Community Property Law in Texas and How to Plan Around It | gray reed

Jack Bux and his high school sweetheart, Diane, have been married for a few years, but the pandemic has took its toll on their relationship, and they could soon separate. At the start of the marriage, Jack had a number of real estate interests – a house with a mortgage, a retirement account and a small part of the family business – and now he fears that Diane could walk away with half of what he built. over the years. Like most Texans, Jack is aware that when it comes to marital property, Texas is a “state of community assets.” What does this really mean for Jack’s home, retirement account and business?

The answers to these questions depend on the type of property involved, when it was acquired, and any agreements between the parties regarding the ownership that may alter the default community ownership regime.

Marital property in Texas is deceptively simple. Property belonging to one of the spouses falls into one of two categories: separate or communal. Separate property is anything owned before the marriage or received by gift or inheritance during the marriage. Community ownership is everything else. Accordingly, any marriage has three domains: a communal domain belonging to both and the separate domain of each party – yours, mine and ours. At the time of divorce, the community’s patrimony is the only property subject to division, and this property must simply be divided in a “just and equitable” manner. So, in general, community property is all the parties acquire during a marriage, and it should be divided fairly – not necessarily 50/50 at the time of divorce.

While this may seem simple at first glance, countless real-world issues arise when assessing estates in divorce and distinguishing between joint and separate property. Let’s discuss some of the problems our characters Jack and Diane are likely to encounter:

Assets owned before the marriage but paid for during the marriage

Like Jack, many people get married owning a home or vehicle they bought before the wedding. Due to the creation of the title rule, which states that a property retains the original (i.e. separate or communal) character it had at the time of purchase, any property purchased before the marriage will remain a separate property. HOWEVER, debts on separate property that are repaid during a marriage create a claim on separate property.

Thus, with Jack’s house purchased before the marriage and paid off during the marriage using the community assets (income earned during the marriage), the community estate will be able to effectively “recoup” the repayment of the principal of the mortgage, thus giving Diane, the non-owning spouse, an opportunity to recover some of the value accumulated by the house during the marriage. Even though Diane’s name never appears on the title deed to the house, she can recover those funds. A particularly true caveat in this booming housing market: Any gain in value of the property itself due to factors beyond the control of the parties remains for the benefit of the separate property. Thus, Diane will include the value paid for the principal of Jack’s mortgage as part of a community “reimbursement” claim against Jack’s separate estate, as Jack’s separate property increased in equity when the community paid off their mortgage.

Retirement account opened before marriage with contributions during marriage

Like many people, Jack also married with a retirement account. Again, creating the title rule allows Jack, the account holder, to keep the account as a separate property. But like paying off his mortgage, when community funds are deposited into the retirement account, the community will have an interest in the account. To add even more complexity, any given retirement or brokerage account will generally increase in value through a combination of deposits, interest, increases in the value of its holdings, and dividends. For Jack’s retirement account that he opened before the marriage but owned and contributed to during the marriage, each of these may have separate or community implications. Therefore, Jack will likely need a forensic “trace” of his retirement account to prove which part of the account is his separate property. Otherwise, the community interest in the account will be any earnings on that account during the marriage, which is in all likelihood an overstatement of the true community interest.

Business owned before marriage

As in the previous illustrations, the interest in a business held before marriage may retain its character as separate property. That said, any number of events that might occur during the marriage will complicate this. For example, Jack may have capitalized the business from time to time with outside funds. To the extent that this has occurred, these funds, and Jacques’ related share in the business, may be subject to a claim for reimbursement by the community estate. Likewise, Jack’s efforts during the marriage to increase the value of the company are also the subject of a possible application for Community reimbursement. Or, as a final example, Jack may have an agreement with the company that he will acquire shares of the company on a vesting schedule, which could create a blurry picture due to partially vested shares at the time of the divorce. . Either of these elements could create the need for a forensic accountant or, at a minimum, an expert family law attorneys to assist Jack and Diane in the valuation and division.

Tipping the scales in your favor

Texas community and separate property laws can be complex, with unexpected traps for the unwary. Finally, do not assume that in the event of a divorce, community property will simply be “halved” or given to the person in whose name it is titled, as many factors can add complexity to the valuation. overall and the division of marital property. property.

In our next article, we’ll discuss how, before entering into marriage, potential spouses can remove many of the uncertainties that can, and often accompany, a “ready-made” communal property arrangement by having a professional experienced drafting a prenuptial agreement to simplify the division of property in the event of a divorce.

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