High Net Worth Divorce

Allocating Assets Between Divorcing Spouses

When dividing property in a divorce, determining whether an asset is community or separate property is crucial. In Texas, there is a presumption that all property obtained during the marriage is community property and should be divided fairly. However, if a spouse wants to claim that an asset is separate property, they must prove it with clear and convincing evidence.
To establish whether an asset is separate property, the inception of title rule is used, which looks at when and how a person first acquired an interest in the property. For example, property acquired before marriage or by gift or inheritance during the marriage is separate property. Compensation for injuries suffered during the marriage, aside from lost wages, is also separate property.
Community property in Texas can include high-value assets such as the family home, business, retirement and savings accounts, stock options, royalties, vacation homes, and investment properties. In longer marriages, dividing community property can be complex since separate and community assets may have become commingled, or in some cases, hidden.
For instance, if a spouse purchased an investment property before the marriage but used community and separate property to renovate it, their spouse might argue that the community has a claim to the property. In such cases, it is essential to determine the value and interest of all property to ensure a fair outcome.

Using Pre-Marital or Post-Marital Agreements

If one or both spouses have significant assets at the start of a marriage, it may be wise to consider drafting a prenuptial or postnuptial agreement to safeguard certain assets from being classified as community property in the event of a divorce. A well-crafted agreement can minimize conflict by deciding ahead of time which assets will be considered separate property and which will be community property. An experienced high-asset divorce attorney can also assist in executing an agreement that can transform some community property into separate property, simplifying the process of maintaining property classification over the marriage.
In the absence of a prenuptial or postnuptial agreement, "tracing" may be used to overcome the presumption that an asset is community property. This may require hiring an expert to analyze relevant documents associated with the asset to determine its classification.
Assets, such as rental properties or stocks, that increase in value over the course of a marriage, may pose unique challenges. The increase in the value of separate property is separate property, while any income derived from it is considered community property. For instance, if one spouse owned a rental property before the marriage, any rent money received while married would be considered community property, while the property's value increase would remain separate property.

Allocating Trusts and Trust Funds

The characterization of trusts can be a complicated matter. A trust is a type of property ownership where a settlor transfers legal title to a trustee and equitable title to beneficiaries. In Texas, separate trusts established before marriage that are irrevocable spendthrift trusts can be a valid way to protect the marriage's separate property. The income from these trusts may not be subject to division during a divorce if the beneficiary does not have a present possessory right to any assets in the trust.
However, if a spouse is given a present possessory right to any part of the trust, the income from the trusts can be divided as community property. In cases where distributions are mandatory or a beneficiary spouse retains control over the amount and frequency of the distribution, the income is typically considered community property. But, if a spouse is not a trustee, and the distribution of income is discretionary with the trustee, the income is generally considered separate.
Furthermore, if a spouse's parents created a trust fund for that spouse as an inheritance, the trust fund's principal is separate property. However, any income earned by the trust fund and distributed during the marriage is considered community property.
It is crucial for a spouse with lower earnings to be aware of the potential for a wealthy or higher-earning spouse to transfer income earned during the marriage into separate trusts to deplete and defraud the community estate.