Money and Divorce: Denton Business Chronicle

The following Denton Business Chronicle article by Charla Bradshaw Conner, managing partner for the Denton office of Koons, Fuller, Vanden Eykel & Robertson, P.C., is adapted from her book, Protecting Your Assets From A Texas Divorce. The author is an acknowledged expert in the division of retirement assets.

Charla Conner is Koons Fuller's managing partner in Denton and is known for her writing and speaking on the division of retirement assets at divorce.

When Darrell and Lisa Holley’s* marriage ended last year, it was our challenge to find and divide enough assets to run two households where only one had existed for almost 12 years.

* Not the real name of a Koons Fuller client. The firm does not publicize client names, so any similarity to other divorced couples is purely coincidental.

At times, I felt like an alchemist, needing to create wealth out of nothing. When we did an inventory of their assets, Darrell and Lisa were shocked at how little they had.

A couple of years earlier, they had sunk their savings into a more expensive home than they could afford. Because of the economy, the home did not appreciate much in value, and so they had little equity.

Like many people at this time, their only real asset was Darrell’s 401(k) account. Money was deducted from his salary and matched by his employer and his pension. Darrell initially felt that this was his money: he earned it and thus, he felt it should remain his.

As Lisa’s attorney, I quickly reminded Darrell’s attorney about the law and his client’s situation. If there were other assets to offset the community portion of his retirement account, Darrell might have been able to keep the money in his accounts. But that wasn’t the case, so we set out to determine what part of the accounts were subject to division.

The first step was to characterize which assets were community property and which were Darrell’s separate property.

Darrell had worked for the same company for more than 20 years, and he and Lisa were married for the last 12 of those years.

In most cases, money in the account when the couple marries is the separate property of the employee spouse. Texas is one of nine community property states, so under our laws any growth of the account (with certain exceptions) during the marriage is usually considered community property. Only community property is subject to division.

Changes to employee compensation packages over the last few years have greatly complicated the job of dividing retirement assets and other benefits of employment at the point of divorce.

A number of large employers have either terminated or frozen traditional pension plans because of high funding requirements. Due to this trend, many employees are relying on defined contribution plans such as the 401(k) and 403(b), as well as their own IRAs, and employers are implementing other forms of long-term or deferred compensation. These forms include incentive bonuses, signing bonuses, retention bonuses, creative stock option plans and employment incentive agreements and plans.

With many of these forms, the employee is “betting on the come,” and the attorneys must evaluate whether these types of employee benefits will be divided. The law in the employee benefit area as to the new forms of compensation has not developed in Texas.

Everyone is concerned about the possible nightmare scenario of whether or not the company in which you’ve just taken stock as part of a divorce settlement could be the next Enron.

In Darrell and Lisa’s case, the division of the 401(k) and the pension were straightforward as far as retirement division goes. Our main concern was making sure Darrell had not borrowed against the account and thereby reduced its value. There were certain tax considerations also, including a one-time forgiveness of the 10% penalty for early withdrawal of the assets by Lisa as a result of a federal law implemented in 1984.

We covered all of the stipulations of this transaction in a Qualified Domestic Relations Order (QDRO), a complex retirement division document that can vary significantly from plan to plan.

It is important, no essential, that your order be drafted by an expert with extensive knowledge of this process and who is working specifically with your fact situation. Many employers offer model orders that may be quicker, easier and less expensive than a customized document. These model orders can be dangerous however, because they are written to make things easy for the plan. They are not written to address or provide the necessary benefits and features for the nonemployee spouse. In the case of Darrell and Lisa Holley, we wrote an order that gave her confidence in her financial future.

When everything was settled, Lisa borrowed against her portion for a down payment on a home she could afford. She found there are significant tax benefits to borrowing money from yourself for a home, and transactions like this can be discussed with a certified public accountant.

The money obtained by the QDRO was taxed at her rate, which was considerably lower than it would have been with their combined incomes. All in all, the couple came out in remarkably good financial shape. While we didn’t actually create wealth out of nothing, we made the existing assets stretch as far as possible under the law.