Texas is a community property state. While I am not licensed in other states, so can’t speak to all of them, I do know that The State of Washington and The State of California are both community property states, and I think that may be due to the Spanish influence.
- What does community property mean?
- What is separate property?
- Are inheritances during the marriage considered to be community property?
- Does one have to plan for a divorce before getting married?
What Does Community Property Mean?
All income earned during the marriage is community property unless you have a premarital or a postmarital agreement that changes the nature of the property. In the event of a divorce or a death, the court presumes that everything owned at the time of the divorce is community property. When dividing community property, the court will do what’s called a ‘Just and Right’ division.
Often, that plays out as a 50-50 division, but not always. It’s completely at the court’s discretion as to what that division will be. There are reasons why a court would do a disproportionate division of the community property estate, and one of them is looking at the cause of the breakup of the marriage; that’s where adultery comes into play. Another thing the court can look at is the income-earning potential.
The court can also look at a possible future inheritance and at the size of your separate property. When the court does a disproportionate division, it typically does it in a 55-45 split. It can be up to a 60-40 split in some egregious cases, but this is less common. And if the court goes beyond that, there’s a risk that the judgment could be overturned on appeal. There’s statutory pressure and case law pressure to make sure that they are within that zone of reason, and then if they are safe, they won’t get overturned.
What is Separate Property?
Separate property is whatever property you owned before marriage, inherited during the marriage, or were gifted to you during the marriage. And so, to prove separate property, you have to meet the high standard of ‘clear and convincing evidence.’ You need to have proof. You can’t say, “Well, I had $100 in my bank account when I got married, so I’m going to guess now I have $102.” You have to show the monthly bank statement to substantiate that the $100 didn’t get spent, and it’s still there, and that is called tracing. It can get complicated when you have a long marriage. You have to unwind all of the information. If you miss a statement, you don’t get to protect your separate property.
The thing about separate property is that a court cannot touch or divest the party of their separate property. The only thing they can do is confirm that it is separate property. So, whatever that separate property is doesn’t get factored into the division except for tilting the scale slightly, one way or another.
When we talk about separate property, it’s obviously whatever you had before marriage. If you are getting married, you should preserve your records properly if you have separate property.
Gifted things, typically pieces of jewelry like the wedding ring, are gift, and therefore separate property. Sometimes, people think, “She has $50,000 worth of jewelry given to her during her marriage.” Well, those items were gifts. So, that’s not going to get counted in our overall spreadsheet.
But it’s not enough to say it’s a gift; one has to prove that there was a donative intent. Generally, suppose it was given around a birthday or an anniversary. In that case, that’s pretty persuasive, especially if you have a card or a picture of you receiving it as a gift. That can help prove it. What does not help are those Lexus Christmas commercials where they drive the car in with a red bow; that’s not necessarily going to be a gift. You all were talking about buying a car, and you went out and bought a car, and it just happened to be around Christmas? Not really a gift.
The other thing is you can’t buy yourself a gift. “I think I did a really good job. I’m going to buy myself a Rolex watch.” That’s not a gift. And a lot of times, we argue over whether an artwork is an investment piece or a gift. If you show up to Grandma’s estate sale, and everyone agrees that you get the buffet out of her estate, but the heirs make you pay for it, that’s not a gift or an inheritance; that’s Grandma’s buffet that the community bought. It’s just interesting when we see those kinds of issues arise.
Are Inheritances During The Marriage Considered Community Property?
Inheritances are separate property. That financial account from your parents’ estate is yours. But you have to be smart with it by segregating it and keeping it separate, so it doesn’t get commingled. Because commingling a separate property can cause it to lose its character. If we cannot trace it or show its every step, it loses its character.
The other important thing is the concept of mutation. For example, “My mom leaves me her car, a beautiful 2016 Honda, and I decide I want to trade it in for something else, and when I go to trade it in, I get $5,000 for the trade-in.” Well, that $5,000 will continue to be separate property.
One thing that can be really complex and very confusing is when we have mixed-character assets. Like the example I stated, when I take that inheritance money and put it as a down payment for a car, I will finance the rest of the car. Hence, I’m going to be paying that loan off from community property. So now the car can be owned by both community and the separate property. Or one can have a reimbursement claim where we look at the car as a community property asset, but then you are entitled to get that $5,000 recognized as your separate property.
State law allows us to change that by a written contract —a premarital agreement. People with some assets or separate property often want to do a premarital agreement, saying that any income earned from that property will stay separate property. So, when you are getting married, you have options. We can say, “No community property, what I earn is mine, what you earn is yours, everything is just separate property” —and that’s common. Or what we do is say, “Alright, your earned income that you are working for will be community property, but any of the income earned off these other assets will be separate property.”
Another thing about separate property is any income that has been generated from it, for example, interest, cash dividends, and rental income; all of that income is community property. So, I sometimes end up with an inadvertently commingled state because that $100 was sitting in the bank account, but it was earning interest. And over the course of the marriage, I’d spend out of that account, and I’d replenish and put money back in that account, and now it’s hard to trace. So, it can get convoluted very fast.
Should One Have To Plan For A Divorce Before Getting Married?
The way I like to structure and have a conversation about this question is to have a marriage by design. There’s a whole body of law that wraps around your marriage in Texas. And it’s a completely different system in another state. But if you have a premarital agreement, it will be enforced and recognized outside the state. Those Texas laws will apply even if you are living in New York.