When dividing assets in a Texas divorce, it’s helpful to know what’s community property and what’s separate property. There are steps you can take before a divorce to designate your separate property as yours.
As anyone who has spent any time in Texas knows, Texas is a community property state. In the event of a divorce, the presumption is that all property owned at the time of divorce is community property. If one spouse wants to claim property as separate property, they must establish it as their separate property by “clear and convincing evidence.” This standard is more than the general civil standard of a “preponderance of the evidence” and less than the commonly known criminal law standard of “beyond a reasonable doubt.”
Separate property is defined as property owned by a spouse prior to marriage, or that property acquired by a spouse during the marriage by gift or inheritance. Keep in mind that separate property gifts include gifts from one spouse to the other during the marriage (e.g., that diamond necklace given as an anniversary present or those power tools given as a Christmas gift).
In Texas, income from separate property is community property. Therefore, if you take the inheritance from Aunt Sue and put it in a bank account, or invest it in stocks, any interest earned or cash dividends paid on that investment will be community property. Also, if you put that inheritance into your joint checking account and spend it, you have most likely just lost it, depending on what it was spent on and the documentation you have to prove it.
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If separate funds are used to reduce a community debt, such as the mortgage on the marital residence, or to make improvements to the marital residence, you may be entitled to reimbursement from the community estate up to the extent of the value by which the debt was reduced or the amount by which the value of the property was increased. It is important to note that reimbursement claims based on improvements made to community property by the use of separate funds are limited to the amount of the enhanced value.
So when you spend $25,000 of Aunt Sue’s money to put a pool in the backyard, you are only going to be able to recover up to the amount that the pool increased the value of the house (and it’s never the full $25,000 – just ask anyone who has put in a pool). Also, reimbursement claims are equitable in nature, which means it is not always a dollar for dollar value that is paid back to your separate estate. And if you use that money from Aunt Sue to pay the bills and regular living expenses for a few months while you or your spouse is looking for a job, there is no reimbursement claim available.
Steps to help protect an inheritance
So if you are expecting or have recently received an inheritance these steps may help protect it from being thrown into the community property pot in the event of a divorce:
- Keep it in a bank account that is separate from any joint accounts, do not put any of your earnings into this account, and if possible set it up so that any earnings are swept out of the account and transferred to a community property account
- If you inherit stock or an investment account, keep detailed records of any sales and purchases of stock so that you can trace the new shares back to the old shares (you will likely need to hire a forensic CPA to help with this at the time of the divorce)
- If you inherit a piece of titled property (e.g., a car or a house), keep it in your name only and do not add your spouse’s name to the title.
Separate property tracing in the event of a divorce can be expensive and time-consuming. The more you do to keep good records and a clean paper trail, the better your chances of protecting your separate property in the event of a divorce.