Dividing property in a Texas divorce can be a complication and expensive affair under the Texas Family Code. The Texas Family Code lays out a complicated framework of community property rules. Property may be community property of the marital estate, the separate property of one spouse, or separate property jointly owned by the spouses. The type of property, its acquisition, its distributions and capital gains (or losses) all affect how to divide property during a divorce.
Allocating property as separate property rather than community property is extremely valuable in a divorce. If the property is separate property then it is not subject to division in the divorce. That is particularly important for people with significant assets from before the marriage or from that person’s family.
Financial accounts containing stocks often fall into this category, whether they are investment accounts financed before the marriage or received as part of an inheritance. Some investments pay dividends. How those dividends pay out affects whether the dividends are separate or community property.
Quick Overview of Community Property Rules in Texas
Before getting into the details about dividends, let us first review the community property rules in Texas. Texas property rules presumes all property is community property until proven by clear and convincing evidence otherwise. The spouse claiming property is separate property must prove that status under Texas’s property rules.
Separate property generally includes all property acquired before the marriage, acquired through gift (including inheritance), or acquired through descent (the property became yours when a family member died without a will addressing the property and the Texas Property Code says you are the rightful heir).
Generally that leaves everything obtained during the marriage, including income on separate property, as community property.
You may have noticed that I described these rules as “generally” the rules. That is because there are some quirky exceptions and dividends are one of those quirky exceptions to the general rules.
Before moving on, it’s worth pointing out that the couple could have executed a prenuptial or postnuptial agreement defining different ways to treat property in a divorce so that the property rules under the Texas Family Code do not apply. We will assume that the Texas Family Code does apply going forward.
Texas Divorces and Dividend Payments
Let’s also briefly talk about how dividends work before applying the property rules. Dividends are distributions to shareholders of an investment out of the assets of the underlying investment. A company may pay dividends through stock ownership or ownership of shares of a pooled investment like a mutual fund. Some companies and funds pay dividends because their charters say they must while others pay dividends by management’s decision. Dividends are a payment of a piece of the entity’s assets to its owners.
It is a different form of investment income than interest or capital gains. Most dividends pay as cash as a determined amount on a determined day per share. Sometimes dividends pay in-kind in which the company distributes additional shares instead of cash. Many people who receive cash dividends reinvest the dividends by buying more shares of the entity automatically by setting up a dividend reinvestment plan (DRIP) through the financial institution that holds the account.
Applying These Community Property Rules to Dividends in a Texas Divorce
Whether the underlying shares are community property and how the dividend pay will determine whether the dividends themselves are community or separate property.
If the underlying shares are community property then the analysis is simple. Dividends from community property are community property regardless of how paid.
However, it gets trickier when the underlying shares are separate property. If the dividends pay as cash then the dividends are income and subsequently community property. This is true even if the cash dividends are immediately reinvested back into buying more shares. Those newly acquired shares become community property.
If the dividends pay in-kind as shares (or partial shares) then those shares are separate property of the owner of the underlying shares.
There’s a good reason why this small rule makes a big difference in property divisions in divorces with financial assets. As mentioned above, most dividends pay as cash and many people reinvest those dividends into buying more shares. Those new shares are community property subject to division in the divorce.
If the owner of the separate property shares gets the full value of the dividends as separate property then the other spouse could suffer a sizable loss to his or her share of the marital estate. Let’s look at an example. Assume wife owns ten shares of stock in XYZ Corp. at $1.00 per share. Each share pays an annual dividend of $0.10 per share reinvested into more shares with the leftover added to next year’s dividend to buy more shares.
The separate property portion of the total stock ownership is less than a quarter of the shares owned. The husband, who only owns stock in community property shares, would give up significant property by ignoring the community property. (Okay, half of $35 isn’t significant but imagine this same scenario with $35,000 or $350,000 in community property.)
Hiring a divorce attorney to navigate these complicated property division issues
Dealing with dividends and other investment issues in a divorce in Texas can be extremely tricky. In a high net worth divorce the marital estate is normally subject to financial experts on both sides. These experts work with the divorce attorneys to assess the ownership and value of the property. However, most divorces are not high net worth. In these divorces we normally deal with financial assets less expensively. Generally employing financial experts to sort out the property is not cost effective.
If you have financial assets then you should strongly consider hiring a Texas divorce lawyer. You should consider hiring a divorce attorney in Texas with experience working with financial assets and understands how to efficiently protect your financial interests in the divorce without figuratively and literally breaking the bank.