When a marriage ends in Texas, whether by divorce or annulment, the judge is required to divide all property owned by either spouse between the spouses.1Tex. Family Code § 7.001. Contrary to what some people think, Texas is not a 50:50 state when it comes to property division. In fact, the Family Code gives the judge broad latitude by instructing the judge that "the court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage."2Tex. Family Code § 7.001.

That means that anything can happen when the judge divides your property. To control the risk of such broad discretion, you need an attorney who can follow the numbers and you need a willingness to settle your case out of court. If your spouse is unreasonable and unfair, a trial may be your best option. Outside of extreme behavior by your spouse, out of court settlement is best, particularly if you have a complicated estate or an estate that contains illiquid, difficult-to-value assets.

Every once in a while, two spouses just want to get a divorce and leave the property division for later. That's fine if you're in a handful of states that are not Texas, but in Texas, there is no way around property division at the time of divorce.3 Dawson-Austin v. Austin, 968 S.W.2d 319, 324 (Tex. 1998) ("It is well settled in [Texas] that the division of a marital estate is not a claim severable from the rest of a divorce proceeding.").,4I suppose the parties could tell the court they have no marital estate, get their divorce, and divide their property later under Tex. Family Code § 9.201, but doing so would involve an unforgivable breach of the duty to be truthful with the court and would invite the harsh application of other rules of law.

Steps in Property Division

Property division can appear to be complicated and many times it is. To maintain one's bearings through the process, it's worthwhile to remember that whether the marital estate is large or small, complicated or simple, the overall process is the same:

1. Determine what is in the marital estate

The first step in dividing an estate is to figure out what is in the estate. The parties will start by exchanging inventory & appraisements with backup documentation. An inventory & appraisement is a list of all the property owned by either or both parties and debts. The backup documentation should include at least one document for each number contained in the I&A. Not every asset is either community or separate property. Some assets, such as a 401(K) that was started before marriage and which has received contributions from community income during the marriage, will have a mix of separate and community property.

(Related: Information Gathering)

Let's walk through a simple example. Assume the following assets are part of the community estate and that the one credit card debt is tied to community assets:

ASSET Value tranche To Husband To Wife
Cash in a safe
Husband's 401(K)
Wife's 401(K)
Traditional Pension
Credit card in husband's sole name
NET

2. Value the marital estate

Once you determine what is included in the marital estate, you have to figure out what the assets are worth and the amount of each debt. Some assets are easy to value, e.g. cash in a safe, others are impossible to value, e.g. a traditional pension that is not yet in pay status.

Some assets are controversial to value, such as ownership interests in illiquid assets like limited partnerships and privately-held companies. Other assets have to be traced to determine how much of the asset's value is separate property and how much is community property. Tracing usually involves an outside expert.

(Related: Retirement Account Tracing)

Continuing the example from above:

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000
Husband's 401(K) $250,000
Wife's 401(K) $300,000
Traditional Pension N/A
Credit card in husband's sole name -$12,000
NET $604,000

3. Separate the assets into tranches

If a community estate had $100 in a 401(K) and $100 in cash, it probably would not be workable to award the cash to one party and the 401(K) to the other, assuming both parties had the same need for spendable cash after the divorce. That's because 401(K) assets receive harsh tax treatment if you try to withdraw and spend the balance prior to the age of 62 and still less favorable tax treatment than cash on hand no matter when the 401(K) is withdrawn and spent.

In a simple case like this, assuming both parties had similar needs for liquidity, it would be more agreeable to the parties to divide the 401(K) so that each gets $50 and the cash so that each gets $50 of cash. That is the point of organizing assets and debts by tranches--it allows the parties to divide like-assets and debts more evenly.

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000 CASH
Husband's 401(K) $250,000 TAX-DEF
Wife's 401(K) $300,000 TAX-DEF
Traditional Pension N/A NON-ASC
Credit card in husband's sole name -$12,000 CASH
NET $604,000

The tranche names are arbitrary but indicate how one type of property can be valued vs. another kind. For example, "Cash in a safe" and the credit card are in the "CASH" tranche. That's because cash is CASH and credit cards should be paid off with cash (as opposed to retirement). The 401(K)s are identified as "TAX-DEF", which here means "tax deferred" and the "Traditional Pension" is identified as "NON-ASC" meaning the value is non-ascertainable.

Tranches can be established along any dimensions of the asset mix that make sense in your case. Common dimensions are:

  • Liquidity--Including liquidity penalties such as taxes, which might be different for each party;
  • Divisibility/Assignability--Not every asset or debt can be transferred to or assumed by either party. If there are closely-held business interests, REITS, partnership interests, etc. the shareholders' agreements or other documents explaining the transfer rules must be obtained very early in the litigation process. One question the attorney for the non-moneyed spouse must be able to answer is this: "How will my client ever get paid?" If you can't answer that question about a certain asset, you can't take that asset;
  • Value-Ascertainabilty--Some assets, such as partnerships and traditional pensions are almost impossible to value and thus should be divided by percent rather than dollar amount;
  • Desirability--Cash is cash, but not every other asset is completely fungible in terms of desirability: Two parcels of real estate are rarely of equal desirability to each party.
  • Enforceability--Is the asset located in a jurisdiction or held in a form that will make it impossible to obtain through legal process when the titled party refuses to transfer it to the receiving party;
  • Reality--Do you really want that asset? This is an important question when considering taking certain burdensome assets such as time-shares (just don't) or motor-vehicle toys (which are susceptible to breaking down and are usually cheaper to rent if you really need one someday in the future).

In this simple example, assets in the NON-ASC tranche should be divided by percent and the others divided based on a dollar amount.

4. Identify a 50:50 property division

The next step is to see what a 50:50 division would look like. (Start by allocating to each party the property already titled to that party.) Once you identify a 50:50 scenario, you can alter it, sometimes through the allocation of one large asset, to arrive at scenarios other than 50:50. But always start with 50:50. First, divide the CASH tranche:

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000 CASH $39,000 $27,000
Husband's 401(K) $250,000 TAX-DEF
Wife's 401(K) $300,000 TAX-DEF
Traditional Pension N/A NON-ASC
Credit card in husband's sole name -$12,000 CASH -$12,000 $0
NET $604,000 $27,000 $27,000

This illustrates a couple of ideas. First, you don't necessarily divide each asset 50:50 but rather you aim for a 50:50 bottom line. Second, you don't want to divide a debt between two parties if it stands in one party's sole name. The reason is that if you divide the debt so that the party who is not on the debt contract is responsible for part or all of the debt, you run the risk that the party who is awarded the debt will not pay the debt or will not pay it on time and thereby negatively impact the party whose name is on the debt. Therefore, in this example, we awarded the husband's credit card to him and then awarded him enough extra cash to pay the credit card. (This assumes that the credit card balance does not reflect items that will be reimbursed to the husband by his employer nor items that
clearly did not benefit the marital estate.)

Next, divide the tax-deferred assets. Again, don't divide each one 50:50 because then you have to draft two qualified domestic relations orders or two letters of instruction. Instead, award the smaller one to the party who owns it and make up the difference with the larger one, like this:

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000 CASH $39,000 $27,000
Husband's 401(K) $250,000 TAX-DEF $250,000 $0
Wife's 401(K) $300,000 TAX-DEF $25,000 $275,000
Traditional Pension N/A NON-ASC
Credit card in husband's sole name -$12,000 CASH -$12,000 $0
NET $604,000 $302,000 $302,000

As you can see, at this point, we have a 50:50 division of items that have an ascertainable value. Now divide the ones with non-ascertainable values:

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000 CASH $39,000 $27,000
Husband's 401(K) $250,000 TAX-DEF $250,000 $0
Wife's 401(K) $300,000 TAX-DEF $25,000 $275,000
Traditional Pension N/A NON-ASC 50% 50%
Credit card in husband's sole name -$12,000 CASH -$12,000 $0
NET $604,000 $302,000 $302,000

The pension is divided so that a percentage of the benefits are awarded to each party.

5. Finalize the property division

Now that we have a 50:50 division with evenly divided tranches of assets and debts, if we wanted to, we could create some disproportionate division scenarios. Let's say that the husband's earning capacity is significantly less than the wife's and for that reason, we want to divide the marital estate 55:45 in favor of the husband.

If husband does not have an immediate need for cash, we can accomplish this disproportionate division through wife's 401(K) like this:

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000 CASH $39,000 $27,000
Husband's 401(K) $250,000 TAX-DEF $250,000 $0
Wife's 401(K) $300,000 TAX-DEF $55,200 $244,800
Traditional Pension N/A NON-ASC 50% 50%
Credit card in husband's sole name -$12,000 CASH -$12,000 $0
NET $604,000 $332,200 $271,800

Challenges at Each Step

1. Determine what is in the marital estate

If one party is making separate property claims that the other does not agree with, those are going to need to be proven before you can continue. This can be done through documentation obtained during the discovery process or by submitting documents to a financial expert, typically a CPA familiar with property issues in divorce matters.

The parties can dispute whether a pre- or post-marital agreement affects the content of the marital estate. Sometimes the dispute is so meaningful that one party or the other may seek summary judgment on the validity or effect of such an agreement. It's a sad use of time to let issues like this linger because until they are resolved, it's unlikely that the parties will be able to settle their financial matters.

The parties can accuse each other of hiding assets. The discovery process can provide enough information to determine whether this is likely. For example, if only one spouse is working and that spouse makes $50,000 a year, it's not likely that same spouse has hidden a million dollars over the course of a 5-year marriage. On the other hand, a spouse earning $500,000 a year and who shows significant transfers to otherwise undisclosed accounts or frequent and significant cash withdrawals probably is hiding money or wasteful expenditures. Another tool is to file an IRS Form 4506-T asking for all income reporting documents, including W-ss and 1099s. A 1099-INT from the IRS will disclose the existence of an interest-bearing account that may not have been disclosed on the inventory.

The parties can accuse each other of wasting assets. For example, if one party is discovered to have spent significant amounts of money on a paramour, that's a form of waste that unfairly dissipates the community estate. When that is proven, we add a synthetic or imaginary asset to the spreadsheet, value it at an amount equal to the total amount of waste or fraud, assign it to the CASH tranch, and award it to the party who made the wasteful or fraudulent transactions. This is called "reconstituting the marital estate" and is one way to make the innocent spouse whole when there are sufficient remaining assets to do so.

Continuing with our example, let's say that through the discovery process, the wife's intrepid attorney discovered that the husband had spent $5,000 on a downpayment for his paramour's new car. That's a clear example of wasting community assets. The first thing we would do is add that $5,000 back to the marital estate as a CASH asset and award it to the husband:

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000 CASH $39,000 $27,000
Paramour waste $5,000 CASH $5,000 $0
Husband's 401(K) $250,000 TAX-DEF $250,000 $0
Wife's 401(K) $300,000 TAX-DEF $55,200 $244,800
Traditional Pension N/A NON-ASC 50% 50%
Credit card in husband's sole name -$12,000 CASH -$12,000 $0
NET $609,000 $337,200 $271,800

If, after discovering this painful news, the wife still agreed to a 55:45 division of the marital estate, that would mean that our target NET numbers would be:

Total To Husband To Wife
100% 55% 45%
$609,000 $334,950 $274,050

If that's our target, then we need to move $2,250 from the husband's cash allocation to the wife's:

ASSET Value tranche To Husband To Wife
Cash in a safe $66,000 CASH $36,750 $29,250
Paramour waste $5,000 CASH $5,000 $0
Husband's 401(K) $250,000 TAX-DEF $250,000 $0
Wife's 401(K) $300,000 TAX-DEF $55,200 $244,800
Traditional Pension N/A NON-ASC 50% 50%
Credit card in husband's sole name -$12,000 CASH -$12,000 $0
NET $609,000 $334,950 $274,050

This effectively pays the wife back for 45% of the $5,000 that husband "wasted" on his paramour. The "Paramour waste" asset is used to make the balance sheet balance according to the target allocation that we established for this estate.

2. Value the marital estate

The parties can and will dispute the value of assets. A common value discrepancy arises over motor vehicles. Generally, this is a silly one and, unless the parties have wildly disparate vehicles (husband has a 2009 Nissan Sentra and wife drives a new Ferrari), for the grief and attorney's fees spent arguing the value of motor vehicles, it's easier to either take them off the marital balance sheet OR take them to an agreed appraiser (e.g. CarMax) and agree to value them according to the appraisal received.

Even if the parties can agree to the gross value of an asset, they might disagree on a factor by which to discount an asset for its liquidity or risk. For example, one spouse may invest in a series of limited partnerships, many of which lose money, but some of which make enough to justify the investment strategy. Some of these investments cannot be awarded to the other spouse because of the terms of the shareholder or partnership agreement (otherwise they could be placed in the non-ascertainable tranche and divided by percent).

A party's 401(K) may have a loan against it and the parties may disagree about whether the 401(K) should be valued as if the loan were added back into the 401(K) balance. This decision should turn on what the loan proceeds were used for.

3. Separate the assets into tranches

This process should not be too controversial except for two issues. First, the other attorney may not be familiar with the idea and thus resistant
to it or unable to understand it. Second, PRE-TAX is a simplistic category because if the two parties had very different incomes and therefore fall into non-adjacent tax brackets, the PRE-TAX implications to one party will be different than what they are to the other.

4. Identify a 50:50 property division

There are often many ways to get to 50:50. If you follow the tranche-based approach described here, most of them should be equivalent. Where it becomes nearly impossible is when the marital estate is net negative or when there is no way to balance the property awards by tranche. For example, the marital estate might include no more than two items: $50,000 in a partnership interest held by the husband and $50,000 in credit card debt held by the wife. The partnership interest cannot be divided or sold. The credit card debt is contractually linked to the wife and the Fifth Amendment to the U.S. Constitution prevents an enforceable mechanism to transfer it to the husband if he can't qualify for a balance transfer credit card of his own. When the pie is small or made up of slices that are not amenable to division, property division will require some creativity that only an experienced attorney can inject into the process.

5. Finalize the property division

Theoretically, once you've made it through the first 4 steps, this should be easy. But this is the step during which all the emotions of betrayal and fear for the uncertain future surface.

What Can the Court Divide?

In Texas, all property owned by either spouse at the end of the marriage is either community property or separate property. Separate property is anything that a spouse owns that was owned or claimed by that spouse before marriage, given to the spouse as a gift or as a result of someone's death, and awards in personal injury suits except for that part of the award that is specifically identified as being compensation for loss of earning capacity during the marriage.5Tex. Family Code § 3.002. Community property is everything that is not separate property.6Tex. Family Code § 3.003(a).

The "estate of the parties" is made up of the community property owned by either party at the end of the marriage.7Pearson v. Fillingim, 332 S.W.3d 361, 362 (Tex. 2011) ("[T]he phrase 'estate of the parties' encompasses the community property of a marriage but does not reach separate property."). Spouses can also convert community property into separate property through a partition or exchange agreement8Tex. Family Code § 4.102., which is outside of the scope of this article.

Bottom line, the court can divide everything that neither spouse can prove as being his or her separate property by clear and convincing evidence.9Tex. Family Code § 3.003(b).

Will the Court Divide the Marital Property 50:50?

Maybe, but not necessarily. As stated before, the judge must determine what is included in the spouses' marital property and then divide in a just and right manner.

The judge may consider many factors in determining what is "just and right." In determining what is "just and right," the judge must arrive at an equitable (not equal) division of the marital estate "and there must be some basis for unequal division."10O'Carolan v. Hopper, 414 S.W.3d 288, 311 (Tex. App.--Austin 2013, no pet.). The basis for an unequal division can include:

  1. In a fault-based divorce, the conduct of the errant spouse.11Lynch v. Lynch, 540 S.W.3d 107, 128 (Tex. App.--Houston [1st Dist.] 2017, pet. filed 11-28-17).
  2. In a no-fault divorce (based on insupportability), maybe the court can consider one party's fault in the breakup of the marriage or maybe it can't.12In re Marriage of Brown, 187 S.W.3d 143, 146 (Tex. App.--Waco 2006, no pet.) ("[A] trial court should have discretion to consider proven fault in the break-up of the marriage when making a just and right division of the community estate.")., 13Phillips v. Phillips, 75 S.W.3d 564, 572 (Tex. App.--Beaumont 2002, no pet.) ("[W]hen dissolution of marriage sought solely on the ground of insupportability, evidence of 'fault' become irrelevant [...] and may not be considered by the trial court in it's 'just and right' division of the community estate.").
  3. Spouses' capacities and abilities14Murff v. Murff, 615 S.W.2d 696, 699 (Tex. 1981) (Listing factors the court may consider when dividing the marital estate.).
  4. Benefits which the party not at fault would have derived from continuation of the marriage
  5. Business opportunities
  6. Education
  7. Relative physical conditions
  8. Relative financial condition and obligations
  9. Disparity of ages
  10. Size of separate estates
  11. Nature of the property to be divided
  12. Disparity in earning capacities or of incomes
  13. The needs of an unmarried adult child with disabilities15Young v. Young, 609 S.W.2d 758, 760 (Tex. 1980) ("An unmarried disabled adult child's right to support corresponds to his parents' duty to support and is entitled to recognition" in determining a just and right division.).
  14. Attorney's fees to be paid16Grossnickle v. Grossnickle, 935 S.W.2d 830, 846-47 (Tex.App.--Texarkana 1996, writ denied).
  15. Fraud on the community17Tex. Family Code § 7.009.; Schlueter v. Schlueter, 975 S.W.2d 584, 585 (Tex. 1998).

We Help People Obtain Fair Property Settlements

When a marriage ends in Texas, the judge must divide the property belonging to the spouses. Property division is more complicated than most people believe and you'll need an attorney with significant financial skills to help you get the best outcome.

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