There are two types of property in a marriage:  separate property and community property.  Separate property is defined as anything either spouse owned before the marriage or anything either spouse received during the marriage through inheritance or a gift.  Community property is any property owned during the marriage that is not separate property.  Property issues can be very complex, and this post is designed to give just a brief overview of a few issues.

In Texas divorce cases, there is a presumption that all property is community property.  In order to prove separate property, the proponent must establish by clear and convincing evidence that the property is separate.  It will generally not be enough for one spouse to simply claim that he or she had certain property before the marriage or that it was received as a gift / inheritance.  He must show records to back it up.  Below are a few examples of separate property issues and how a party could prove them.

Example 1:  Husband owed Home 1 prior to marriage.  Wife moves into Home 1 with Husband.  Two years later, the couple sells Home 1 and uses the $50,000 proceeds from the sale of Home 1 as a down payment on Home 2.  Home 2 is now co-mingled community property and separate property.  Husband must be able to prove (a) that he owned Home 1 as his separate property prior to the marriage, and (b) exactly how much money from Home 1 was put down for Home 2.  He could show that Home 1 was his separate property by producing a deed for the house dated before the marriage and showing him as the owner.  He could show how much money from Home 1 was put down for Home 2 through closing records from the sale of Home 1 and the purchase of Home 2.  Through those records, Husband has established a separate property claim for $50,000 in Home 2.  Husband would be entitled to a dollar for dollar credit for that separate property.

Example 2:  Wife has a separate property bank account before the marriage that contains $100,000.  The account is in her name alone.  Wife marries Husband and continues to have her paycheck deposited into the account.  Her paycheck is community property, and now she is commingling community funds and separate funds.  If Wife is making withdrawals from the account over time, Wife will need to providing a tracing of the account to prove her separate property.   There are a variety of different tracing methods used in Texas.  The most common is the “community out first” rule.  This provides that all withdrawals are presumed to be community so long as there are community funds in the account.  Wife deposits an additional $20,000 into the account during the marriage.  She withdraws money numerous times, for a total of $30,000 in withdrawals.  Under the community out first rule, the first $20,000 out would be the community funds.  The next $10,000 would be her separate property.  In the end, the community would have $0 in the account and Wife would have $90,000 in separate property.  There are other methods of tracing that could lead to a different result.

Example 3:  Husband and Wife are married for 30 years.  Husband receives an inheritance of $50,000 ten years into the marriage.  Husband deposits the $50,000 into the parties’ joint bank account.  Over the years, hundreds of deposits and withdrawals are made from that account.  Twenty years later, the parties divorce.  Husband is unable to provide tracing to prove what happened to the $50,000 because it was hopelessly commingled with community funds.  Husband is most likely out of luck in trying to keep any of the inheritance as his separate property.   The community property presumption will prevail.

Separate and community property issues can be complex and far exceed what can be put into a single blog post.  It is important to have an attorney familiar with the rules and the various ways to characterize property in order to ensure that it is done right.  It is also important to have an attorney who will help you understand the cost benefit analysis of trying to prove separate property.  Is it worth it to spend thousands of dollars on a forensic accountant to trace the money in an account?  Maybe.  It depends on the amount of separate property at issue.

Divorce

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Texas is a community property state, and there is a presumption that ALL property in the name of either party at the time of divorce is community property.  Certain types of property are classified as separate property, specifically any property owned before the marriage or any property received by inheritance or gift during the marriage.  The big problem here is proving the amount and existence of the property as separate.

For example, Husband had several 401(k)s from employers he had before the marriage.  At some point during the marriage, he rolled the 401(k)s into a new account.  He is able to show the creation of the account during the marriage and that the funds came from these other accounts.  The only way the husband can show by clear and convincing evidence that the money in the account is his separate property is to produce statements from right before the marriage and trace those accounts to their current location.  If the account has been rolled over and there is no paperwork from the prior account, this can be very difficult to do.   Husband would have a much more difficult time in this scenario if he had rolled the separate property accounts into an account co-mingled with community property.  Establishing what is separate and what is community in a co-mingled account can be extremely difficult.

If you happen to receive separate property during the marriage, either by inheritance or gift, it is advisable to keep that property in its own, separate account.  Once you co-mingle the funds, it can be hard to prove which funds were separate and which funds were community, especially if some funds have been spent or moved around.  It is also critical to keep records reflecting where the separate funds came from so you can prove that money is, in fact, your separate property.

Although very few people expect to get divorced, the bottom line is that many people find themselves in that situation some day.  The moral of the story is to keep records of separate property accounts going all the way back to before the marriage or to the date you received the separate property.

Divorce

 

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