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How is income from separate property treated in a Texas divorce?

Texas is a community property state. The past few days we have spent some time discussing that here on our blog. There are a handful of other states in the USA that adhere to principles of community property when dividing assets upon death or divorce, but Texas has some specific rules in place that are fairly unique even among community property states. 

For instance, income that is earned from separate property is considered to be community property in our state. As with most things in the law, there are exceptions to this rule, however. First of all, if you and your spouse can agree in writing before or during your marriage that this kind of income will remain the separate property of whichever of your property earned the income, that is acceptable. Marital and premarital agreements are the sort of documents that would contain these sort of arrangements. Depending on your circumstances that maybe something worth looking into.

A second scenario that would result in the income remaining separate property is if there is a gift from you to your spouse (or vice versa), the income from that gift is presumed to be your spouse's separate property. A premarital agreement would be a wise idea for many people who have large investment portfolios and are about to get married in Texas. You can speak to your spouse-to-be before engaging in dialogue like this with an attorney.

However, in most other scenarios income generated from separate property is community property in Texas. That means if you own stocks or equity funds in your name and have owned them since before you were married, the dividends and interest earned on those accounts are considered to be community property. It is very important that you keep track of your account statements and records that you are provided by your investment servicer. If your property is commingled with other community funds then there may be an issue if you want to prove that the account is your separate property.

What is a premarital property agreement?

We have discussed in some detail today and yesterday about premarital property agreements but I wanted to give a full-fledged explanation to anyone who still may be unclear or unsure of how they could apply to you’re their life. If you have read through our blogs for any length of time then you have likely seen this term used in other contexts, as well.

We have already covered the presumption that is in place for Texas spouses that property on hand at the time of your divorced or death is community property. For those of us who do not own a ton of property or have a ton of cash in the bank, this may not be such an issue. However, if you are a person who owns a substantial amount of assets it may do you some good to enter into a premarital property agreement to make sure that you and your spouse are crystal clear on how assets will be handled at the time of your divorce.

The laws in Texas won’t change on this subject (most likely) all that much, so if you know the law will not treat your property the way you want, go ahead and start to consider whether or not a premarital property agreement is for you. 

First and foremost, a premarital property agreement must be in writing. You cannot make an oral deal with your spouse and then pinkie swears to live by that agreement later on if you get a divorce. Your agreement can set forth that income from any spouse's separate property would remain that spouse's separate property. If you get a divorce the premarital property agreement can also determine how that property is going to be disposed of.

One issue that cannot be sidestepped via a premarital property agreement is that of paying child support. Your obligation to pay child support cannot be limited via a premarital property agreement. IF you already have a high earning potential before you get married it is a good idea to at least consider signing a premarital agreement that would allow your income to remain separate property upon your divorce. You should take your time when preparing a premarital agreement and start the negotiation process months before your wedding date. 

Partitioning the community estate

It is also a possibility that you and your spouse could agree to partition or exchange portions of your community property estate. You may, for example, partition one piece of your community property estate in a written agreement so that you are assigned a percentage of that property and your spouse is assigned the remaining portion. You would retain that portion as a part of your separate estate at the time of your divorce. 

You can also exchange community property assets for different assets not in your community estate to make the community property interest turn into a separate property interest. This can occur for a wide range of property interests. However, if you are doing a partition or exchange regarding a piece of real property you must update the deed to that property to reflect any of the changes that you have made. This will ensure that if you decide to sell that real estate later on that the title is correct and contains no defects.

Agreeing ahead of time that a piece of property is going to be part of the community estate

We usually see premarital agreements that concern particular pieces of property that a spouse wants to be part of their separate property upon divorce. However, married couples can agree in writing that a piece of property that would normally be classified as separate property be made a part of your community estate. 

How can you determine what sort of management power you have over a piece of property?

The answer to this question can be sorted out in a premarital or marital property agreement. For community property assets, management can either be done according to sole management or joint management community property. For instance, salary, wages, and income from separate property are solely managed community property of the spouse who owns the property or who earns the income. This means that the income you earn from your job is solely managed community property. It is subject to division in your divorce but you are the manager of the money during your marriage. The same idea applies to rental income earned from a home that you own as your separate property.

What happens if you and your spouse commingle sole management community property that is owned by you with sole management community property of your spouse? Or what if either of these types of community property is commingled with jointly managed community property? The answer is that all of it would then be considered joint managed community property. If the asset in question is not documented as being owned by you or your spouse it is presumed to be the owning spouse's solely managed community property.

What responsibility is there to creditors of you or your spouse?

Creditors are especially concerned with the above distinctions between solely managed community property and jointly managed community property. A creditor who wins a lawsuit against you may use the judgment won to collect the debt against you. For instance, if you signed a contract with a credit card company and that credit card company took you to court and won a judgment, that company can only reach your separate property and the community property over which you have management abilities.

This means that any property that your spouse owns and solely manages that is also considered to be community property (like the income from their job) cannot be touched by a creditor of yours. The exception to this rule that I just finished laying out to you would be if someone sued you in a tort case (as if you were negligent in hurting that person somehow), a judgment would attach and to you and your spouse so that even their solely managed community property would be fair game in order to satisfy any judgment.

What does this mean for your separate property if you are married to a person who has a creditor judgment against him or her? Your solely managed community property and separate property are not in the firing line for any claim from a creditor like a credit card company or retail store. As far as preparing for this sort of reality if it is relevant to your marriage, you may want to talk to your spouse-to-be about whether or not he or she is comfortable with the idea of signing a premarital property agreement. You all can allocate your responsibility to pay debts between one another in whatever manner you would like. 

Malpractice claims as a reason to do a partition/exchange agreement with your spouse

Are you married to a doctor, lawyer or other people who are potentially in the line of fire to be sued for a malpractice claim? Then you should pay attention to this portion of our blog post. The assets that you own with your spouse are potentially exposed to people who sue your spouse and win a judgment against him or her. Your home is one thing that cannot be taken to satisfy a judgment, however. For that reason, many couples will partition the residence to become the separate property of the doctor/lawyer spouse. 

Why does this all matter to you and your spouse?

Until you and your spouse get a divorce or have a money judgment issued against one of you, it doesn't matter how property is classified. I doubt that you look at pieces of property in your home and think "community" or "separate." Once a divorce begins then you and your spouse are entitled to your separate property. The judge in your case has no power to take your separate property and then convert that to your spouse's separate property.

Community property can be divided in a manner that is “just and right.” This is what the Texas Family Code says will be done by a judge. This does not mean a 50/50 split necessarily. Factors such as the age of you and your spouse, your physical health, your ability to earn an income moving forward, your education, your role in the breakup of your marriage, the size of your community estate and what each of you stand to gain/lose by continuing the marriage will all be weighed by a judge. 

If you are concerned with how your community estate would potentially be divided in a divorce, you can always sign a premarital agreement that states your community estate will be divided exactly 50/50 in a divorce. This way even if your case were to go to a trial, the judge could not intercede and attempt to consider other factors and divide your community estate based on those factors.

Questions about community property, divorce or Texas family law? Contact the Law Office of Bryan Fagan

The attorneys with the Law Office of Bryan Fagan thank you for spending some time with us today discussing this important topic. If you have any questions about what we wrote about today or want some clarification on this or any other family law topic please do not hesitate to contact our office today.

Our licensed family law attorneys offer free of charge consultations six days a week here in our office. These consultations are a great opportunity to learn more about your situation, to receive direct feedback about your life and to find out how our office can assist you in whatever situation you are facing. Our attorneys have achieved successful results for our clients in all of the family courts of southeast Texas and we would be honored to do the same for you and your family, as well. 

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