By Earl N Jackson
Board Certified by the
Texas Board of Legal Specialization
Texas Marital Property – Community or Separate?
In Texas, if you are married – all property is presumed to be community property – property owned by both spouses. The key word is presumption. If you own separate property then the burden is upon you to prove that it is your separate property. It is a matter of constitutional importance: Texas Constitution Article 16 Section 15.
Note: in a general sense it does not matter whose “name” is on a piece of property. That may indicate who has dominion and control over the property, but does not in an itself make it separate property. All property, all income is presumed to be community property.
Community Property: “Community property” is all property, other than separate property, acquired during marriage.
Separate Property: “Separate property” is property owned before marriage, acquired during marriage by gift, devise, descent, or received as recovery for personal injuries sustained during marriage, except for any recovery for loss of earning capacity during marriage.
- Gifts: Any property acquired by gift is separate property. To prove “gift” there has to be an intent to make a gift; the transmission of the gift and the receipt of the gift. If there was no intent to make a gift, then there is no gift. Classic examples include a parents $12,000 tax free gift to a child or, in one case, a winning lottery ticket placed under the tree.
- Devise: Any property received by will.
- Descent: any property that was received by inheritance but not via a will is separate property.
Everybody owns some separate property. It might only be a wedding ring, but everyone owns some separate property – grandpa’s shotgun, momma’s neckless, the old photobook. I once received a stinging letter from a lawyer stating – “the parties own no separate property! Why did you plead that?” This letter told me a great deal about the opposition. Namely, not a very bright bulb to put it mildly. Note, you must prove the separate property characteristic or it will be community property. DO NOT rely on your spouse’s testimony to establish separate property. Prove it with documents.
Commingled Property: “Commingled Property” is marital Property that is a mixture of both separate property and community property.
- Example A. Farmer Husband owns a farm prior to his marriage – separate property. After marriage, he raises crops – community property. He takes the proceeds from the sale of the crops and buys more land. This land is community property. His father dies while he is married, and leaves his farm to his son – separate property. Thus, Farmer’s land is both separate and community property. In this case, the farmland is “commingled” but it is easily identifiable because we have county records, which are easily located and specifically identify the property.
- Example B. Husband opens a bank account with funds which are clearly separate – inherited monies. He then deposits his paychecks into the account – community monies. The account is commingled. Wife withdraws funds to pay expenses. What money did she withdraw – community or separate? Under the community out first presumption, she has withdrawn community funds. If she withdraws all of the money out of the account, she has withdrawn both community and separate property. The separate property is gone.
- Example C. Husband takes both separate and community funds to buy Microsoft stock. He then sells Microsoft in order to buy AT&T. He holds AT&T for two years and then decides to invest in local real property. Where is the separate property? If we are unable to trace the separate funds, then no one knows. We know it is there, but we do not know where it is. It may have been hopelessly commingled. Therefore, the community property presumption prevails and husband looses. If husband can “trace” the separate property funds, then husband may be able to recover.
Tracing: “Tracing” is about finding the separate property. It is about proof. Property purchased or exchanged for separate property is and remains separate property. Mutations and changes in the form of the property do not affect its character as separate or community. However, the spouse must clearly trace and identify the property.
- Example: If husband owns separate property land which he then sells in order to buy AT&T stock, then that stock is separate property. The difficulty arises, however, because the burden of proof is placed upon that person claiming the separate property. This person must build a chain by documents and/or other extrinsic evidence establishing the separate property characteristic. He or she must clearly identify the separate property. Otherwise, the community property presumption will prevail.
Property Acquired Outside of Texas: Property which is acquired outside of Texas is characterized as either separate or community under the same conditions as if it were in Texas. This property is also known as “Quasi-Community Property.” Property which would be classified as community property if the spouses had resided in Texas at the time of its acquisition is classified as community property. If property acquired while the spouses were domiciled in another state would be classified as separate property if they had resided in Texas then that property is classified as separate property.
Martial Property Management: Each spouse has the sole management, control, and disposition of his or her separate property. Each spouse also has the sole management, control, and disposition of the community property he/she would have owned if single. Sole management community property includes personal earnings, revenue from separate property, and the increase, mutation of, and revenues all property subject to his/her sole management, control, and disposition. Property in which both spouses have joint control is called joint management community property.
Caveat: The following examples are subject to the characterization rules outlined above and the particular facts of your case. Each rule of law is subject to either exception or argument to either maximize or minimize its effect.
Real Property: Appreciation in value is separate property. Rents, revenues, and income derived from separate real property is community property.
Stocks: Appreciation in the value of stock and/or stock splits is separate property. Dividends are community property. The exception to this rule is when corporation is closely held and corporation is really an alter-ego of the stock holder. In this case, the stock may be impressed with the community characteristic.
Partnership Interests: Generally, profits earned by the operation of a business during marriage are community property even if the business is separate property. Even though partnership property is owned by the partnership, and not by the individual partners, each partner’s partnership interest, that is, his/her right to receive a share of the profits and surpluses of the partnership is subject to characterization rules. If the right to partnership profits accrues prior to marriage, the profits are the separate property of the partner. If the right to partnership profits accrues during marriage, but the profits are not distributed until after the marriage, the profits are nevertheless community profits. If profits have been retained in the business to meet the needs of the business, then the profits remain partnership property whether in the form of cash in the bank, increased inventory, or otherwise.
Trusts: A beneficiary’s equitable interest in a trust is characterized according to the rules of separate and community property. If the beneficial interest is acquired before marriage or through gift devise or descent, it will be separate property. If the beneficial interest in a trust was funded by the Trustor out of separate property funds then the beneficial interest is separate property.
Oil & Gas Mineral Interests: Oil and gas mineral interests are separate property. Think about it, you are removing a piece of the land every time you sell a barrel of oil.
Employee Benefits: It is well settled that a spouse has a community property interest to that portion of retirement benefits of the other spouse earned during marriage regardless of when the retirement account was opened. Generally, the community interest may be mathematically ascertained by apportioning the benefit between the months in the plan during the marriage and the total number of months necessary for accrual and maturity.
Livestock: The growth of livestock is separate property. Offspring is community property. This rule is derived from a classic case entitled Stringfellow v. Sorrells. Stringfellow was about mules. The mules grew. The mules became more valuable. Creditor tried to execute upon the increase in value. Creditor lost. Stringfellow is one of the foundation cases for the law of separate and community property.
Crops: Whether mature or growing, crops are impressed with the community presumption. Does not matter whether the crops are growing on separate property land. For example, the proceeds derived from the sale of timber growing on separate property were community property. It is only in the instance where crops are sold with separate property land without reservation that crops take on the characteristic of the property.
Claims of the Federal Government
Tax Liens: The federal government’s claims for taxes is a lien in favor of the United States on all property and rights to property, whether real or personal, belonging to the person who is liable to pay the tax and who neglects or refuses to pay the tax after demand.
Taxable Estate: Under federal law, one half of all community income is taxable to each spouse, regardless of which spouse exercises control over the income at issue.
Homestead: A homestead right, though securely established and existing, is subject to a lien for federal taxes. When a homestead is subject to a federal tax lien, the federal government must compensate the nondelinquent spouse for his or her homestead interest, regardless of whether the property is community or separate.
Sole Management Community Property: The federal government’s claim for taxes may subject even a spouse’s sole management community property to the other spouse’s premarital income tax liability. Be that as that may, the Internal Revenue Service has ruled that a spouse’s community one-half interest in a joint income tax refund may not be used to offset the separate premarital tax liability of the other spouse, unless state law permits that interest to be reached to satisfy premarital debts. Texas law does not permit that interest to be reached to satisfy premarital debts. Under Texas law, each spouse has sole management and control over his or her personal earnings. In addition, unless both spouses are liable by other rules of law, community property subject to a spouse’s sole management and control is not subject to premarital liabilities of the other spouse.