Life Insurance and Its Role in Property Division as Part of a Texas Divorce

Texas applies the inception of title rule to decide if an asset or property in a divorce falls under the community estate or under one of the separate estates of you or your spouse. The inception of the title focuses the judge鈥檚 attention on when the transaction occurred that brought about ownership of the property in you and your spouse. When considering how the inception of title rule impacts assets in divorce, you may wonder, 鈥淎re life insurance proceeds considered marital property in Texas?鈥

If you entered into a contract to purchase land before your marriage, then the 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 made payments on the land with community income, you would eventually pay off the note on the ground and receive title to the home. It would not matter even if you used community property income to pay 95% of that note. You signed the contract to purchase the house before your marriage. While your spouse would likely have a valid claim for reimbursement against your separate estate, the land itself would remain your individual property.

This significantly impacts our discussion on treating life insurance policies in a Texas divorce. Are life insurance proceeds marital property? Texas employs the inception of title rule to determine whether a property belongs to the community estate or the separate estates. Therefore, if the insured party (you or your spouse) owned the policy before marrying, then the policy constitutes individual property. However, life insurance proceeds may be marital property in that the community estate must receive reimbursement for any community property income used to pay the premiums up until the time of your divorce.

Are life insurance proceeds marital property in Texas?

In asking whether life insurance proceeds are marital property, know that characterizing certain types of property and personal property purchases in a divorce case can be complicated. Let鈥檚 consider an example where your spouse owned a life insurance policy on his life before your marriage. During your wedding, 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.

Are life insurance proceeds marital property? Is that policy the separate property of your spouse, or does it belong in the community estate? In Texas, if the initial premium was paid before the marriage began, the life insurance policy would typically be considered his individual property.

What about credit accounts being opened during the marriage? How are they treated in a divorce?

Let鈥檚 say that you and your spouse have had money problems during your marriage. It all boils down to issues with your spouse opening up credit cards without your knowledge. Then your spouse building up huge balances on each account. Now that you are divorcing him, your concern is that the law will consider the accounts opened during your marriage part of the community estate.聽Will you be responsible for paying them after the divorce?

If your spouse opens a line of credit or a credit card account in Texas, the law considers this an act of the community estate. This is unless you clearly and convincingly show that the creditor (Bank of America, VISA, etc.) agreed to rely solely on your spouse鈥檚 separate estate to settle any debts from that account. This may be not easy to achieve since you do not readily access your spouse鈥檚 agreements with these creditors. You may need to request them in discovery 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 your marriage. Suppose you intend to dispute the community nature of your spouse鈥檚 debts. In that case, 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 can 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聽can be the most confusing and complicated when it comes to characterizing 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 different estate?

During your marriage, retirement plan contributions are generally treated as income, making them community property of you and your spouse. Suppose the participant spouse began to participate in the plan before the date of your marriage. In that case, a portion of the program may be your separate property, and part of the method may be a part of the community estate. Timing is essential 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?

Timing is crucial when determining the characterization of business interests in a Texas divorce. The classification of your ownership stake in a business as part of your separate estate or community estate depends on the circumstances of acquisition.

The assets of a business, for example, will almost always belong to the company 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 shops are one man (or one woman) 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.

You own the assets of your sole proprietorship. Each asset may form part of your separate estate or the community estate. As discussed repeatedly in today鈥檚 and yesterday鈥檚 blog posts, the presumption stands that all existing property belongs to the community estate when you divorce. You must demonstrate that certain assets belong to your separate estate, exempting them from division by the judge.

If your interest in a business is part of the community estate- if it is your spouse鈥檚 business that is in question and not your own- any increased value of that company benefits your spouse as well as you. On the other hand, if your interest in a business is part of your separate estate, you are the only one who accrues any benefit from the increase in value of that company.

What if your working on your spouse鈥檚 business contributed to its increase in value?

However, an interesting question arises if your work on your spouse鈥檚 separate property business dramatically increased the value of that business. In that case, even if the business is your spouse鈥檚 individual property, shouldn鈥檛 you positively impact the work you contributed to the company? This is the basis for community property- you and your spouse share in the benefits donated to one another are property during your marriage.

In the inception of a title state like Texas, it would follow that your spouse鈥檚 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 in the industry. It would be up to you to submit an estimate of what your time and labor are 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 what separate property is. The Texas Family Code provides some detail regarding the rights you have to property in each estate.聽What options do you and your spouse have to bypass these codified rules and instead choose your 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. You and your spouse can also gift property to each other. This might alter its classification as part of the community estate or one of your separate estates.

Otherwise, Texas has some default rules that are in place that address how property is classified in a divorce. Let鈥檚 consider a hypothetical situation to illustrate this point better.

Let鈥檚 assume that your husband has previously been the spouse who has performed most of the work within your jointly held business venture. In Texas, certain community property assets held solely in either your name or your spouse鈥檚 name are subject to the sole management and control of the named spouse. Other assets may be jointly controlled and managed.

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 which do not incorporate theories of community property into the property law of their state. This will make a future divorce more complicated. Generally speaking, the direction 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.

Just because an asset or debt is considered part of the community estate in Texas does not guarantee that this designation will remain when you relocate to another state. When we look to judge-made law (as opposed to the family codes), there isn鈥檛 much here to provide guidance. Tomorrow鈥檚 blog post will pick up where we left off today. We鈥檒l discuss how complicated things can get if you decide to move to a state that doesn鈥檛 incorporate community property concepts into its divorces.

Questions about the content of today鈥檚 blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the content of today鈥檚 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 an excellent opportunity to ask questions and receive direct feedback about your particular circumstances. We hope that today鈥檚 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.

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