Separate property issues come into play in divorces and estates. The Texas rules of separate property are frequently misunderstood. Ignorance can cost a bundle of money. The distinction between separate property and community property in Texas is critical in the event of a divorce or death, especially when the deceased person did not have a will.
Local, board-certified, family-law attorney, Andrea James, gives us a peek into the complexity of separate property rules along with some tips about how to avoid separate property disputes when facing divorce.
What is (and is not) separate property
In Texas, separate property is property owned by the spouse before marriage; acquired during the marriage by gift, devise or inheritance; and recovery for personal injuries sustained by a spouse during the marriage (but not recovery for loss of earning capacity). For example, separate property might be income earned prior to the marriage; it might be inherited during the marriage; and it might be the increase in value of separate property stock shares.
Separate property is not the retirement account that you started after the marriage and contributed to through payroll deduction. It is also not dividends and interest earned on your separate property investments during your marriage. Those are just a few examples.
James gives an example of separate property problems when you do not have an appropriate pre-nuptial agreement (pre-nup) to protect your separate property.
Let’s say you have a separate property savings account. According to the rules, the interest earned on your separate property is not separate property. It is community property. Leaving the earned interest in the separate property savings account amounts to commingling. It starts out as separate property, but with the deposit of interest, which is community property, you may have inadvertently created problems with the characterization of that account. It is possible to lose the separate property character of property if you are not careful.
This might not be a big deal in a short marriage, but in a lengthy marriage or when commingling involves considerable wealth, mixing separate property with community property could amount to a mess. Expensive and detailed tracing work by an accountant might be required in attempting to identify the separate property from the community property. It is the burden of the separate property owner to prove the amount of separate property. You can have a situation where your separate property is so terribly mixed up with community property that is called hopelessly commingled. “There are situations in which you cannot recreate separate property because it has been so horribly commingled”, explains James.
Pre-Nups are not magic
A pre-nup is a premarital agreement that can, among other things, define separate property. It can’t guarantee all your separate property remains separate if you ignore the rules established by statute and those established in the premarital agreement. Failing to prevent the commingling of separate property can defeat the intent of the pre-nup agreement.
James gives the example of the not uncommon story of the bride’s parents giving her a gift of land.
Are they giving the land to the couple or to their daughter? If it is meant as a married gift, the land becomes each of their separate property (half and half). There can be no gift of community property.
Let’s say the land was clearly a gift to their daughter. She and her fiancé did not negotiate and sign a pre-nup prior to the wedding. They are now happily married. They decide to build a home on her separate property land. The bank requires both their names to be on the land title in order to get the financing on the house. The title company says the wife has to sign a document showing she made a gift of part of the land to her husband. She signs the paper and puts his name on the land title so the house can be financed in both names, using the dirt as collateral. Since there is no such thing in Texas as a gift of community property, they each now have a separate property interest in the entire property—house and land.
James explains that when you put someone’s name on a deed, there is a very strong argument that it was a gift.
Is it really a gift or is it intended to be for another reason? Putting someone’s name on a deed merely to facilitate a loan creates havoc down the road. In a divorce the judge has jurisdiction to, and must make a “just and right” division of the community property. But the judge has no authority over separate property. The court is not authorized to divest a spouse of his or her interest in separate property.
Fast forward several years – can this wife reestablish her separate property? James has the answer:
She may be able to fix this situation with an agreement after the fact. There are now provisions in the law that authorize the parties to enter into a written agreement converting community property into separate property or separate property into community property. However, every situation is unique, and there is no guarantee you will be able to remedy the problems after the fact. Everybody needs to be on the same page and make every effort to avoid creating the issue in the first place.
Investing before the vows
In these days of couples cohabitating before marriage, second marriages, and later-in-life first marriages, couples can face separate property issues without even realizing it. James has seen a number of unmarried couples buy a house together with or without plans to get hitched. Each person puts in 50% of the mortgage down payment. They later tie the knot. This house is not community property. It is the separate property of each of them. After the marriage, one spouse pays 100% of the mortgage payments and all the property taxes with his or her income earned during the marriage. Several years later, they break up. The house is not subject to division by the court because it is each spouse’s separate property. What about those mortgage payments and property taxes paid? There’s the pickle. The judge cannot award the house to either spouse or even order the sale of the house, because each spouse has an undivided, separate property interest in it. And, as far as one spouse having borne the majority of the financial burden of the house, the reality is that each spouse has a legal responsibility to maintain the household. James explains,
If you are going to buy property with your betrothed, you need to have agreements in place as to how bills are going to get paid. If not, you can inadvertently create problems down the road. And the problems can also become apparent if one of the spouses dies. The problems are also not limited to the death of a spouse who has no will. Similar legal tangles arise if the deceased spouse had not periodically reviewed her will and made changes to ensure the distribution of her estate consistent with her desires.
Separate property rules are complex. Many couples get into legal snarls because they were not aware of the legal issues that can arise. Whether you are considering a gift of separate property to an adult child or you have inherited separate property, learning Texas separate-property rules can be well worth the time and expense.