Understanding “Separate” Property

The Significance of “Separate Property” in a Divorce

June 2013

Dan Johnson, Certified Divorce Financial Analyst

In helping clients understand the divorce process, their specific financial situation and settlement options and negotiating the best possible settlement, one of the important considerations I help clients with involves determining what assets are “Community Property” verses property that in NOT jointly “owned” by the “Community”…..or “Separate Property”.

Historically, Texas has treated a marriage between a husband and wife somewhat like a partnership, with property acquired during the marriage belonging to the community. Many of the community property concepts in Texas were derived from Spanish law and survive to this day. The partnership or community property approach to marriage holds that each party brings unique talents to the marriage, the parties work together to support the marriage, as a husband and wife, and that the property that either one of them, or both of them, acquires belongs to the community. The legal definition of community property in Texas is that it “consists of the property, other than separate property, acquired by either spouse during marriage”. Along with the legal definition of community property, there is a legal presumption in Texas that all property possessed by either spouse during or on disillusion of marriage is community property.

A spouse’s separate property consists of:

1. the property owned or claimed by the spouse before marriage;
2. the property acquired by the spouse during marriage by gift, devise, or descent; and
3. the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage

However, the burden is upon a person claiming separate property to prove that the property is in fact separate by “clear and convincing evidence”. In a normal case, the party has to prove facts by preponderance of the evidence (the greater weight and degree of credible evidence).

In Texas, upon divorce, parties either negotiate a settlement or…..the Court will divide the community property in a manner the Court deems just and right. Please note that the Court does not have to divide community property equally. Instead the judge gets to divide community property in a manner the Court deems “just and right”.

The significance of separate property in a divorce in Texas is that if a party can show by clear and convincing evidence that property is their separate property, the divorce court cannot divest them of the title to their separate property.

It is not uncommon to find cases where one party has significant separate property, the party is able to prove that it is his or her separate property by clear and convincing evidence, the parties acquired very little property during the term of the marriage, and upon divorce, the other spouse gets virtually nothing.

Over the years, the Texas courts have adopted a number of significant “rules” regarding how to determine separate property, and how to trace separate property (a critical matter which I help clients to determine and to understand their options). Ideally, clients will be much better prepared for a divorce if they understand what is legally considered “community property” BEFORE becoming too entrenched in the divorce proceeding.

One “rule” is that if a party starts out with separate property, sells that separate property and acquires new property during the term of the marriage, the new property becomes a spouse’s separate property, provided they can trace the acquisition by “clear and convincing evidence”. For example, if a party has a $300,000.00 certificate of deposit, prior to marriage, is married five years, liquidates the certificate of deposit for $300,000.00, and uses the money to purchase a ranch, than the ranch becomes that party’s separate property. Frequently, in order to be able to adequately trace community property, it is necessary to hire a forensic accountant to analyze all of a party’s transactions and be available to testify.

Another rule that Texas courts have adopted over the years is the so-called “inception of title” rule. If you will note the definition of separate property includes property that was owned or claimed by a spouse before marriage. For example, if a spouse enters into an earnest money contract to buy a piece of property prior to marriage, and then closes on the property after marriage, the property remains their separate property since it was claimed prior to marriage.

Another rule regarding separate property is that the appreciation on separate property remains a spouse’s separate property. If a spouse owned 100 acres of land on the date of marriage, and that land is valued at $1,000.00 per acre (or $100,000.00), and thirty years into the marriage, that spouse sells the 100 acres of land for $50,000.00 per acre, (or $5,000,000.00), the entire $5,000,000.00 is the spouse’s separate property. The same rule applies to other assets, such as stocks, small businesses, equipment, gold, etc.

Another rule of separate and community property in Texas is that the income from separate property is considered to be community income. For example, if a party owns 100 acres of land, and rents it out for grazing rights for $5,000.00 per year, and saves the $5,000.00 per year in a savings account, and then gets divorced after ten years, the entire $50,000.00 in the savings account is community property. The same rule applies with income from stock. Many people use the dividends on their stock to reinvest and acquire new shares. If a spouse starts out the marriage with 1,000 shares of stock, and receives a 4% dividend each year, then uses the dividend to acquire 40 shares of stock, and then at the end of the 10-year marriage has 1400 shares of stock, the initial 1,000 shares of stock constitute the spouse’s separate property, but the 400 shares of stock acquired with the dividends constitute community property and is subject to division by the court.

Another rule of separate property is that if part of the separate property is severed off during the term of the marriage, the proceeds from that severed property constitute a spouse’s separate property. This usually arises in connection with oil and gas and timber. If a person owns a track of land prior to marriage, with mineral rights, and oil is discovered on the property, when the person sells the oil, they are actually selling a piece of their ownership interest in the land each and every year – therefore, the sale of oil is not considered income, but is considered the sale of the property and is treated as a spouse’s separate property. The same rule applies with timber.

All too often, clients place little emphasis upon the importance of separate property in a divorce and are wrapped up with establishing new households, dividing the furniture, children’s schedules and establishing their new life. Unfortunately, by not paying attention to the importance of identifying and tracing separate property, the settlement outcome in a divorce frequently shortchanges one of the parties involved.

Call me today at 512-346-6444 for more information!