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Specialty tag(s): Property Division, Characterization of Separate and Community Property

Five Tips to Protect and Maintain Your Separate Property in Divorce

Jonathan James | March 29, 2022

It is not difficult through a quick internet search to learn that Texas is a community property state.  However, the legal analysis of what is not considered community property (called separate property in Texas) can be much more nuanced.  When a spouse owns or receives separate property, that spouse is at risk of having what was once considered separate property instead be classified as community property during the divorce process unless that spouse takes affirmative steps to protect that separate property. 

In a community property state like Texas, understanding what is considered separate and community property is important for spouses considering divorce. In this article, you will learn the difference between separate and community property and tips on how to protect your assets.

What is Separate Property in a Divorce?

Separate property includes property owned before marriage and property acquired during marriage by gift or inheritance.

Unlike community property, the separate property of a spouse cannot be divided by a court and is instead awarded to a spouse independent of the property division if that spouse can prove the property is separate property by clear and convincing evidence.

Tips to Protect Your Separate Property

Because the law presumes all property owned by spouses to be community property, meeting the burden of proof to confirm your separate property can quickly become an expensive undertaking. Here are five tips that can help you avoid some of the more costly mistakes we commonly see married parties make in managing their separate property funds.

1. Avoid Commingling

In a hypothetical situation, if husband David deposits $100,000 he received as an inheritance from his mother’s estate into a joint account he holds with wife Deborah that already has $100,000 of community property, David’s separate property inheritance has now been commingled with community property funds in a joint account.

To establish his clear and convincing evidence burden, David must trace the funds through this account from the time he deposited his inheritance through the date of divorce. This typically requires a forensic financial expert. If the separate property deposit was made in 2009 and the divorce is filed in 2022, David will have difficulty tracking down statements going back thirteen years. And the law generally requires that he have each statement for each month of the entire period.

Steps you can take to avoid this situation:

• Do not commingle your separate property with your spouse’s property. Set up a separate property account (or accounts) solely in your name. Do not set your spouse as a signatory on the account. And even though the name of the account does not establish the separate property character of the contents, we recommend that you add “Separate Property” to the name of the account, so that you (and anyone else who might help manage your accounts) are very aware that this is separate property and is handled accordingly.
• Set up a separate property account If you receive an inheritance or put them into an already existing account which is titled as a separate property account.

2. Set Up an Interest-Sweeping Account

In the hypothetical situation above, David should have set up a separate account and deposited his $100,000 inheritance in the account. But even then, David risks commingling unintentionally because the funds will likely bear interest. That interest is considered income, and income from separate property is considered community property (unless you have a premarital or post-marital agreement that states otherwise).

If you do not have a premarital agreement or post-marital agreement establishing that income from your separate property is separate property. Your separate property accounts should be set up to transfer interest to a community account as the interest is incurred. This is called an interest-sweeping account. This further ensures that you do not commingle with your separate property.

3. Pay Attention to Dueling Dividends

Suppose David had instead taken his $100,000 over to a money manager and used it to buy stocks or bonds. In that case, David still risks unintentionally commingling his separate property funds as a number of stocks, bonds, and funds issue dividends to stockholders. These dividends are commonly used to reinvest and purchase additional stock; however, cash dividends, like interest, are considered community property.

Over the years, David might have unintentionally commingled what he thought was a separate property brokerage account, and he would need to trace those individual stocks and bonds for a court to find it to be his separate property. Sometimes, even with all the records, this isn’t easy to do:

• Once again, the stocks or bonds need to be set up so that the dividends are swept into a community property account (unless you have a premarital or post-marital agreement that sets out that the dividends are separate property).
• If you inherit stocks or bonds, those accounts need to be set up so that the dividends are swept into a community property account (unless you have a premarital or post-marital agreement that sets out that the dividends are separate property).

4. Implement a Prenuptial or Postnuptial Agreement

A prenuptial agreement can be an effective tool for securing and protecting separate property. For example, it can provide that income from separate property will remain separate property, so one would not have to bother with interest-sweeping accounts or cash dividends.

Additionally, when neither spouse brings assets into the marriage, but one spouse receives an inheritance, a post-marital property agreement can be prepared that will do essentially what the premarital agreement does for someone coming into the marriage with a considerable amount of separate property.

5. Talk to a Family Lawyer

There are far too many twists and turns on the road to protecting separate property. Whether you own a home before marriage that is being sold, or inherited assets during your marriage, you should contact an experienced family lawyer for advice on effectively managing and protecting your separate property. More often than not, mistakes are made throughout the course of a marriage that make confirmation of your separate property more challenging and expensive. A small investment of time and resources early on can save you a lot of headache and hassle (and money) down the road.

Learn More

Jonathan James is a highly skilled litigator and negotiator in high-conflict legal situations and consistently receives praise from his former clients for his integrity, professionalism, and responsiveness. Jonathan is Board-Certified by the Texas Board of Legal Specialization in family law and is a member of the State Bar of Texas. Additionally, he is trained in Collaborative Divorce and has been named a Super Lawyers Rising Star, 2019-2022 and Best Lawyer 2020-2021 by The Best Lawyers in America.  

To learn more about protecting and maintaining your separate property in divorce, please contact Jonathan James at 214-473-9696.

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