In a Texas divorce, marital property—or the community estate—must be divided fairly between the spouses. Any attempt by either spouse to thwart this fair division is considered fraud against the community estate, and it can directly affect how the marital property is ultimately divided by the court.
If you have questions or concerns about the just and right division of marital property, don’t wait to consult with an experienced Round Rock divorce attorney.
Property Division in Texas
In Texas, any asset or debt that either spouse – or both spouses together – acquires during their marriage is considered marital – with very few exceptions that include the following:
A gift one spouse receives in their name alone
An inheritance one spouse receives in their name alone
The pain and suffering component of either spouse’s personal injury settlement or court award
Marital assets – as offset by marital debt – must be divided fairly given the unique circumstances that apply, and fraud on the estate is one such circumstance.
Because property division directly affects each spouse’s financial future, it has the potential to become a hotly contested divorce term. When one spouse attempts to cheat the other out of a fair division, the matter becomes even more challenging.
Factors that Guide Property Division
In addition to the fraud on the community, factors like the following guide the just division of marital property in the State of Texas:
Each spouse’s separate assets
The size of the marital estate
The length of the marriage
Either spouse’s wrongdoing, which can play a role even in a no-fault divorce
Each spouse’s age and overall health
Any disparity between the spouses’ earnings
The contributions each spouse made to the community estate, including in the form of homemaking and childcare
Each spouse’s financial obligations
Whether either spouse is expecting an inheritance
Any gifts one spouse made to the other
The tax implications of the division under consideration
The terms included in a valid prenuptial or postnuptial agreement
Ultimately, the court can consider any relevant factor in determining the division of marital property in a Texas divorce.
Separate Assets
The assets that either spouse owns at the time of the marriage and keeps separate during the marriage remain the property of that spouse. However, the distinction between separate and marital assets isn’t always cut and dried.
Texas courts begin with the presumption that all the assets and debts at the time of divorce are marital, and the spouse who lays claim to a separate asset is tasked with proving its separate nature.
Any intermingling of separate and marital financials can blur the line that divides them. Further, if an asset increases in value over the course of the marriage, that increase is likely to be treated as a marital asset upon divorce. A prime example is the increase in value of a retirement account that either spouse owned before the marriage.
Financial Fraud
Fraud on the community in a Texas divorce refers to either of the following:
One spouse’s intentional misrepresentation of the marital finances
One spouse’s intentional nondisclosure of relevant financial information to the other
Either of these can lead to a skewed division of assets upon divorce.
Financial fraud can also take the form of unfair spending practices that disadvantage the other spouse. Examples include lavish spending on wining and dining with a paramour or racking up large gambling debts.
When a couple marries, their finances commingle, and each spouse has equal claim to the marital estate. This is based on the fact of the marriage and not on the amount of revenue or assets that each spouse contributes to the marriage.
As such, when one spouse engages in any action that diminishes the size of the marital estate without the other’s involvement, knowledge, or permission, it’s considered fraud on the estate.
It’s Complicated
A Texas divorce that focused solely on the division of marital property was recently appealed, and the results highlight just how complicated it can be to resolve this divorce term.
The Basics
The couple in question divorced in 2019 after 17 years of marriage. The wife was 22 years her husband’s junior, and 4 years into their marriage, he began collecting social security benefits. The husband put these benefits toward mortgage payments on the home he owned before marriage and that the couple lived in.
The husband also covered the home bills, which included all the following:
The mortgage
The utilities
The routine maintenance
The HOA dues
The wife, on the other hand, paid for home insurance, the couple’s health insurance, housekeeping expenses, and vacations together.
Employment
The husband owned and ran a business, while the wife had various jobs that included working for her husband’s business without compensation. Later in the marriage, she obtained a full-time job that paid $96,000 at the time of the divorce and that allowed her to earn an MBA tuition-free.
The wife also had about $35,000 in student loans that preceded the marriage, which her husband was in charge of paying. At the time of the divorce, however, the wife reported that he’d made only a handful of payments, and as a result, the debt had grown to almost $100,000.
The husband was largely responsible for managing the marital finances, and the wife maintained that she wasn’t well informed about their overall assets and debts.
Commingling of Assets
About six years prior to the divorce, the husband asked his wife to borrow $22,000 from her retirement account to cover tax debt on their home. For doing so, he promised to transfer the home from separate to marital property via deed. When her husband executed the deed in question, the wife understood it to mean that the home had become community property.
About a year before their divorce, the wife took out an additional $35,000 loan to cover debts that included two of her husband’s business credit cards—along with a personal credit card in each spouse’s name. At the time of the divorce, the wife maintained that her husband had used her personal card to purchase supplies for his business without her consent.
The Home Is Deemed the Husband’s Separate Property
The trial court ultimately found that the house the couple lived in was the husband’s separate property based on both the following factors:
The special warranty gift deed didn’t include the legal language necessary to convert separate property to marital property.
The husband asserted that he didn’t receive reasonable disclosure regarding the legal effects of converting his separate property to community property prior to the deed’s creation.
The Wife’s Forensic Accounting
In protection of her own financial rights, the wife engaged an expert forensic accountant who completed a careful analysis of the couple’s finances based on all the following:
Their bank statements
Their loan documents
Their tax records
Their business records
All liens
From this analysis, the forensic accountant pinpointed several badges of fraud. A badge of fraud is a sign that financial shenanigans are likely. When enough of these badges are gathered, it supports a conclusion of intentional financial fraud on the community estate, which is generally identified in relation to a pattern of suspicious conduct rather than by direct evidence.
The badges of fraud identified in this case included all the following:
The husband’s failure to maintain records documenting transactions for his business, including customer orders, invoices, documentation of cost of goods sold, and documentation of labor costs
The husband’s understatement of income based on comparing bank statements to his personal income tax records
The business’s inadequate books and the husband’s failure to timely pay business taxes
The husband’s implausible explanations for his behavior
The fact that the husband failed to produce his business’s complete books led to the forensic accountant recreating these records for an eight-year period – based on industry norms as well as the company’s profit margins prior to the couple’s marriage and in the two years prior to their divorce.
Ultimately, the forensic accountant found about $259,500 in business funds that were either unaccounted for or were wasted, which is yet another badge of fraud. The wife maintained that she was led to believe the business was much less financially successful than it actually was.
Finally, the forensic accountant found that more than $200,000 of community funds went toward the mortgage on the home, which the husband identified as his separate property.
Another $100,000 of community funds were used to pay the home’s property taxes and home improvements. Finally, nearly $55,000 of community funds went to keeping the husband’s business up and running.
The Divorce Granted
While the wife sought a divorce based on her husband’s cruelty, the trial court granted the couple a no-fault divorce – confirming the husband’s assessment that the house was his separate property.
The court, however, recognized the wife’s claim of fraudulence regarding the $22,000 she’d withdrawn from her retirement account for the home’s tax debt and, as such, required the husband to take on all remaining tax debt.
Each spouse walked away with their own financial accounts, life insurance policies, vehicles, personal effects, home furnishings, and credit card and post-separation debts. Further, the wife kept her retirement account while the husband kept his business.
In response to the husband’s fraud on the estate, the wife was awarded a judgment of more than $200,000, which represented 60 percent of the cumulative value of the fraudulence.
The Appeal
The appeals court identified two primary errors in the trial court’s findings.
The Husband’s Home and Fraudulent Inducement
Fraudulent inducement refers to promising future performance without the intention of following through. The wife claims that her husband induced her to take a $22,000 loan against her retirement account in exchange for transforming the home they lived in from separate to community property.
For fraudulent inducement to apply, the perpetrator must have intended not to keep the promise offered, and the appeal court found that, in this case, the husband intended just that.
He signed the deed reciting his intention to convert the separate property to community property, along with a Survivorship Agreement reciting that he and his wife owned the property jointly.
Later, however, he claimed he didn’t understand what he was signing. The appeals court found there was sufficient evidence to demonstrate that he had no intention of keeping his promise, which supported a fraudulent inducement judgment.
Fraud on the Community: Waste
While fraud in the form of waste is generally reserved for instances when a spouse transfers or gifts community property to a third party, a spouse who is in control of community funds but fails to accurately account for them also suffices.
Once fraud on the community is established, the court is charged with assessing the total amount and dividing it with the intention of rectifying the estate in a just and right manner. This can mean awarding a larger percentage or a money judgment to the spouse who was wronged.
The appeals court agreed with some of the trial court’s points related to waste and disagreed with others. As a result, the case was returned to the trial court for a new division that addresses both concerns.
An Experienced Killeen Divorce Attorney Is Standing By to Help
Brett Pritchard at The Law Office of Brett H. Pritchard – proudly serving Round Rock for more than 20 years – is a formidable divorce lawyer who dedicates his imposing practice to diligently advocating for his valued clients’ financial rights under highly challenging circumstances, and he’s here for you too.
To learn more about what we can do to help you, please don’t wait to contact or call us at 254-781-4222 to schedule your free consultation today.