Separate Property: What it is and How to keep it

Under the Texas Family Code, separate property consists of (1) property owned or claimed by a spouse before marriage; (2) property acquired by the spouse during marriage by gift, devise, or descent, and (3) recovery for personal injuries sustained during marriage, except for recovery for lost wages or earning capacity.

Community property is defined as all other property acquired during the marriage other than separate property.

These rules apply whether a marriage ends by divorce or death of a spouse. For instance, if a person’s Will gives separate property to someone, then it will be important to determine what the separate property consists of.

There is a higher standard of proof under the law to prove a claim for separate property. At the time of divorce, all property is presumed to be community property unless proven otherwise. Separate property must be proved by clear and convincing evidence. The key to proving a claim for separate property is good record keeping. Maintain documents of assets and debts existing on the date of marriage, and keep on-going records. It is not sufficient to show you had an investment account at marriage with $10,000 in it, and that the account at divorce is your separate property. Why? Income earned during marriage from separate property is community property (because it was earned/acquired during marriage). Additionally, it is unlikely that there would be no deposits or withdrawals in the account during the marriage, and it needs to be determined if those were separate or community.

Let’s look at some common divorce scenarios:

1. Investment account value was $50,000 at date of marriage and $100,000 at date of divorce.

There will most certainly be fluctuations in the value of stocks during marriage, up and down. Those don’t change the character of the stock. One share of Southwest Airlines stock worth $50 at marriage is still separate property at divorce even if the stock is now worth $75.

Interest income is community. Deposits into the account after marriage from community property (e.g. wages) are community, and any investments purchased with those funds are community.

The typical scenario at divorce is that the investment account is mixed: community and separate. If the spouses cannot agree on what is separate then it is necessary to hire a forensic accountant to trace the account from the date of marriage to divorce. This is where good records come into play. Without them it is unlikely that a clear and convincing case can be made.

2. House Owned Prior to Marriage, Sold after Marriage, and Proceeds used to Purchase New Home with Spouse

Maintain all closing documents from the sale of the first house and purchase of the second house. Keep bank statements to show what happened with the proceeds from the sale of the first house (e.g. deposit into bank account, copy of check and statement showing money going toward the purchase of second house).

This is another typical situation of mixed title, because usually there is a down payment, which, in this case, is separate property, and a mortgage note signed by the husband and wife. The separate property interest equals the down payment divided by the purchase price.

The Texas Legislature allows spouses to change the rules of characterization, and that can be done through pre-marital and post-marital agreements. There are technical rules to follow in drafting the documents, and you should consult an attorney if you think that you need such an agreement.

In the meantime, keep all of your records