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What happens if you and your spouse mix community and separate property?

At the tail end of yesterday's blog post from the Law Office of Bryan Fagan, we introduced the concept of tracing as it pertains to determining whether the property is either going to be classified as community or separate in nature. Basically, a judge would need to look at the source of the funds that were used to purchase property in order to make a decision as to the nature of the property being owned jointly by spouses or individually. If the money used to buy a house was separate property then that house would be the separate property of the spouse whose funds were used to purchase it.

That is how things work in theory. Let's begin today's blog post by discussing just what happens if the property were mixed together with community-owned property. How, then, would the property be classified? Would it remain separate property or would it lose those separate property characteristics and instead become community property?

This is a concept that is known as commingling. Essentially, commingling occurs when separate property and community property assets are mixed together in such a way that it becomes difficult to determine the nature of any property involved. We know from yesterday’s blog post that the community property presumption would still be in effect. Therefore, it would be presumed at the outset of any analysis that the property in question is community property.

Using an example to illustrate a point about comingling

Suppose that you deposited $100,000 of your separate income into a bank account along with $100,000 of community income. If there are clear indicators that one deposit was made in separate income and the other was made in community income there would be no issue as to the ultimate determination. The reason is that there is another presumption that would go into effect. It is called the “community out first rule.”

The community out first rule means that when funds are withdrawn from a bank account it is done with community property income going out first. Using our prior example again, if you go into that bank account which contains $200,000 total ($100,000 each from your community and your separate estates) and withdraw $100,000 it is then presumed that the remaining $100,000 is separate property. If you were to, later on, withdraw an additional $50,000 and then despite $150,000 back into the account only $50,000 would count as separate property. Opening up two bank accounts- one for the separate funds and one for the community funds would have been the wiser move for you to have employed.

Premarital and post-marital property agreements

While the rules regarding the characterization of property can become quite convoluted and somewhat difficult to understand, it is fortunate for Texas spouses that you do not have to go by the letter of the law when dividing property. What many spouses choose to do is to employ what is known as property agreements, either premarital or post-marital in nature.

Why, exactly, would you and your spouse want to come up with an agreement before the time of your divorce that seeks to divide property between the two of you? Isn’t that a little upsetting? I mean, you are essentially anticipating the demise of your marriage. While this is one interpretation of a premarital or marital property agreement, there are valid and sensible reasons for doing so. One of which involves the protection of the property of one spouse from the creditors of another spouse. Let’s discuss this in greater detail using an example.

Creditor rights and marital property

Let’s say that you and your spouse have spent your entire married lives in Texas. Both of you have jobs. Your spouse has a 401(K) and you have an Individual Retirement Account (IRA). Your home is in Dallas and your spouse owns a home in Houston that was inherited from her deceased grandmother. Your spouse owns a luxury automobile that was given to him on his thirtieth birthday. You own some valuable personal property and have since before you and your spouse married. Finally, you own a joint checking account as well as separate checking accounts.

All of this is relevant because your spouse was just involved in an auto accident which left the driver of the other vehicle injured due to the alleged negligence of your spouse. The driver has sued your spouse. Your car insurance company is defending the lawsuit that was filed against your spouse. You and your spouse would like to know what would happen if the other driver is successful in proving negligence on the part of your spouse and in alleging that money damages are appropriate as a means to compensate the injured party for wages lost, pain and suffering, etc.

For starters, your home, regardless of its value, is exempt from any creditor as it counts as your homestead under Texas law. It does not matter whether you or your spouse is the debtor in this scenario or if the home is community or separately owned.

Next up on the hierarchy of concerns are any retirement savings that are in place. For you and your spouse that would be the 401(k) and IRA. Retirement plans and the cash value portion of life insurance policies are also exempt from the reach of creditors under Texas law. Again, it would not matter if these items were classified as community or separate property.

Finally, we would need to have a discussion about the property listed out above that is classified as separate property. Since your spouse is the actual debtor in this hypothetical scenario their vehicle is certainly within the reach of his creditors if it became necessary to access those funds to satisfy any civil judgment from the auto accident trial. Your separate property is rarely in that same category.

Solely managed versus jointly managed community property

Stick with me just a little bit longer and we'll have gone through the entire scenario that I laid out earlier. The only part we have not yet discussed is the checking accounts that you and your spouse own. Remember- one is jointly owned and two are operated separately- one by you and one by your spouse.

Sole management means that you would have been able to have control of the community property owned if you were single. Income received from jobs would count as solely managed community property because had you never gotten married that income would be solely managed by you as the person who went to the job and earned the income. This income is not available to your spouse’s creditor in the event that that creditor is a tort creditor. An auto accident arose from a tort action (civil negligence) and therefore that community checking account would be on the hook in the civil judgment phase of the trial, as would your separately managed checking account. Of course, your spouse’s separately managed checking account would also be in play.

Does it matter if the liability began before or during your marriage? As in, what if your spouse became a debtor before your marriage even started? Is your jointly managed checking account still on the hook to pay his creditor? The answer is, yes. It doesn’t matter if the auto accident occurred ten years before you and your spouse got married, the result would still be the same.

Reasons why premarital and marital property agreements are beneficial

The above hypothetical scenario is a great illustration of why premarital and marital property agreements can offer so many benefits to spouses. By having the ability to characterize your marital property in whichever manner suits you and your spouse, you remove power from other sources like creditors. If you know to go into your marriage that the jointly held checking account can be tapped by a creditor of your spouse’s it is simpler to classify any monies in that account as your separate property. This protects it from the reach of your spouse’s creditor.

Anticipating death or divorce

The other main reason that I can conceive of as to why you and your spouse may be interested in either a marital or premarital property agreement would be to determine how your property will be divided up in the event that one of you passes away or if a divorce occurs.

In a Texas divorce, a judge would order a just and right division of your community estate. Just and right is not the language that I am using to describe the division process. Rather, this is the language that the Texas Family Code utilizes in order to describe how the property will be divided up. This does not, however, mean that you and your spouse will be splitting up the property in an exact 50/50 manner.

What happens, then, if you and your spouse were married in Oklahoma and subsequently moved to Texas. As we learned earlier in yesterday's blog post-Oklahoma employs a common law theory of property ownership in the event of a divorce and Texas employs a theory of community property theory in that same event. Were you and your spouse to get divorced in Texas, you would be in a difficult position if you never worked. The reason for that is that the Texas court would not be able to award you any separate property because under common law theories on property division you would not have contributed any income to the marriage and therefore a court applying the laws of Oklahoma to your divorce would put you in a difficult spot.

The State of Texas has attempted to rectify this outcome by instituting laws regarding what has come to be known as Quasi-Community Property. Under quasi-community property law, any property that would have been classified as community property had you and your spouse been married and lived in Texas to be subject to a just and right division by the judge at the time of your divorce. Anything that you have purchased with your spouse's salary would be subject to being divided in the divorce even though under Oklahoma law those purchased items would technically be the property of your spouse.

Community funds used to improve one spouse’s separate property

What happens when community income was utilized to upgrade the plumbing in a home that is owned separately by your spouse? Under Texas law, you would be eligible to be reimbursed for these funds used to improve your spouse's separate property. If your husband made a down-payment on his house prior to your marriage beginning but then all subsequent mortgage payments are made out of community property funds, you can make a claim that you need to be reimbursed for these community funds that went into the payments towards the mortgage.

Wrapping up the subject of community property law and divorce

Community property laws in Texas are much more complicated than simply splitting the baby in half and giving you one part and your spouse the other. There are clearly a great many exceptions and circumstantial considerations that need to be made. I have done my best to cover many of those nuances with you but there are many more that you should consider before you feel like you can confidently enter into a divorce.

If you have any questions about divorce or family law, in general, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys represent clients from all parts or southeast Texas and so with a great deal of pride. We offer free of charge consultations six days a week and can address any issues you present to us and answer the questions that you have about divorce, marital property agreements or anything else related to family law.

It is our honor to represent members of our community just like you. We thank you for your interest in today’s blog topic and hope you will join us again tomorrow as we discuss more subjects related to Texas family law.

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Law Office of Bryan Fagan, PLLC | Houston, Texas Divorce Lawyers

The Law Office of Bryan Fagan, PLLC routinely handles matters that affect children and families. If you have questions regarding divorce, it's important to speak with one of our Houston, TX Divorce Lawyers right away to protect your rights.

Our divorce lawyers in Houston TX are skilled at listening to your goals during this trying process and developing a strategy to meet those goals. Contact Law Office of Bryan Fagan, PLLC by calling (281) 810-9760 or submit your contact information in our online form. The Law Office of Bryan Fagan, PLLC handles Divorce cases in Houston, Texas, Cypress, Klein, Humble, KingwoodTomballThe WoodlandsHouston, the FM 1960 area, or surrounding areas, including Harris CountyMontgomery CountyLiberty County, Chambers CountyGalveston CountyBrazoria CountyFort Bend County and Waller County.

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