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What is a reconstituted estate and why do I need one?

What is a reconstituted estate and why do I need one?

 

            Briefly, what happens in a divorce is that the court will split the assets owned by you and your spouse (the community estate) in a just and right manner. Tex. Fam. Code § 7.001 (2015). Sometimes, however, a spouse has wasted community assets by spending it on a paramour, for example, or attempted to hide assets from his or her spouse and the court. This is called waste or fraud on the community. See generally Schlueter v. Schlueter, 975 S.W.2d 584 (Tex. 1998). In these situations, the trial court may reconstitute the estate by adding back into the community estate the value of the property that was wasted or disposed of fraudulently. See Tex. Fam. Code § 7.009. This can be done without recovering the property from the third party.

            After the trial court reconstitutes the community estate—determines what the value of the estate would have been without the waste—the court has three options in dividing the estate. The court may: (1) award the defrauded spouse a greater portion of the remaining community estate, (2) award a money judgment to the defrauded spouse, or (3) a combination of the two. Id. The result is essentially more money or assets to the defrauded spouse. Let’s see how this can play out.

            Anticipating divorce, a husband gives $200,000 to his brother with the thought that he’ll get that money back after the divorce is finalized. The remaining community estate is valued at $800,000. If the wife does nothing, the trial court will divide the $800,000 between the two parties and award each $400,000. The husband then ends up with $400,000 from the court and $200,000 from his brother for a total of $600,000.

 

 

Estate remaining (un-reconstituted estate)

Share given by court to wife (50% of un-reconstituted estate)

Share given by court to husband (50% of un-reconstituted estate)

Waste by husband

Husband’s actual take (assuming his brother returns the money)

$800,000

$400,000

$400,000

$200,000

$600,000

 

            Had the wife discovered the fraud and asked the court to reconstitute the estate, the court could have awarded her a larger portion of the remaining estate, even if the brother had not returned the money.

            To reconstitute the estate, we look to the property wasted and add that value to what’s left. Here, it’s $1,000,000. That value is then divided between the spouses, awarding each $500,000. But since the court can’t turn $800,000 into $1,000,000, the court has to instead give the wife a greater share of what’s left.

 

Waste by husband

Estate remaining

Value of reconstituted estate

Share of remaining estate given by court to wife (half of the value of the reconstituted estate)

Share of remaining estate given by court to husband

Husband’s actual take (assuming his brother returns the money)

$200,000

$800,000

$1,000,000

$500,000

$300,000

$500,000

 

            The court can also award a money judgment to the defrauded spouse. Let’s say the couple owned a home valued at $200,000. I’ll make the wife the bad guy in this example. We’ll pretend she gave her boyfriend a fancy watch and a motorcycle and went on a vacation with him and that the value of all of these gifts added up to $100,000. The money remaining in the spouses’ joint bank account is $200,000.

            The value of the community estate (cash and house) that the court sees is $400,000. The court will split it down the middle giving each spouse $200,000. In this simple example, let’s say the court will give the wife the house and all equity and the husband all remaining cash.

 

Waste by wife

Estate remaining (un-reconstituted estate)

Share given by court to husband (50% of un-reconstituted estate)

Share given by court to wife (50% of un-reconstituted estate)

$100,000

$400,000

$200,000 (cash)

$200,000 (house)

 

            But the wife wasted community property! Half of that watch, motorcycle, and vacation belong to the husband! So the court can reconstitute the estate by adding the value of the gifts back to the estate, making the value of the reconstituted estate $500,000. The court will then split the value of the reconstituted estate, giving each spouse half ($250,000).

            Yet in this example, there is not a good way to divide the assets to award each spouse the value of half the reconstituted estate. The court may resolve this problem by awarding a money judgment in the husband’s favor. The court can award the house to the wife and all remaining cash on hand to the husband as before and also a money judgment ordering the wife to pay her husband $50,000.

 

Waste by wife

Estate remaining (un-reconstituted estate)

Value of reconstituted estate

Share given by court to wife (50% of un-reconstituted estate)

Share given by court to husband (50% of un-reconstituted estate)

Money judgment in favor of the husband

$100,000

$400,000

$500,000

$200,000 (house)

$200,000 (house)

$50,000

 

 

            Why not a money judgment for $100,000 if the wife wasted $100,000? Because that $100,000 in community property that the wife spent belonged 50% to her. Thus $50,000 of what she gave to her paramour was basically hers to give. That’s why she only has to pay half of it back to her husband.

            But wasn’t the wife supposed to get $250,000 not just the $200,000 house? Yes. For the purposes of reconstituting the estate, the court is pretending that it awarded all the wife’s waste—the watch, the motorcycle, and the vacation—to the wife. So we can look at the numbers and pretend that the wife gets $300,000 (house and gifts). She then has to make up the amount to her husband in order to put her award at half of the reconstituted estate. Shown another way:

 

Value of the reconstituted estate

Share given by court to husband

Share given by court to wife

$500,000

$200,000 (cash)

- $50,000 (money judgment)

=$250,000

$200,000 (house)

+ $100,000 (waste)

-$50,000 (money judgment to the husband)

=$250,000

 

            Finally, the court can do a combination of the two above methods, giving the defrauded spouse a greater share of the assets and a money judgment. Let’s say the husband gambled away $100,000 without the wife’s knowledge or consent and the couple’s only assets are $100,000 in the bank account and the husband’s $20,000 vehicle. Without reconstituting the estate, the court would consider the value of the estate to be $120,000 and give each spouse half.

 

Remaining estate

Share given by court to husband

Share given by court to wife

$120,000

$20,000 (vehicle)

+ $40,000 (cash)

=$60,000

$60,000 (cash)

 

            If the wife catches the fraud, the value of the reconstituted estate would be $220,000. Each spouse would thus get $110,000. To give the wife her full portion, she would have to get a greater share of the remaining estate and a money judgment.

 

Remaining estate

Husband’s waste

Value of the reconstituted estate

Share given by court to husband

Share given by court to wife

$120,000

$100,000

$220,000

$20,000 (vehicle)

+100,000 (waste)

-$10,000 (money judgment to wife)

=$110,000

$100,000 (cash)

+ $10,000 (money judgment)

=$110,000

 

            All of the three ways a trial court can exercise a remedy—a greater share of the remaining estate, a money judgment, or a combination of the two—result in more value to the defrauded spouse. It’s worth it to look at your spouse’s transactions to determine if there was any waste and if any mo

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