Dividing 401(k)s, Pensions and Stock Options in Texas

Can my spouse claim part of my 401k in divorce?

Yes, the part of your 401(k) earned during the marriage is community property, and your spouse can be awarded a share of it. Contributions you made before the marriage, and their growth, can be your separate property.

Texas Family Code § 3.007(c) says the separate share of a defined contribution plan is traced the same way as any other asset. In practice that means statements from the date of marriage and an account history. If the old statements are gone, the plan administrator or a former employer may still have them.

Do retirement accounts always have to be divided?

No. Spouses often agree that one keeps the retirement accounts and the other keeps the house or more of the cash. A court can also award an entire account to one spouse as part of a just-and-right division.

When retirement money is offset against other assets, adjust for tax. Money in a traditional 401(k) or IRA will be taxed when it comes out, while home equity or cash in a bank account usually will not be taxed the same way.

How do we split a pension after 20 years of marriage?

Only the part of the pension earned during the marriage is divided. Texas courts generally measure it by comparing the service during the marriage with the total service, valued as of the divorce, so raises and service after the divorce belong to the employee.

The division is carried out by a qualified domestic relations order (QDRO) that the plan approves. The order can give the other spouse a share of each payment when the pension starts, or, under some plans, a separate benefit of their own. Survivor benefits need their own language, or the share may stop if the employee dies first.

Have the plan administrator review a draft of the QDRO before the divorce is final. A plan can reject an order that asks for a benefit form it does not offer, and fixing an order after the decree takes time and may require going back to court.

Will my spouse receive part of my stock options or RSUs?

Yes, for awards granted during the marriage, even if they are not vested yet. Texas Family Code § 3.007(d) covers employer stock option plans and restricted stock plans, and Texas courts and lawyers commonly apply the same formula to RSUs. Because an RSU is a promise of future shares rather than restricted stock, the grant documents should be reviewed.

• Granted during the marriage, vesting after divorce: the employee's separate share is the time from divorce to vesting divided by the time from grant to vesting. The rest is community.
• Granted before the marriage but requiring work during it: the separate share counts the time before the marriage (and any time after divorce) over the whole period from grant to vesting.
• Each vesting date is calculated on its own, under § 3.007(e).

Unvested shares usually cannot be transferred. Settlements commonly leave them with the employee and pay the other spouse their share when they vest, or offset an agreed value now. The grant agreements, vesting schedule and tax withholding all need review.

How are private equity and partnership investments handled?

The divorce divides the spouse's interest in the fund or partnership, not the underlying assets. That interest is characterized like any other property, by when and with what money it was acquired.

Valuation is the hard part. These interests are illiquid, may carry future capital calls and are usually subject to transfer limits in the partnership agreement. The common result is that the investor spouse keeps the interest and the other spouse receives other property for any community share, based on a value the parties accept or an expert supports.

Can I protect family wealth before marriage or held in a trust?

Yes. Property owned before marriage and gifts or inheritances received during it are separate under Texas Family Code § 3.001, provided they can be traced. Income from that property during the marriage is generally community unless a written agreement under § 4.103 says otherwise.

Assets held in a trust are owned by the trustee. A spouse's interest in a trust created by family is usually separate, but how distributions are treated depends on the trust terms. A prenuptial or postnuptial agreement and sound estate planning are the usual tools for keeping family wealth separate.

How do I avoid unnecessary taxes when dividing assets?

Use the transfer methods the tax law allows and compare assets after tax. Transfers of property between spouses incident to a divorce are generally not taxed when made, but the receiving spouse takes over the original tax basis, so stock with a large gain carries a future tax.

• Divide employer plans by QDRO; a payment to the former spouse under a QDRO is generally exempt from the 10 percent early-withdrawal tax, though income tax still applies.
• Divide IRAs by direct transfer under the decree, not by withdrawing cash.
• Look at basis, not just market value, when splitting investment accounts.

This is general information, not tax advice. John reviews these points with tax advisors, and your own CPA should confirm them for your situation.

Do we need a financial expert for a multimillion-dollar divorce?

Usually yes. Wealthy couples divide assets under the same Texas rules as everyone else, but larger estates hold assets that need an appraiser, a valuation expert, a forensic accountant or a tax advisor to value correctly. Without one, the spouse who knows the finances best tends to set the numbers. John B. Polk works with these professionals and helps decide which ones your case needs. See how he handles these cases or contact him.