Assets in Divorce: Protect What’s Yours
by Charla Bradshaw
Divorcing spouses or those contemplating divorce often have concerns about how to protect their assets. “What will happen to my house? What about my business? My investments? My retirement? Benefits?” All are extremely valid questions and all go to the crux of marital property law and the protection of your assets. The first and most important step to protecting an asset in divorce is to determine which “estate” owns that asset.
Separate and Community Estates
When two people marry, they each have a separate estate. Upon marriage, they create a community estate, which is owned by both spouses. Texas is what we call a “community property state.” This means that all property is owned by the community estate unless a spouse can prove that property is owned by their separate estate. Separate property and community property are even set out in the Texas Constitution.
In a divorce case, a court cannot divide separate property, only community property. The origins of these laws date from 1841, and the mandate has been consistent for the courts to divide the community property in a manner that the court deems “just and right,” not necessarily. Marital property rules can be complex because each type of asset has its own set of rules.
The most common types of separate property are: property owned by a spouse before marriage; property that was a gift; or property that was inherited. There is a high standard (called clear and convincing evidence) to prove that property is separate property. A spouse can protect their separate property by keeping financial records during the marriage, and if possible, keeping separate property separate from community property. The complexity of this record keeping involves knowing which property is separate property and which property is community property.
Prenuptial and Postnuptial Agreements
Those planning to marry can avoid creating a community property estate by signing a premarital agreement (often called a “prenuptial agreement” or “prenup”). These types of agreements, for example, can address alimony, spousal support, separate property, community property, and the division of community property in case of a divorce. During marriage, spouses can turn community property into separate property by signing a postmarital agreement (often called a “postnuptial agreement” or “postnup”).
The Complexities of Comingling
Certain income from separate property is community property. When community property and separate property are mixed together (comingled), it may be difficult or impossible to prove which property is separate property. In some cases, it may be necessary to hire experts to identify the separate property. If a spouse cannot prove their separate property, then the property is community property and a court can divide it. This usually occurs when separate property and community property are hopelessly comingled.
Take for example, a spouse that has a retirement investment, such as a 401k, on the date of his marriage (separate property). He makes contributions to the 401k during the marriage (community property), and both his separate, and now the community property, earn interest together (community property). This is an example of separate and community property being comingled. Things can get pretty complicated, but with good records, the separate and community property can be identified.
Another common example of determining separate and community property occurs when a marital residence (along with its mortgage) is owned by one spouse prior to the marriage. During the marriage, the spouses pay the mortgage with community property and/or make improvements to the property with community property. The reduction in the mortgage debt and/or improvements can create claims between the community estate and the separate estate(s).
Yet another example occurs when spouses create or join entities such as LLC’s, partnerships, corporations, or were involved in such entities prior to marriage. Such entities, regardless of their size, create complex marital property issues. It would be wise for anyone contemplating divorce to seek advice from a family law attorney before an entity is formed or before there are any changes made to existing entities. As a matter of fact, in all the examples given above, the complexities that arise from marital property law and the risks to your assets are just too great. To protect what’s yours, it’s always best to consult with an experienced family law attorney.