For most high asset or high net worth individuals, you can structure your estate planning, asset protection, and business entity planning in a way that protects any separate property interests that you may have during your divorce in Texas. The problem arises when working with an attorney who does not know you have separate property, or when you are working with an attorney who does not specialize in an area of law that deals with separate and community property rights. Your business lawyer may be the best in Texas at structuring an asset purchase agreement for your separate property company but may not have experience with how a “covenant not to compete” being part of that transaction can impact your separate property rights.
What is the difference between community and separate property?
Texas is a community property state, which means that everything that you and your spouse own, regardless of when you acquired it, is presumed to be community property. However, if you can prove something as your separate property, then you will have important and valuable rights. Your separate property is property that:
You owned before marriage
Property that you received as a gift before or during your marriage
Property that’s an inheritance
Recoveries for personal injuries
The main right that you have regarding your separate property, if you can prove something is your separate property, is that not even a judge in a divorce case can take it away from you, and not even a judge in a probate proceeding after you die can change what you properly decided to do with your separate property before you died.
Can I lose my separate property if I use it to set up a company?
Yes, you can. The most common way that people lose their separate property is not properly keeping track of it. For example, where you own a piece of real estate that is clearly your separate property, but this would apply to all different types of property. So, in this case, you own real estate, you are going to rent it out and you decide you’re going to set up a company and put that real estate in a limited liability company. In fact, you get advice from a lawyer telling you that that’s a good idea, and so you decide to take that advice and you set up an LLC. As part of that process, you deed the real estate into the LLC.
Unfortunately, in this example, a few years later, you’re in a divorce situation and what your divorce lawyer is going to have to tell you is that you no longer own that piece of real estate. What you own at that point is an interest in an LLC that you acquired during marriage and is therefore presumed to be community, not separate property. So even though you owned a piece of real property that you clearly could prove was your separate property, by putting it into the LLC, you likely lost your right to claim that property as your separate property. There are many ways that you can lose your separate property rights, and this is just one example.
How do I move forward?
At Goranson Bain Ausley, we work with many high asset and high net worth divorces and often see these situations; by the time we see them, it’s too late. Unfortunately, there’s nothing that can be done to undo the transaction. However, before engaging in a transaction with your separate property, many things can be done to maintain the value of your separate property. For example, you can enter into a marital property agreement with your spouse that describes what will happen with your separate property, so you both agree on what is separate and what is community property.
Another way is to involve a family law lawyer experienced in high net worth divorces before you do a transaction with your separate property. By seeking the advice of a family law lawyer before you engage in a transaction with your separate property, the greater your opportunity is to preserve the value of your separate property.
Please contact Clint Westhoff at 214-473-9696 if you have questions on how to make sure that your rights are protected and your separate property rights are preserved.
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