Community Property vs. Separate Property

The Texas Marital Property System governs ownership, management, liability, and disposition of all property possessed before, during, and upon dissolution of marriage.  There are two major categories of marital property in the State of Texas: Community Property and Separate Property.

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

Community property consists of the property, other than separate property, acquired by either spouse during marriage.  This is true regardless of which spouse has possession of the property.  The fact that one spouse is named on the title, deed, or account, or that one spouse receives the asset as payment for personal services (e.g. salary), or the asset will not be paid until a later date (e.g. retirement benefits), will not change the character of the property.

Presumption of Community Property

In Texas, there is a legal presumption that property possessed by either spouse during or on dissolution of marriage is presumed to be community property. This legal presumption can only be overcome by “clear and convincing evidence” that the property in question is indeed separate property. The most common way of proving separate property is by tracing the asset from the date of acquisition to the present date.

Because of the presumption that property on hand at death or divorce is community property, many people with substantial assets enter into premarital property agreements to clarify the nature of their assets or to change the rules applicable to division of their property.

Right to Reimbursement

The increase in value of a spouse’s separate property during marriage is generally considered separate property. However, a spouse may have a claim for reimbursement when the community estate in some way improves the separate estate of one of the spouses, or vice versa. The right of reimbursement is not an interest in property or an enforceable debt; rather, it is an equitable right that arises upon dissolution of the marriage through death, divorce, or annulment.

Why Would One Want a Marital Property Agreement?

One of the main reasons a married couple would want to clearly define whether an asset is community or separate property is to protect it from the claims of possible creditors. Another reason a couple might want to characterize marital property is to determine how it will be divided upon divorce or death.

In a divorce, the court will order a “just and right” division of the couple’s community property. This means that a party is not automatically entitled to an even split of the community estate nor is a court ever allowed to award one spouse’s separate property to the other spouse. The judge must award the separate property to the spouse who owns it, which means that a party must prove something is separate property to place it out of the judge’s reach in a divorce case.

When a married person dies, 50 percent of the community property is owned by the surviving spouse, which means the will of the deceased person conveys only the 50 percent he or she owned. On the other hand, the will conveys 100 percent of the separate property owned by the deceased because the surviving spouse does not have any ownership in those items.

Marital property agreements include premarital agreements, post-marital agreements, partition or exchange agreements, and co-habitation agreements.

Marital Property Agreements

Marital property agreements provide a way for married couples in Texas to bypass the rules of characterization. The primary purpose of a marital property agreement is to define what will be community and what will be separate property during the marriage.

The agreement can provide that income from separate property will remain separate property. The agreement can govern the disposition of property on separation, divorce, or death. Furthermore, the agreement can waive any homestead allowance, personal property set aside, and family allowance to which a spouse may be entitled.

Texas courts have taken the position in recent years that they will uphold the enforcement of marital property agreements and there are very few exceptions where a party can avoid the effects of a premarital agreement.  Specifically, the parties to a marital property agreement may contract with respect to the rights and obligations of each party and any property of either or both of them whenever or wherever acquired or located; the right to buy, sell, use, or otherwise manage and control property; the disposition of property on separation, marriage, death; the modification or elimination of spousal support; the making of a Will, Trust, or other arrangement to carry out the agreement; and including almost any other matter.

Premarital Agreement

A premarital agreement is a written agreement made between prospective spouses in contemplation of marriage to be effective on marriage. A premarital agreement is a contract executed by a couple prior to their marriage that addresses the rights and obligations of the parties in property they own, property they will acquire in the future, and the disposition of property on death or divorce.

Post-Marital Agreement

Post-marital agreements allow spouses to accomplish many of the same goals as premarital agreements, but are executed during the marriage.  A post-marital agreement is a written agreement made between spouses. It allows a married couple to create rules to govern their property that are different than the rules in the Texas Family Code and the Texas Constitution. These sorts of agreements are sometimes used by spouses to partition and exchange community property into separate property or, conversely, separate property into community property. Spouses can also settle property issues through a post-nuptial agreement instead of a separation agreement.
A valid premarital or post-marital agreement can contractually eliminate the creation of community property by legally partitioning property to each spouse as it is acquired thereby eliminating disputes over division of assets in the event of a divorce.

In addition to issues relating to potential divorce, parties can include provisions for support of a spouse and confirmation of last wills and testaments of spouses in premarital or post-marital agreements.

Additionally, a marital property agreement can help spouses and their family members avoid controversy by clearly establishing the character of property in advance as well as delineating each spouse’s priorities before they become issues. These types of agreements can preserve pre-marriage residences and other property, set aside future income as separate property, provide for spousal support, eliminate alimony and avoid other financial claims, and allocate the obligation to satisfy certain debts, including tax liabilities.

Partition or Exchange Agreements

Another agreement frequently entered into between spouses is an agreement to partition or exchange community property. One article of community property may be partitioned by written agreement so that each spouse owns a fraction of that property as his or her own separate property.
A partition does not have to be into equal shares. Further, spouses may exchange their community property interests in different assets in order to make one of the assets the separate property of one spouse and another asset the separate property of the other spouse. If real property is involved in either of these types of agreements, the ownership status must be recorded in the deed records in the county in which the property is located.

Cohabitation Agreement

The Texas Family Code does not provide for non-marital cohabitation agreements. Nonetheless, like most marital property agreements, a non-marital conjugal cohabitation agreement is governed by contract law, and is not enforceable unless the agreement is in writing and signed by the person to be charged with the agreement.  In some instances, it may make sense for persons who are cohabitating to enter into such an agreement.

Conclusion

Many times prospective spouses have substantial assets, children from other marriages, partnership or business agreements, or other reasons why they believe it is important, before marriage, to enter into a marital property agreement defining the respective rights and obligations of each party. In many circumstances, these agreements help preserve and protect the parties’ estates, reduce future litigation and expense, and can be beneficial for both parties.

All marital property agreements, whether pre or post-marriage, have significant legal impact and should be reviewed carefully by an attorney. Marital property agreements require complete disclosure of information and have rigid statutory requirements to ensure that the parties fully understand the legal effect of signing the agreement.

If you have questions about marital property agreements, please contact us at the Law Office of Sam M. “Trey” Yates, III, P.C., divorce lawyer in Houston, for a consultation.