In the State of Texas, the assets that a couple acquires over the course of their marriage are considered marital or community property – with very few exceptions. However, in some instances, a spouse’s personal injury settlement can be excluded from community property.
A recent Texas divorce case highlights the complications divorcing couples often face when dividing personal injury settlements during divorce. If you have questions or concerns about property division in your own divorce case, it’s time to reach out to an experienced Killeen divorce attorney.
Establishing Separate Assets
In Texas, everything that a couple comes to own while they are married is considered marital property unless the separate nature of the asset can be proven. Common exceptions to the presumption of marital property are inheritances and gifts received during the marriage in the name of one spouse alone.
A portion or all of a personal injury settlement can similarly be claimed as a separate asset, but the spouse making the claim needs clear and convincing evidence to establish separate ownership.
A Recent Divorce Case Involving a Personal Injury Settlement
In a recent Texas divorce case, the wife challenged the separate nature of her husband’s personal injury settlement after the trial court deemed the monthly payments to be his alone. The circumstances of this unique case dictate how the personal injury settlement must be addressed in divorce cases. It also shows how quickly such cases can become complicated. As such, it is always a good idea to work closely with a skilled Killeen divorce attorney.
The couple married in 1998, and the husband was the primary breadwinner while the wife took on the role of a homemaker who occasionally held part-time jobs outside the home.
In 2006, the husband was seriously injured on the job, which led to a lawsuit on his behalf. The man was incapacitated at the time of the lawsuit, so the wife was also a party to the case in the role of his guardian. In 2009, a settlement agreement was reached.
The Settlement Agreement
When the wife signed the settlement agreement on behalf of her and her husband, she released all future claims against the defendants. Then, the defendants made cash payments and committed to monthly payments for the duration of the husband’s life – guaranteeing a minimum duration of 30 years. Consider the details of the personal injury settlement:
The amount of $200,000 went to the husband and to the law firm representing the couple.
The amount of $1 million went to the husband, to the specific lawyer representing the couple, and to the insurance company that had a workers’ compensation lien against the settlement.
The settlement agreement determined that the cash payments should be divided between the husband and wife with the wife receiving $50,000 and the husband receiving $1,150,000.
Monthly payments were set at $3,125 with an increase of 2 percent annually, and there was a provision about using the monthly payments to purchase an annuity, which is how these payments were held at the time of the couple’s divorce.
The monthly payments were identified as being "for the benefit of" the husband.
Finally, the settlement agreement had this to say about the couple’s financial responsibility relative to the settlement:
[They are] responsible for paying, satisfying, and completely resolving from this settlement their attorney’s fees, court costs, and case expenses and all hospital, health care, medical, Medicare/Medicaid, and worker’s compensation bills, expenses, or liens, if any in a manner so that neither the Defendants nor the Insurers will be responsible for any payment or the reimbursement of same.
The Divorce Filing
The wife filed for divorce in 2020, and the husband counterpetitioned. Before the case went to trial, they reached an agreement regarding the division of the majority of their marital assets.
However, they had not reached an agreement on the legal characterization and division of the proceeds that came from the personal injury settlement. While the original cash payments had been exhausted, the monthly payments from the annuity remained a point of contention. This matter was heard in a bench trial, which decided on the following issues:
The characterization of the funds stemming from the annuity – whether marital or separate
The wife’s claim of personal medical concerns, which led her to request ten years of spousal maintenance in the event she was not awarded at least half of the annuity payments
The Court’s Findings
The trial court that heard the couple’s arguments found that the monthly annuity payments were the exclusive property of the husband – based on the fact that they were funded exclusively by a personal injury award made to him directly.
The court proceeded to dissolve the marriage between the two spouses, to confirm that the monthly annuity payments belonged to the husband alone, and to order that the husband pay the wife $1,500 a month in alimony for the next two years.
The wife appealed the trial court’s rulings – contending that it was in error when it characterized the monthly annuity payments as her husband’s separate property – rather than as community property that belonged to both of them.
As mentioned, those properties that either spouse comes to own during the marriage are presumptively marital. It falls to the spouse who claims separate ownership to disprove this characterization.
Breaking down Personal Injury Settlements
The compensation a personal injury claimant receives in relation to the injuries they sustain, including physical and mental pain and suffering and any disfigurement, is deemed the separate property of the person who suffered these losses.
However, recovery that is related to the claimant’s loss of earnings, medical expenses, and other related costs is deemed community property because it represents the earnings the spouse would have contributed to the marriage had they not been injured and had they continued to earn the way they did before the accident.
In other words, it is the claimant’s responsibility to assert that part or all of their personal injury settlement is separate property and then prove this assertion with clear and convincing evidence.
The husband contended that the remaining settlement proceeds represented by the annuity belonged to him alone. As such, he was responsible for proving this claim with clear and convincing evidence to a standard that exceeds the usual preponderance of the evidence used in civil cases.
The Appeals Court Reviews the Trial Court’s Findings
The question the appeals court is left to grapple with is whether the trial court’s conclusions are in accordance with the law. When courts determine whether the proceeds from personal injury settlements are separate or community property, they generally first consider whether the settlement terms were allocated to specific categories of damage.
When the Amount Is Clearly Separate Property
In some cases, the settlement agreement is clear on the matter of which damages the payment is based upon. For example, the appeals court cites a case in which the matter is addressed as follows:
Payment herein is made for physical pain and mental anguish and physical disfigurement alone, and the sum announced herein is being paid exclusively on the basis of pain, suffering, mental anguish and other intangible damages.
In such cases, the damages are clearly the sole property of the injured spouse. However, not every case is as clear-cut. Contact a Killeen divorce attorney to discuss your unique case.
In This Divorce Case
The settlement agreement in this divorce case required the couple to satisfy specific financial obligations. It also earmarked specific amounts for each spouse – with the monthly payments addressed as a benefit of the husband. However, the settlement agreement did not address how the amounts were categorized in relation to the type of damage involved.
While the language used to describe the monthly payments indicated they were for the husband's benefit, it did not address whether they were intended as compensation for pain and suffering, wages lost, medical expenses, or anything else.
Regardless of what kind of damages the compensation was based upon, it was all for the husband’s benefit, which further clouded the issue of whether the monthly payments were marital or separate property.
The Husband’s Take on the Matter
The husband maintained that the monthly annuity payments were his separate asset for two reasons.
Community Property Obligations
The husband first points to the fact that the settlement agreement specifically addressed paying specific community property obligations, such as medical bills and attorney fees, from the early cash payments, not the monthly payments. The husband believed this was proof that the monthly payments were designated for his personal pain and suffering.
However, the appeals court specifies that the settlement agreement does not incorporate clear language that makes this point. Instead, the settlement agreement stated that the community property obligations in question should be satisfied "from this settlement," which the appeals court interpreted to include both the early cash payments and the monthly annuity payments.
Income Tax Consequences
The husband also references the settlement agreement’s federal income tax consequences and the language used, including the following language:
All sums set forth herein constitute damages on account of personal physical injuries or sickness, within the meaning of Section 104(a)(2) of the Internal Revenue Code and physical injuries or physical sickness within the meaning of Section 130(c) of the Internal Revenue Code.
He maintained that the use of the terms "personal physical injuries" and "physical injuries" was reflective of the proceeds being intended to specifically compensate him for his physical injuries and not to be used for damages to community property.
However, the appeals court found this argument lacking in the face of the Supreme Court’s interpretation of the language noted above as including both lost earnings and medical expenses.
The Matter of Alimony
The wife also identified the trial court as being in error in regard to her being awarded only two years of spousal maintenance. She sought indefinite maintenance in response to her inability to provide for her own minimum reasonable needs with the property division she received and her inability to earn enough to provide for these needs based on the physical disability she claimed.
The Wife’s Request on Appeal
The appeals court noted that the wife had originally sought only ten years of maintenance rather than the indefinite period sought on appeal. Further, she didn’t provide a percentage that applied to her disability and shared that she had worked previously. In addition, others testified that she’d worked before and likely could again – with the right limitations in place.
The appeals court noted that the wife had requested alimony only in the event that she did not receive at least half of the monthly payments in the division of marital property. If the division of marital property leaves her with funds that are adequate to provide for her reasonable, minimum needs, she would not be entitled to alimony to begin with.
In other words, if the appeals court overturned the ruling on the division of the personal injury settlement, alimony would likely not be necessary for the woman to support herself.
The Appeals Court’s Ruling
The appeals court found that the husband failed to show clear and convincing evidence that the monthly annuity payments were his separate property. To do so, he would have needed to disconnect the monthly payments from damages related to his lost earnings and medical bills, which he failed to accomplish.
As such, the appeals court found that the trial court was in error when it characterized the monthly annuity payments as the husband’s separate asset. The appeals court reversed the ruling on the payment classification and sent the case back to the trial court for limited proceedings to divide the marital property and decide on the wife’s request for alimony.
It's Time to Consult with an Experienced Killeen Divorce Attorney
Brett Pritchard at The Law Office of Brett H. Pritchard in Killeen, Texas, is a trusted divorce attorney who dedicates his practice to defending the rights of all his clients. Mr. Pritchard has a wealth of experience guiding cases involving complex property division toward favorable resolutions.