsuit payouts. Depending on the circumstances of how these assets are handled, they may constitute an individual’s separate property.
If the property is appropriately proven to be separate, Texas courts are unable to award any portion of them to the other spouse in a divorce. In a high-net-worth divorce, one or both spouses generally have complex financial arrangements that involve substantial separate property held in trust or earned through an inheritance.
While the importance of keeping your separate property separate is obvious, proving the characterization of separate property is an otherwise challenging task.
Separate property must be proven by a preponderance of the evidence, which can be complicated by the financial arrangements of any joint bank accounts or the perception that you gifted any separate property to the community estate.
Furthermore, even if your separate trust or inheritance remained unmingled with community assets, you and an attorney will need to determine whether any income generated from separate property assets constitutes community income that your spouse is entitled to.
Often, complicated separate property arrangements require one or both parties to a divorce hire a forensic accountant to do a full financial tracing of separate property and generate a report on the final separate and community value of a trust, inheritance, or other separate property asset.
These forensic accountants will also often serve as expert witnesses at any trial to assist your attorney to prove the characterization and valuation to the court.
Protecting that separate property is of the utmost importance to our clients, and our attorneys understand that affirmatively proving the value and existence of separate property is a critical task for any attorney handling a high-net-worth divorce.
Property Located Outside of Texas
It is not uncommon for high-net-worth marriages and divorces to involve property located outside of the state of Texas. In those cases, you may wonder whether a Texas court adjudicating your divorce can resolve out-of-state property issues. For example, what will happen to a vacation property you or your spouse owns in a different state?
If a marriage involves a piece of property located outside of the state of Texas, Texas courts do not have the power to directly assign the title of that property to an individual.
However, just because it cannot directly affect the title does not mean Texas courts are powerless to address out-of-state property. Instead, Texas courts rely on their power over the individuals to indirectly affect a division of out-of-state property.
For example, a Texas court can compel a party to a divorce to take action with regard to an out-of-state property per the court’s instructions. Thus, a Texas court has the power to indirectly order the valuation, sale, distribution, division, or conveyance of property owned by one or more parties to a divorce.
Whether you own a second home, apartment, or condo in another state, our attorneys can work with you to properly address out-of-state property division with a Texas court.
Disputes Over Business Interests
Like any other asset in a divorce, business ownership is property that a Texas court must value and characterize as either separate or community property.
In some cases, ownership or a portion of interest in a business may be divided between spouses like any other community property asset—even if the other spouse was never involved in the business. This can be an incredibly distressing thought for clients that have spent years building an incredibly valuable business.
In those cases, our attorneys do everything within their power to argue for an equitable distribution that awards the business to the spouse best suited to capitalize on the value of the business as an asset.
Regardless of whether a spouse is interested in receiving an ownership stake in a business characterized as community property, any business at issue in a divorce will need to be assigned its fair market value.
As with any complex asset, high-net-worth individuals with a business at stake in a divorce will likely need to hire a business valuation expert to provide a report on the fair market value. In turn, the fair market value of the business will instruct the court on how much equity value the business adds to the community estate.
A truly fair market assessment of your business can thus be the difference between having to pay our thousands or hundreds of thousands in equity to a spouse at the finalization of a divorce.
Is Your Spouse Hiding Assets?
Hiding assets in a high-asset divorce is illegal and unethical, but understanding the methods can be important for identifying and preventing such actions. Here are some common ways individuals might attempt to conceal assets:
- Undervaluing or Omitting Assets: Failing to disclose certain assets or significantly undervaluing them on financial statements.
- Transferring Assets to Third Parties: Transferring ownership of assets to friends, family members, or business associates temporarily to hide them from the spouse.
- Creating Fake Debt: Claiming false debts or exaggerating liabilities to reduce the apparent net worth.
- Using Offshore Accounts: Opening bank accounts in foreign countries with strict privacy laws to keep assets hidden from domestic authorities.
- Investing in Cryptocurrency: Using cryptocurrencies, which can be harder to trace and less regulated than traditional financial instruments.
- Forming Shell Companies: Establishing shell companies to hold and obscure the ownership of assets.
- Manipulating Income: Delaying bonuses, commissions, or promotions until after the divorce is finalized to underreport income.
- Storing Cash: Withdrawing large amounts of cash and storing it in safe deposit boxes or other secure locations.
- Purchasing Undervalued Assets: Buying valuable items like art or antiques at below-market prices and not declaring their true value.
- Altering Business Records: Falsifying or manipulating business records to hide profits and assets within a company.
What Should I Look Out For During My High-Asset Divorce?
If you're engaging in a high-asset divorce, we've got some tips that can help you prepare for the process and make your divorce smoother:
- Inventory all your assets and liabilities. Yes, all of them. As part of the property division process, you'll be asked to present a complete list of both marital and separate property to the court. Omitting items from that inventory, even by accident, can result in legal penalties.
- Factor in tax season when you evaluate how to divide your property. It can be tempting to try and fight for assets like the marital home, but is that the best decision for your financial future? Your taxes could change significantly post-divorce, which could impact you financially. If you keep the marital home, will you need to pay an estate tax on it? If you sell it, will you need to pay capital gains? Sit down with your accountant and figure out how various parts of the divorce process might change your taxes.
- Think about liabilities. For most people, liabilities like debts play a secondary role in divorce, but they can take over the property division process. If you or your spouse possess significant debts (or you own debts together), think about how you want to handle that.
- Expect complicated child and spousal support negotiations. Alimony and child support are two of the areas most affected by a high-asset divorce, especially if one party was the primary breadwinner. The court tries to ensure that all parties have the tools to maintain the same quality of life post-divorce they enjoyed while married. That means the noncustodial parent may have to pay for amenities like tutoring or extracurricular activities they provided while married. Whether you're the payor or recipient, you should buckle in for complicated support and alimony disputes as you move through the divorce process.
- Don't neglect the value of financial professionals like forensic accountants. You probably have an accountant you already work with, but bringing a specialist like a forensic accountant or investment specialist can help you accurately value your assets and navigate the property division process more easily.
- Consider methods of alternative dispute resolution (ADR). Using legal processes like mediation or collaborative divorce to dissolve your marriage can be highly beneficial for high-net-worth individuals. These types of divorce resolution focus on conflict de-escalation, making it easier for spouses to compromise with one another and develop a mutually beneficial arrangement. They also keep the divorce out of the public eye and away from public record, which can be invaluable if you worry that the media will try and spin your divorce to gain attention.
At Cofer & Connelly, PLLC, our Austin high-asset divorce attorneys understand the high-asset divorce process inside and out. We'll work with you to help you come to a peaceful, equitable resolution with your soon-to-be-ex.
To schedule a consultation with our high-asset divorce lawyers in Austin, contact us online or via phone at (512) 991-0576.
