Community property versus separate property can be a complex matter in reaching a divorce settlement

Division of property in a divorce settlement under Texas Family Law can be a complex process. The first issue that must be clarified is the characterization of property that is owned by you and your spouse—what is “community property” and what is “separate property”?

These are legal terms of art, which means they have specific meaning under Texas Family Law.

Almost everybody has an opinion about what is community property and what is separate property. However, under Texas Family Law, these definitions are very specific, and will frequently differ the preconceived ideas you have as to their meaning.  The law on characterization of property is extensive and this is not intended to cover all aspects of this complex area of the law.

Simple definitions of community property and separate property

Community property:  all property, except separate property, that was acquired by either spouse during the period of marriage.

Separate property:  generally held to be property

  • owned by a spouse prior to marriage,
  • acquired by inheritance or gift at any time during the marriage,
  • compensation for personal injuries (but not loss of earnings compensation) received by a spouse during marriage.

Property exchanged for any of the three items above may also be considered separate property. This is known as the “mutation” of separate property. For example, if you inherit $30,000 during the marriage and immediately take that $30,000 and buy a car for $30,000, the car is your separate property.  However, if you put the $30,000 in the bank and spend it on a nice trip, then come back, and slowly build the account back up to $30,000 and then buy the car, the car will be part separate property and part community property (the amount that you built back up). The money spent on the trip is likely simply gone (we hope you had fun!).

Common misconceptions of community versus separate property

Just because only one spouse has his or her name on a title or deed, or on a bank account, Texas Family Law may not consider this separate property. And even property earned during the marriage to be paid out at a later date, such as deferred income from an employer, may not be considered separate property.

Texas family courts require clear and convincing evidence of separate property ownership within the strict bounds of the legal definition. The court typically requires proof by tracing the source of the separate property acquisition, and when funds are co-mingled in a joint account, it may become difficult to prove. Clear and convincing evidence generally requires documentary evidence of the separate property (e.g. bank statements for all the years beginning with the beginning of the marriage or when the separate property was acquired, if after the marriage).

As a general rule, the appreciation of separate property continues to be separate property. For example, if you own a separate property house that increases in value during the term of the marriage, that increase in value is separate property. However, if payments of principal were made during the marriage with community property, the community estate could have a “claim for reimbursement.” This is an equitable claim (which means it is an opportunity for the court to consider any benefits that the community may have received from the separate property in conjunction with the community funds used to pay down the debt on a spouse’s separate property).

However, as a general rule, interest and dividends earned on separate property are community property. Capital gains, on the other hand, continue to be separate property, because capital gains are an “appreciation” in the value of property. For example, if you own one share of stock at the time of marriage that has a value of $100 which at the time of divorce is worth $150, that increase in value (the capital gain) is all separate property. This makes sense to the court because you still own just one share of stock!

For a number of years ending in September 2009 there was a Texas Family Law statute that created a specific claim for “economic contribution.”  The idea was that the value of the community estate’s interest could be precisely determined and was not an equitable claim.  In other words, if you proved the claim then it should be awarded, it was not discretionary. Unfortunately, the statute was severely flawed and was finally abandoned.

How community is divided in Texas–more misconceptions

In Texas Family Law, there is no presumption that community property will be divided in a 50/50 split. The test for the court is to divide the community property in a manner that is “just and right.” And as with community and separate property, just and right is another legal term of art. There are many issues that may be considered by the court in deciding how your community property will be divided. In the 25 years I have practiced Family Law in Texas, I have seen divisions of property anywhere from 50/50 up to 99/1.  That 99 percent was in a case of severe physical abuse where the husband failed to appear at trial. This kind of disparity is rare, but it can happen.

Community property can be converted to separate property by simply gifting community property from one spouse to another (but you must be sure you can prove it by clear and convincing evidence–remember documentary evidence). This can also be done with a “Partition Agreement” which is a written agreement entered into during the marriage that sets aside certain community property as separate property. This agreement must meet specific statutory requirements to be effective and is subject to attack for various reasons.

Until a few years ago, there was no way of converting separate property into community property. The Texas legislature then passed a law providing a specific manner in which that conversion can be accomplished. This also requires a written agreement that must meet specific statutory requirements in order for it to be effective.

The measure of the value of property and at when to value

The value of community property to be divided is determined as of the date your divorce (or reasonably close to that date). Value usually refers to Fair Market Value or the current marketable price.

Debt considerations–community debts offset the value of community property

Your attorney should be able to provide you with a worksheet to complete to assist in calculating the value of your estate taking into consideration not only the community and separate property assets, but the debts as well.  Before you go to trial, the Court will customarily require that each party file a sworn inventory and appraisal that sets out all the property and debts of the parties and the values of each. This does not mean that you need to count the forks in your drawers (or that it is even desirable!).  This is what is in bank accounts, the values of your vehicles, your house, etc.  The household furniture and furnishings will generally be lumped into one line item unless you have something of extraordinary value (such as a valuable piece of art).

Be careful about debts incurred after separation but before the divorce is granted. As I have said in an earlier Blog, a case can easily pend for more than a year before getting to trial. During this time everyone continues to live. As a general rule the Judge will have each party be responsible for any debt that party incurred from the date of separation until the date of divorce without considering it in reaching a just and right division. This is not a hard and fast rule, but it is something that should be given close attention.

Beware of special rules defined in case law

Many special rules have been adopted by the Texas Family Law courts addressing the just and right standard mentioned above. These rules have become a matter of case law and can weight as heavily as the Texas Family Law statutes do in the judge’s decision on your property division. If you are concerned about how your property will be characterized and treated by the court in your divorce, seek the advice of an attorney experienced in Texas Family Law and in the prosecution of complex property division in Texas courts.