“Texas is a Community Property state.” This is a phrase I use almost daily in my work as a Certified Divorce Financial Analyst. In fact, there are nine states in the United States that have Community Property laws.

But what does that mean for you?

When a married couple lives in a Community Property state, the law deems that any property acquired by either member of the couple during the marriage is jointly owned by both spouses regardless of how the asset might be titled or whose labor earnedthe money used to buy the asset.

Think of it this way: If you order a basket of French fries with money you earned at your job, in the eyes of the law, half of those fries belong to your spouse.

The other side of the Community Property coin is, Separate Property. Separate Property is property to which only one spouse has a legal claim.

“Characterization of assets as either Community Property or Separate Property can have a big impact on your divorce settlement.”

Understanding the difference between Community and Separate Property will be key to crafting and understanding your settlement agreement.

The Divorce Process in Texas

Separate Property

Separate Property is exactly what it sounds like.

It is property that can be legally claimed by just one member of a married couple.

If your spouse has Separate Property, you have no legal claim to that property, and it will not be subject to division in your divorce.

“In general, to be considered separate, property must have been acquired before the date of marriage.”

A simplistic way to think about this concept is that you take out what you brought in.

However, there are other types of property that are characterized as separate regardless of when the property was acquired. Those include gifts, inheritances, proceeds of personal injury settlements, and student loans.

If one spouse receives property as a gift (cash, securities, real estate, jewelry, etc.), that property is presumed to be separate.

The same goes for an inheritance.

Student loans, regardless of when they were originated (before or during the marriage), are generally held to be separate and the responsibility of the student.

Where Separate Property is present, the party making the claim must generally provide evidence for their claim (more on this later). In Texas, all property is presumed to be community until proven separate by clear and convincing evidence.

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Community Property

Community Property is sometimes referred to as marital property and consists of any income, real property, investment assets, cash or personal property acquired by either spouse during the marriage — except gifts, inheritances, the proceeds of a personal injury settlement, and student loans.

Previously Separate Property may come to be characterized as Community Property in the event of commingling.

Commingling happens when community assets are added to separate assets through new account contributions, or when community funds are used to pay on a separate liability or build equity in a separate asset.^[1]

Proving Claims

So, how do you prove a Separate Property claim?

The standard specified in the Texas Family Law Code is “clear and convincing evidence.”^[2]

For the purposes of establishing a separate property claim, that usually means having a paper trail in the form of account statements, a schedule of pre-marital property, and/or a pre-nuptial agreement.

If your marriage is more than seven years old^[3] and you aren’t the type to keep every scrap of paper, you may find it difficult to prove any Separate Property claims you may have.

Implications

To understand the implications of Separate Property claims, let’s look at a case study.

Dan and Martha have been married for 20 years. Dan has been a saver his whole life and started setting money aside after he got his first job at age 13.

When Dan and Martha married, Dan already had a Roth IRA with $100,000 in it, 100 shares of Apple stock, and a home with $50,000 of equity.

Martha came to the marriage with a bank account worth $20,000. During the marriage, Martha received a modest inheritance of $50,000 when her mother passed away shortly after the wedding.

In addition to being a saver, Dan is also a diligent record keeper. He has kept most of his old account statements and has detailed records of his real estate holdings.

This year Dan and Martha decided they no longer wanted to be married to each other.

Dan’s IRA is now worth $430,000.

After several stock splits, his original 100 shares of Apple now number 22,400.^{[4]The home was paid off five years ago and is now valued at $500,000.}

Martha kept her inheritance in the same savings account that she had when she married Dan. Let’s look at each asset in turn.

Dan’s Roth IRA

Over the years, Dan made wise investments and continued making regular contributions to his Roth IRA. Those contributions were made with Community Property, and thus commingling has occurred.

If Dan has the account statement from just before the marriage, he may be able to prove $100,000 of Separate Property. If not, the entire account is likely to be deemed community and subject to division.

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Dan’s Apple stock

Dan’s Apple stock has appreciated significantly in value over time. After several stock splits, Dan now owns 22,400 shares. During the marriage, he did not sell any shares, nor did he purchase any additional shares.

All dividends were reinvested.

If Dan can show an account statement proving his ownership of 100 shares of Apple purchased before the date of marriage, as well as evidence regarding each stock split, he may be able to claim all shares as separate.

Martha’s divorce attorney may point out, that all price appreciation and re-invested dividends are community, which may limit Dan’s claim to the value of the shares on the date of marriages.

The House

Once Dan and Martha were married, mortgage payments were made on Dan’s Separate Property home using community assets.

Commingling has occurred.

Dan never re-financed the original mortgage, so tracing his separate portion and the community portion should be simple to do. Dan would likely need to show documents from the original purchase and his first few years of payments before the date of marriage.

That could be sufficient evidence to claim his original $50,000 of equity as Separate Property. However, any growth in value of the property over time, as well as the equity built with community assets, are likely to be deemed community and subject to division.

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Martha’s Savings Account

During the marriage, Martha didn’t put any new money into her savings account except for the small inheritance from her mother.

She received a very modest rate of interest, and the account is now valued at $85,000. If Martha can show an account statement from just before the marriage and an account statement showing the inheritance proceeds being deposited, she may be able to claim the account as her Separate Property.

Dan’s divorce attorney may argue that all interest earned is community and subject to division which would limit Martha’s claim to the original pre-marital balance and original inheritance.

So, what are the potential outcomes?

If Dan is unable to prove any of his Separate Property claims, Martha stands to be awarded up to $2,789,112 of assets between the Roth IRA, Apple stock,^{[5]and the house.}

If Dan can prove all of those claims, she may not be awarded any portion of those assets.

Likewise, if Martha can prove her Separate Property claim, she may keep as much as $85,000 from her savings account. If not, she may only keep $42,500 (50% of the total account balance).

“It's common in divorce for clients to misunderstand the rules surrounding Community Property and the rules around proving Separate Property claims.”

If your case features Separate Property claims, keep in mind that the burden of proof falls on the party making the claim, and that they must provide “clear and convincing evidence” of those claims.

The presence or absence of such evidence could make a big difference in the value of your final settlement. A competent CDFA^® Professional may be able to help sort out and document those claims.

Always consult with your attorney on the legal validity of any Separate Property claims in your case.

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This is a case study provided for informational purposes only. Specific details of your situation and Texas law, which is subject to change, should be reviewed by your attorney. Robert W. Baird & Co., Inc. does not give tax or legal advice.