Originally published by The Law Office of Bryan Fagan, PLLC Blog.
Texas utilizes what is known as the inception of title rule in order to determine whether an asset or piece of property in a divorce belongs to the community estate or to one of the separate estates of you or your spouse. Inception of title focuses the attention of a judge on when the transaction occurred that brought about ownership of the property in you and/or your spouse.
If you entered into a contract to purchase land before your marriage then inception of title would follow that the land is your separate property. It would not be divisible in your divorce, therefore. When you later married your spouse and make payments on the land with community income, you would eventually pay off the note on the land and receive title to the home. It would not matter even if you used community property income to pay 95% of that note. The contract was signed by you to purchase the home prior to your marriage. While your spouse would likely have a valid claim for reimbursement against your separate estate, the land itself would remain your separate property.
Now, how does this impact our discussion on how life insurance policies are treated in a Texas divorce. Since our state does utilize the inception of title rule in order to analyze whether property is part of the community estate or separate estates, if the policy was owned by the insured party (you or your spouse) prior to your marriage then the policy is your separate property. Your community estate would be reimbursed to the extent that community property income was utilized in order to pay the premiums before the time of your divorce.
Are there any rules in Texas that handle special circumstances?
Some types of purchases of property and personal property can be particularly difficult to characterize in a divorce case. Let’s consider an example where your spouse owned a life insurance policy on his life prior to your marriage. During the course of your marriage he continued to pay premiums on that policy out of your jointly held bank account. Each of you would deposit your paychecks into that account. The question follows: is that policy the separate property your spouse or does it belong in the community estate? I believe in Texas that it would be his separate property as long as the initial premium was paid prior to your marriage beginning.
What about credit accounts being opened during the marriage? How are they treated in divorce?
Let’s say that you and your spouse have had money problems during the course of your marriage. It all boils down to problems associated with your spouse opening up credit cards without your knowledge and building up huge balances on each account. Now that you are divorcing him, your concern is that those accounts will be considered part of the community estate since they were opened up during the course of your marriage. Will you be responsible for paying them after the divorce?
If your spouse opens up a line of credit or a credit card account in Texas, doing so will be considered as an act of the community estate unless you are able to show clearly and convincingly that the creditor (Bank of America, VISA, etc.) agreed to look only at your spouse’s separate estate in order to pay any debts associated with that account. This may be difficult to achieve since you do not readily have access to the agreements that your spouse signed with these creditors. You may need to request them in discovery so that you are able to utilize them for your protection during a potential trial.
The burden of proof would fall on you to overcome the presumption of community property for any asset/debt acquired during the course of your marriage. If you intent to dispute the community nature of your spouse’s debts you will need to act quickly and request documentation showing if the credit card company, for example, agreed to look only to your spouse for payment on that debt. If you are able to come up with evidence like this then you will be in good shape. If not, the presumption is likely going to be too much for you to overcome.
Retirement benefits in a community property state
I think out of all property that could be at issue in a Texas divorce, retirement benefits can be the most confusing and complicated when it comes to having to characterize them as either part of the community estate or a part of one of your separate estates. First of all, you and your attorney will need to determine whether the plan is part of a government pension plan or is a private company 401(k) or similar retirement vehicle. In some instances, you may have already retired and chosen to take a lump sum payout of a pension plan. That lump sum would be directly rolled into an Individual Retirement Account (IRA). Is any income from separate property accounts part of the community estate or your separate estate?
In a general sense, contributions made to a retirement plan during the course of your marriage will be treated as income would be. Thus, the contributions would be treated as community property of you and your spouse. In the event that the participant spouse began to participate in the plan prior to the date of your marriage, then a portion of the plan may be your separate property and part of the plan may be a part of the community estate. Timing is important when it comes to apportioning the balance of your account between the two different estates.
How are business and financial assets handled in a Texas divorce?
If you own an interest in a business (like a partnership or LLC) then that interest that you own may be part of the separate estate of yours or could be part of your community estate. The facts and circumstances surrounding when you came to acquire that property is particularly important in this regard. Again, just as we saw with retirement benefits- timing is everything when it comes to the characterization of business and financial interests in a Texas divorce.
The assets of a business, for example, will almost always belong to the business itself and are not part of the community or separate estate of you or your spouse. Until distributions occur to its owners, the profits from that business are not part of either estate.
Most small businesses that are relevant to Texas divorces are classified as sole proprietorships. These are one man (or one woman) shops that are not classified under the law like an LLC or a partnership. If you are a contract employee then you likely operate as a sole proprietorship, technically speaking.
The assets of your sole proprietorship belong to you. Your interest in each asset individually could be a part of your separate estate or the community estate. As we have touched on numerous times throughout today and yesterday’s blog posts, it is presumed that all property on hand at the time of your divorce is a part of the community estate. You would need to prove that particular assets are part of your separate estate and thus not eligible for division by the judge.
In the event that your interest in a business is part of the community estate- if it is your spouse’s business that is in question and not your own- any increased value of that business benefits your spouse as well as you. On the other hand, if your interest in a business is as part of your separate estate, then you are the only one who accrues any benefit from the increase in value of that company.
What if your working on your spouse’s business contributed to its increase in value?
An interesting question arises, however, if your work on your spouse’s separate property business increased dramatically the value of that business. In that case, even if the business is your spouse’s separate property shouldn’t you gain some positive impact for the work that you contributed to the business? This is the basis for community property- you and your spouse share in the benefits that are contributed to one another’s property during the course of your marriage.
In an inception of title state like Texas, it would follow that your spouse’s interest in the business remains their separate property even if the increase of the value of that business is due to his labor and time. You would likely have a claim for reimbursement of your time and work into the business. It would be up to you to submit an estimate of what your time and labor is worth.
What does it mean to own property or have an ownership stake in a business?
Community property states like Texas have passed laws that tell you what community property is and tell you what separate property is. The rights that you have as to property in each estate is detailed to a certain extent in the Texas Family Code. What options do you and your spouse have to bypass these codified rules and instead choose your own manner of dividing up (and not dividing up) assets and debts in a Texas divorce?
The options that you and your spouse could choose to partake of before your divorce begins would be a premarital or marital property agreement. Property can also be gifted between you and your spouse and that, as well, could potentially change whether the property counts as part of the community estate or as part of one of your separate estates.
Otherwise, the state of Texas has some default rules that are in place that address how property is classified in a divorce. Let’s consider a hypothetical situation to better illustrate this point.
Let’s assume that your husband has heretofore been the spouse who has performed most of the work within your jointly held business venture. In Texas, that means that some community property assets (like ones that are held in either your name or your spouse’s name individually) are subject to that named spouse’s sole management and control. Other assets could be controlled and handled jointly.
What happens if you move from Texas to a common law state?
As it happens with more and more regularity, you and your spouse could end up moving from Texas to one of the many states who does not incorporate theories of community property into the property law of their state. This will make a future divorce more complicated. Generally speaking, the law of the state where you are domiciled at the time of your divorce will govern the divorce- not the laws of Texas, no matter how long you lived here.
What you need to know is that just because an asset or debt is considered to be part of the community estate in Texas does not mean that designation will continue when you move states. When we try to look to judge made law (as opposed to the family codes) there isn’t much here as far as providing us with guidance. In tomorrow’s blog post we will pick up where we left off today by discussing how complicated things can get if you decide to move to a state that doesn’t incorporate community property concepts into its divorces.
Questions about the content of today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the content of today’s blog post please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week here in our office. These consultations are a great opportunity to ask questions and receive direct feedback about your particular circumstances. We hope that today’s blog post has been both informative and entertaining. Thank you for your time and consideration of the services our office can perform for you and your family.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
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