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Life insurance and its role in property division as part of a Texas divorce

Texas utilizes what is known as the inception of title rule to determine whether an asset or piece of property in a divorce belongs to the community estate or one of the separate estates of you or your spouse. The inception of the title focuses the judge's attention on when the transaction occurred that brought about ownership of the property in you and your spouse.

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.

How does this impact our discussion on how life insurance policies are treated in a Texas divorce. Since our state utilizes the inception of title rule to analyze whether a property is part of the community estate or separate estates, if the policy was owned by the insured party (you or your spouse) before your marriage, then the procedure is your individual property. Your community estate would be reimbursed to the extent that community property income was utilized to pay the premiums before the time of your divorce.

Are there any rules in Texas that handle exceptional circumstances?

Some types of purchases of property and personal property can be complicated to characterize in a divorce case. Let's 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. The question follows: is that policy the separate property of your spouse, or does it belong in the community estate? I believe in Texas that it would be his individual property as long as the initial premium was paid before your marriage beginning.

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

Let's 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 and building up huge balances on each account. Now that you are divorcing him, your concern is that those accounts will be considered part of the community estate since they were opened up during your marriage. Will you be responsible for paying them after the divorce?

If your spouse opens up a line of credit or a credit card account in Texas, doing so will be considered as an act of the community estate unless you can show clearly and convincingly that the creditor (Bank of America, VISA, etc.) agreed to look only at your spouse's separate estate to pay any debts associated with that account. This may be not easy to achieve since you do not readily access your spouse's agreements with these creditors. You may need to request them in discovery so that you can 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's 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 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?

In general, contributions made to a retirement plan during your marriage will be treated as income. Thus, the contributions would be treated as 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?

If you own an interest in a business (like a partnership or LLC), that interest that you own may be part of your separate estate or could be part of your community estate. The facts and circumstances surrounding when you came to acquire that property are significant in this regard. Again, just as we saw with retirement benefits- timing is everything when characterizing business and financial interests in a Texas divorce.

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.

The assets of your sole proprietorship belong to you. Your interest in each asset individually could be a part of your separate estate or the community estate. As we have touched on numerous times throughout today and yesterday's blog posts, it is presumed that all property on hand is part of the community estate at the time of your divorce. You would need to prove that particular assets are part of your separate estate and thus not eligible for division by the judge.

If your interest in a business is part of the community estate- if it is your spouse's 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's business contributed to its increase in value?

However, an interesting question arises if your work on your spouse's separate property business dramatically increased the value of that business. In that case, even if the business is your spouse's individual property, shouldn't 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's 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 rights that you have as to property in each estate are detailed to a certain extent in the Texas Family Code. 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. Property can also be gifted between you and your spouse, and that, as well, could potentially change whether the property counts as part of the community estate or as part of 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's consider a hypothetical situation to illustrate this point better.

Let's assume that your husband has previously been the spouse who has performed most of the work within your jointly held business venture. In Texas, that means that some community property assets (like ones that are stored in either your name or your spouse's name individually) are subject to that named spouse's sole management and control. Other assets could be controlled and handled jointly.

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.

You need to know that just because an asset or debt is considered part of the community estate in Texas does not mean that designation will continue when you move states. When we look to judge-made law (as opposed to the family codes), there isn't much here to provide guidance. Tomorrow's blog post will pick up where we left off today by discussing how complicated things can get if you decide to move to a state that doesn't incorporate community property concepts into its divorces.

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

If you have any questions about the content of today's 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's 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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