Marital Settlement Agreement: How to Draft It Well

What an MSA is and what it covers

A marital settlement agreement is a written agreement that settles the main issues of a divorce. Depending on the state, it may also be called a separation agreement, a property settlement agreement or a marital termination agreement. In the Texas Family Code the section that allows it is titled “Agreement incident to divorce or annulment” (7.006).

It usually covers the division of property, spousal support (called maintenance in Texas), the allocation of debts and, where there are children, parenting terms. It is not a prenup. A prenuptial agreement is made before the marriage. An MSA is made when the marriage is ending.

When an MSA becomes binding in Texas

The steps below follow the Family Code. The order and timing in a real case depend on the court and the facts. The court reviews the terms; it does not negotiate them for either spouse. A draft should therefore be reviewed before it is signed, especially because a mediated agreement that meets Section 6.602(b) entitles a spouse to judgment on it (6.602(c)).

1. The spouses sign a written agreement about the division of property, liabilities and maintenance (Family Code 7.006(a)).
2. Until the court renders the divorce, either spouse may revise or repudiate the agreement unless it is binding under another rule of law (7.006(a)).
3. An agreement reached in mediation (6.602) or at an informal settlement conference (6.604) is binding if it has a prominent statement, in bold type, capital letters or underlined, that it is not subject to revocation, is signed by each spouse and is signed by any attorney present at signing. A spouse is then entitled to judgment on it (6.602(b)–(c), 6.604(b)–(c)).
4. The court reviews the terms. If it finds them just and right, they are binding on the court, and it may set them out in the decree or incorporate them by reference (7.006(b)).
5. If the court finds the terms are not just and right, it may ask the spouses for a revised agreement or set the case for a contested hearing (7.006(c)).
6. In most cases the court may not grant a divorce before the 60th day after the suit was filed. The statute removes the wait in some family violence cases (6.702).

Children: parenting terms need practical detail

Spouses may sign an agreed parenting plan for conservatorship and possession of the child, including variations from the standard possession order (Family Code 153.007(a)). If the court finds the plan is in the child's best interest, it shall render an order in accordance with it. If not, it may ask for a revised plan or, after notice and hearing, order its own plan (153.007(b), (d)).

Terms in the order can be enforced by all remedies for enforcing a judgment, including contempt, but are not enforceable as a contract (153.007(c)). That is a reason to write them in clear, specific language. A plan that lists only a schedule can leave open practical questions: notice, exchanges, missed time, rescheduling, holidays and decision-making authority. The less room for interpretation, the less room for conflict later.

Business interests and complex assets

If the spouses do not agree, a Texas court divides the estate of the parties in the manner it deems just and right, with due regard for each spouse and any children (7.001). An agreement lets the spouses choose the structure themselves.

When one or both spouses own a business, standard language is often not enough. The goal is not always a sale. Sometimes the business stays with the operating spouse and the other spouse's financial interest is addressed another way: a buyout, offsetting assets, deferred payments or another negotiated structure. In some cases the agreement can add a time-based formula tied to a later sale. The key is that the terms match how the business really works and define each spouse's rights clearly.

Property division: net value and who owes the lender

A house, a car or another major asset cannot be divided by market value alone. What matters is the net value after mortgages, liens, loans and other obligations. A Texas decree must also specifically divide or award each spouse's rights in insurance policies (Family Code 7.004).

An agreement that says one spouse will pay a debt does not by itself change the loan contract. The lender is not a party to the divorce, so each borrower named on the loan generally stays liable to the lender. Strong drafting therefore sets a date by which a shared loan is refinanced, paid off or otherwise resolved, and says what happens if that does not occur. Without that plan, a spouse who thinks the issue is closed can face credit damage or collection efforts later.

Taxes and retirement accounts

A Texas court may consider whether a specific asset will be taxed and when the tax will be due (Family Code 7.008). It must also determine each spouse's rights in pensions, retirement plans, IRAs and similar plans (7.003).

Federal tax rules matter too. 26 U.S.C. 71, which made alimony taxable to the recipient, was repealed for divorce or separation instruments executed after 31 December 2018, so the date of the instrument matters. Under 26 U.S.C. 1041, no gain or loss is recognized on a transfer between spouses, or to a former spouse if the transfer is incident to the divorce, meaning it occurs within one year after the marriage ends or is related to its end.

ERISA requires pension plans to bar assignment of benefits, except under a qualified domestic relations order (29 U.S.C. 1056(d)(1), (d)(3)). A transfer of an IRA to a spouse or former spouse under a qualifying divorce or separation instrument is not treated as a taxable transfer (26 U.S.C. 408(d)(6)). Because the tax result depends on the type of payment, the date and the facts, tax language should not be treated as boilerplate.