It’s important to be proactive when protecting retirement funds. In the event of a divorce, most spouses expect to divide assets such as the house, vehicles, and bank accounts. However, when it comes to retirement funds, spouses are sometimes surprised to learn that retirement funds will also be divided.
Under the Texas Family Code, retirement benefits accrued during marriage are community property. Retirement savings and other benefits acquired during the marriage are divided in a divorce regardless of whose name is on the plan or who earned it.
A good way to secure retirement assets is with a marital property agreement such as a prenup prior to marriage, or a postnup during marriage. A prenup is a binding agreement that establishes the property and financial rights of each spouse in the event of a divorce or death. If a couple is already married, they may sign a postnuptial agreement. Both prenuptial and postnuptial agreements are used to keep property separate and outside of the community estate.
Prenups for retirees or those close to retirement are becoming more and more common. They can designate 100% of a spouse’s retirement benefits as the separate property of that spouse.
Without a marital agreement, the portion of a retirement plan owned before marriage is separate if it can be proven by clear and convincing evidence. Contributions to the plan and other benefits accrued during marriage are community property. Income produced by the retirement plan, including reinvested income, is also community property. Community property is divided in divorce. There is no automatic 50/50 division. If the plan has community and separate property in it and there is no way to distinguish them, it will all be presumed to be community property and will be divided “in a just and right division” by a judge.
All this uncertainty can be avoided with a prenup or postnup. An agreement can award each spouse 100% of his or her retirement, or can specify each one’s percentage in each plan by agreement.