Does it matter whether property is characterized as community or separate in a divorce?
Yes, because you keep all your separate property but you must divide all community property with your spouse when you divorce.
What is Separate Property?
Property is characterized as separate if you owned or earned it prior to marriage, acquired it by gift or inheritance during marriage, were compensated for a personal injury or enjoyed a capital gain on stock or other property.
What is Community Property?
In Texas, all property is presumed to be community unless you can prove it’s separate. Examples of community property include all income earned during marriage, property bought by community funds during marriage, all income and dividends earned on stocks, bonds, or other investments during marriage and income earned on separate property during marriage.
How Does Property Become Community or Separate?
The character of property is determined when title is acquired. This means if you acquire title to a house prior to marriage, it’s separate property. On the other hand, if you acquire a house during marriage, it’s community property unless you bought it with separate money. Once title is acquired and it becomes separate property, you can sell the house and buy another without changing its character – it’s still separate because you used the proceeds from the sale of a separate property asset to buy the new house.
Can You Transform Property?
Yes, there are several ways to change the character of property. For example, spouses can change community property into separate property by agreement during marriage. Another way to transform separate property to community is to commingle funds. If you put separate property in a community account it may become community property unless you can clearly trace the separate funds into and out of the account.
What is a Reimbursement Claim?
If you use separate funds to purchase a house and then use community funds to pay the mortgage and add capital improvements, the community estate has a reimbursement claim on the house. The house belongs to a separate estate but the community estate has an interest in the property because the mortgage was paid by community funds and the capital improvements during marriage added value to the house. Reimbursement claims need to be estimated and the separate estate must pay the claim into the community estate to then be divided between the spouses.
How Do You Keep Property Separate?
To maintain the character of separate property it needs to be segregated from community property into a different account. Commingling separate and community property can transform the separate property to community if it can’t be traced into and out of the commingled account.
What About My Trust Fund?
If a trust fund was established by your parents the principal of the trust fund is separate property while any income earned by the trust fund and distributed during marriage becomes community property.
Can a Couple Agree to Own No Community Property?
Yes, if you execute a post nuptial agreement that transforms all community property into separate property. This arrangement makes it easier to maintain the character of inherited or gifted separate property, especially if the estate is large.
What About Mineral Interests?
Oil and Gas interests have the same character as the surface interest because they are considered a depletion of the land. Both royalty and bonus payments are considered separate property; however, rental payments are not separate because they simply maintain an operator’s right to drill for oil and gas and are not a direct payment for extraction of minerals.
The basic rule in characterizing property is that all assets acquired during marriage are presumed to be community unless shown to be separate by clear and convincing evidence. It’s important to keep separate property segregated from community funds because if they are commingled the separate property can become a community asset. And, couples can agree to transform their community property into separate property by signing a post nuptial agreement. The character of property is important in Texas.
Written by: Harry Munsinger, J.D., Ph.D.
Harry practices collaborative and estate law in San Antonio. He has over twenty years experience resolving disputes involving divorce, probate, wills, and trusts. Harry was an adjunct law professor at the University of Texas and St. Mary’s University. He has published several textbooks and over forty psychological and legal articles. Harry has been a forensic psychology expert, a licensed psychologist and a litigator.