COMPLEX DIVORCES IN TEXAS
Many times people come into my office, and the first question they want to be answered is how quickly they can get divorced. They then proceed to explain to me that they and their spouse are in agreement that they should get a divorce. When I ask them about the property, sometimes they indicate that they have an agreement on the property; however most of the time, they indicate to me that they do not have an agreement on the property, but it shouldn’t be a problem because Texas is a community property state and all they want is their fair share. Once I start inquiring about the types of property owned by the parties, then the issues become much, much more complex. Quite frankly, most people do not think that their community property/separate property involves any complex issues. However, from a legal standpoint, many cases are what we call complex divorces — involving many different legal issues. It’s very important to go through and accurately identify the legal issues in connection with all of the property as soon as possible. Many times we have to wait until after we receive some discovery or review additional documents before we are able to really advise a client concerning the complex nature of their divorce.
Normally, the starting place for a divorce in Texas is to analyze separate and community property. Texas is a presumptive community property state — it is legally presumed that, at the time of divorce, all property that is in existence at the time of divorce is in fact community property and is subject to division by the court. However, Texas also recognizes separate property, and the Texas Constitution specifically provides that a court cannot divest a party of their separate property. The significant difference is that in Texas, in order to show that property is your separate property, you have to show the court by, “clear and convincing evidence,” that property is your separate property. If you cannot show a court clear and convincing evidence that your separate property is, in fact, your separate property, then the court will treat the property as community property and divide it as it would any other item of community property.
The second initial inquiry in a complex property case is whether or not there is the existence of a pre‑marital agreement. If there is a pre‑marital agreement, then it is going to be necessary for the attorney to go through the pre‑marital agreement, determine whether or not the parties have followed all of the terms and conditions of the pre‑marital agreement, and then determine how the property is to be handled pursuant to the pre‑marital agreement. Sometimes pre‑marital agreements are partial pre‑marital agreements, in that they provide that certain assets will remain separate property, or that certain assets will be treated in a particular way; however, in many cases, these agreements fail to address all of the property issues that are going to come up in a divorce.
One of the most interesting areas in connection with complex divorces in Texas has to do with various company benefit plans. Most people are familiar with 401k plans — these are essentially savings plans whereby an employee contributes an amount of money every month, or year, into a 401k plan, and the employer may, or may not, match the contribution. What most people do not realize is that these 401k plans are in fact a form of trust which have been set up with a complete trust agreement, and are frequently administered by a plan administrator. When you go to get divorced, the divorce court cannot alter the terms and conditions of the underlying trust. Instead, the divorce court has to be provided with sufficient information as to how the plan may be divided, when amounts may be withdrawn, when parties may retire, etc., and then the court must approve and sign what is referred to as a Qualified Domestic Relations Order (QDRO) in regards to the 401k plan. Once the QDRO is submitted to the plan administrator, the plan administrator has a certain number of days to approve or reject the QDRO. What the plan administrator is looking for is to make certain that the QDRO conforms to the terms of the 401k trust, and does not require that the 401k trust divide property in a way that is contrary to the trust instrument. If the plan administrator finds that the QDRO complies with the plan, the plan administrator will then approve the QDRO, and segregate the assets into two separate accounts — one for the participant, also known as the employee, and one for the former spouse, also known as the alternate payee.
Some companies have what is called a “defined benefit plan”. This is another form of retirement account which provides that when an employee reaches a certain age, the plan will pay the employee a specified amount — a defined benefit — either for the life of the employee, or in some cases for the life of the employee, and the life of the employee’s spouse. These defined benefit plans tend to be more complex than the 401k plans. These plans tend to be evaluated every year by the employer, and they actuarially re‑compute the amount of money that the company must contribute each and every year in order to be able to pay the employee the defined benefit plan once the employee reaches retirement age. We used to divide these plans in the State of Texas based upon a ratio of how long the parties were married, to how long the employee served in order to receive the benefit. However now, the Texas Legislature required that the trial court determine the present value of the defined benefit plan. This can be an extremely difficult and complex task. Frequently, you have to know the participant’s age, the alternate payee’s age, then life expectancies have been programmed in, and then you have to determine how you’re going to discount the value of those future benefits back to the present value. Some plans go ahead and specify the interest rate that is to be used to discount the benefits back to present value. Other plans are silent on the discount rate, and it is necessary for the court or your attorney to make assumptions regarding the discount rate. If no discount rate is available in the plan, frequently the courts use what is referred to as the judgment rate — currently 5% — to discount the value of the future benefits back to a present value.
Both defined contribution plans and defined benefit plans are what we call qualified retirement plans. That is, these plans meet specific requirements of the Internal Revenue Service so that the employer may deduct certain contributions, and the employee may exclude certain amounts from their taxable income. However, a few employers have what are referred to as non‑qualified plans. This means that an employer has simply decided to set up some type of retirement plan, without regard to the tax consequences of the plan, and therefore the plan is not in any way regulated by the Employee Retirement Income Security Act. For example, I recently ran into a non‑qualified plan that did provide that the plan would pay a benefit to a spouse upon divorce, but only when the participant employee retired and quit working. Therefore, it was conceivable that the employee would elect to work the rest of his or her life, and the spouse would never get a dime. Needless to say, these plans are complex, have to be reviewed in detail, evaluated, and different assumptions have to be made on how to weigh this in a divorce property settlement.
Many employees receive stock options or restricted stock. Stock options are simply a right to buy the stock at a pre‑determined price in the future. For example, if stock in the employee company is currently selling for $100.00 per share, they may give an employee the right to buy 1,000 shares at $100.00 any time within the next five years. Thus, if the stock goes up to $150.00 per share, an employee is going to buy the stock at $100.00, and almost always turn around and re‑sell it for $150.00 a share, thereby making $50.00 a share profit. Restricted stock is stock which is given to an employee which basically says that you are an owner of shares of the company, but you may not take control of the shares of the stock until certain things occur. In both stock option plans and restricted stock plans, it is very important to review all of the details of the plans. Some of the plans provide that if the employee terminates employment, they may exercise a stock option or the restricted stock at the time of termination; however, other plans provide that they lose all of their rights as soon as they terminate their employment.
Phantom stock is a contractual agreement between a company and an employee that provides that the employee will at some future date, receive cash which is somehow tied to the market value of the company’s stock. Phantom stock plans frequently contain all sorts of restrictions and conditions that make the phantom stock very difficult to value in a divorce.
Investments in limited partnerships have become common for real estate investments, apartment properties, medical clinics, etc. Sometimes, several individuals who join together and other times the limited partnership is formed by professionals such as wealth managers, money managers, real estate developers, etc. Generally, limited partnerships agreements have clauses that prevent the transfer of interest and clauses that require a limited partner interest to be sold back to the limited partnership or other limited partners. No matter how complex the limited partnership is, for divorce purposes, the limited partnership interest must be valued.
Annuities are a contractual investment with an insurance company. Commonly, they provide that in exchange for a series of payments to the insurance company, or a lump sum payment to an insurance company, the insurance company will pay the beneficiary a fixed monthly, quarterly, or annual payment for either a certain number of years or for the beneficiary’s life. Some annuities are so-called “variable annuities”, meaning the value can rise or fall based on the stock market. Many times, a company’s retirement payment is actually an annuity that the company purchased. For divorce purposes, most annuities can be divided by the Court and in all divorces, the value of annuities must be taken into account.
Many times, the most valuable asset is some type of small business such as a store, a manufacturing business, a trading company, a brokerage business, a service business, etc. Some of these businesses own buildings and equipment, others generate income from services and some have assets or service income. In a divorce, these businesses must be dealt with – who gets them and what is their value.
If you and your spouse own any of these complex assets, contact John K. Grubb & Associates, P.C. about your divorce.
If you decide that you have reached a point where there is nothing more for you to do to save your marriage but get a divorce, contact Houston attorney, John K. Grubb.