Texas Community Property Rules
UPDATED: March 4, 2020
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Texas community property distribution utilizes a standard called fair and equitable. Instead of being bound by a rigid fifty-fifty rule of division, the judge can look at a variety of factors to determine the division of property. When deciding how to divide marital property, an individual should consider all of the implications of how the property is divided as separating the intricacies of joint finances during a divorce can be complicated.
Texas Community Property Division
With some exceptions, community property is any property that is purchased or acquired during the marriage. Some separate property can become community property depending on how it is treated during the marriage. For example, if a husband inherits a home before he marries, and then after the marriage he transfers ownership of the home into both his and his spouse's names, then this overt act could convert this home into community property, despite its original classification as separate property. Debts are treated similarly, in that any debts acquired during the marriage are presumed to be community debts, regardless of whose name is actually on the account.
Texas does not utilize a fifty-fifty system of division, but rather a fair and equitable standard for deciding how to divide community property and debt. This standard actually provides the parties to a divorce and the court a great deal of flexibility in designing a marital settlement plan that can accomodate the financial situations of the parties. When most people think of a division of community property they envision a court giving one spouse one car, and the other spouse the other family vehicle. Physical division of property is a common method of dividing the community estate, but this method can be difficult when property is not easily divided, such as a large family home.
The court can also divide property through a cash settlement where one spouse is ordered to pay the other spouse a lump sum or a series of payments. Essentially, one spouse is buying out the other spouse’s interest in the property. If neither party wants a piece of property or neither can afford the property on their own, then the court can order a receiver to take the property, sell it, and then divide the proceeds of the sale. A receiver is a neutral third party designated by the court to exercise custody of the property. This prevents one side from claiming that the other party undersold the community property.
Debt Considerations in the Division of Property
When deciding whether or not to ask for a certain item of community property, a spouse should also consider the debt associated with the property and other debt obligations. While they were married, a couple may have been able to afford the $1,000 per month mortgage payment. After the divorce, the spouse may no longer have the ability to make the payment. In this situation, it would be poor financial planning to seek an award of a home that will eventually end up in foreclosure for non-payment.
Both parties should also factor in whether or not one or both parties are looking to file for bankruptcy. Some obligations are dischargeable in bankruptcy, and others are not. For example, one spouse may consider filing for spousal support instead of asking for a cash payout from the community estate. If the final decree is worded and labeled as a spousal support obligation, then the other spouse cannot undo this obligation by filing for bankruptcy. However, if the final divorce decree labels a cash payment as a division of a community estate, then the obligation could potentially be dischargeable in bankruptcy. Labeling can also affect tax future tax obligations.
Alimony or spousal support is awarded under limited circumstances in Texas. Many people ask for alimony or spousal support, at least in part, to punish the other spouse for conduct during the marriage. Unfortunately, the decision can backfire in the way of higher taxes as spousal support and many types of alimony are considered income. This means that the ex-spouse gets a tax deduction, and the supported spouse will have to pay taxes on the support received.
Instead of asking for spousal support, an individual may be better off asking for a cash settlement of the community estate. This cash award is not considered spousal support or alimony. Texas courts authorize a cash award even if the other spouse does not have sufficient, immediate funds to pay the cash award. A court can require the settlement to be paid in installments. The main concern is to make sure that the payment is properly labeled.
If an individual decides not to seek alimony, spousal support, or a cash settlement, but instead decides to seek the higher award of physical property, then she should be aware of and understand the tax consequences of the award. If a spouse is awarded a home or business, she then become responsible for all of the tax and insurance obligations associated with that property. If the spouse knows she cannot afford the tax, insurance, or debt obligations associated with certain property, she should consider allowing the other spouse to take possession or agree to liquidate the property.
Even though the parents are separated, they may still have a joint objective in taking care of the future needs of their children or other dependents. Child support obligations are not considered income, are not taxable, and cannot be discharged in bankruptcy.
Beyond basic support, many people have wills written to provide for the division of certain property or life insurance policies which name beneficiaries. Many of these documents may need to be revised after the divorce since one side will no longer have the right to dispose of certain property, like the family home. To avoid the tax consequences of a spousal support obligation, the parties may want to use community property to fund a trust account for their children. The focus of dividing a marital estate does not have to be limited to the end of the marriage, but can also be the beginning of some effective estate planning to provide for a child's future.
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