For many Texans, their 401(k) plan is one of their largest assets – particularly for those who have made regular contributions throughout their career. On top of that, 401(k) plans often hold symbolic significance above and beyond their sheer dollar value. To some, they represent safety, security, and an end to the monotonous rat race. For others, they are a prize, a badge of honor earned after countless late nights at the office. However, no matter the role they play in your life, the thought of losing half of your hard-earned nest egg can be terrifying. This begs the question: how much of your 401(k) is actually at stake in a Texas divorce?
Community vs. Separate
You may or may not have come across the terms “community” and “separate” in regards to Texas divorce law. Texas is considered a community-property state, which means that Texas divorce courts characterize all property owned by spouses as either community or separate. Community property is property, including money, that is acquired during the marriage regardless of which spouse acquires it or in whose name it is held. Separate property, as relevant to a 401(k) plan, includes, among other things, any property owned before marriage. Upon divorce, a Texas court will determine which property is community property and which property is separate property. The court will thereafter divide the community property between both spouses, but, notably, is prohibited from awarding either spouse’s separate property to the other spouse.
When it comes to 401(k) plans, the distinction between community and separate is paramount. Because Texas couples are getting married later and later in life, and because more Texans are re-marrying after previous divorces, many Texans bring sizeable 401(k) plans with them into marriage. Upon divorce, the contributions made to their 401(k) plan prior to marriage are not subject to division – provided that the contributing spouse can prove exactly how much they contributed prior to marriage. Therefore, for the spouse seeking to protect as much of their nest egg as possible, it is essential to present evidence of your 401(k)-account balance, if any, on the date of marriage. This will maximize your chances of ensuring that only a portion of the account balance is actually up for grabs upon divorce.
But It Is My 401(k), Right?
You solely contributed to the 401(k), it arises from your employment, and it is held solely in your name; so, it is your 401(k), right? Perhaps wrong. As discussed above, Texas is a community-property state and characterizes all property acquired during the marriage as community property, even where the property arises solely from one spouse’s income or is held solely in one spouse’s name. You may think of your 401(k) as yours, but a Texas divorce court may think otherwise.
Protect Your 401(k) Strategically
While most people envision a judge dividing up marital assets upon divorce, the reality is that the vast majority of divorces end in settlement, not a dramatic trial. More importantly for those interested in protecting their 401(k) plan above all, the ability to reach a mutual settlement serves a prominent role in any asset-protection strategy.
Often, each spouse has a similar goal (namely, to be awarded as many assets as possible); however, each spouse may have a slightly nuanced way of approaching that goal. For some, staying in the marital home is of the utmost importance. Others want to walk away with as much liquid cash as possible, or perhaps to retain an ownership interest in a closely held business entity. Still others desire to be awarded assets – such as the funds within a 401(k) plan – that have the highest potential for appreciation. This is where strategic settlement comes into play.
Although a Texas divorce court must divide the entire community estate upon divorce, it is not required to divide each and every asset comprising the community estate. Instead, there is leeway – particularly where settlement is involved – to award whole assets to each party while still effectuating an overall division of the community estate. For example, one spouse may be awarded $100,000 in a 401(k) plan, while the other spouse is awarded the marital home in which the couple has $100,000 in equity. This is an equal division of assets without actually dividing either individual asset.
Savvy divorce attorneys employ this strategy during settlement negotiations and, if settlement negotiations fail, in court to maximize the chances that those assets most prized by you, such as your 401(k) plan, are awarded to you and those assets least prized by you are awarded to your spouse.
401(k) Plans Are Complex – Call McClure Law Group Today
The Texas marital-property laws surrounding 401(k) plans are complex and the existence of a 401(k) loan, non-vested benefits, pre- and post-marital agreements affecting property, or other unique circumstances can further complicate the situation. If you find yourself facing or contemplating divorce and want to maximize the chances of protecting the funds within your 401(k) plan, contact the knowledgeable attorneys at McClure Law Group at (214) 692-8200 today.