Protecting Your Assets During Divorce
by Charla Bradshaw
Divorcing spouses or those contemplating divorce often have concerns about how to protect their assets. It is very common to have concerns such as “What will happen to my house?” “What will happen to my retirement?” “What will happen to my investments?”- “What will happen to my employee benefits?” – “What will happen to my business?” These are all very valid concerns and go to the crux of marital property law.
When two people marry, they each have a separate estate, and 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. The most important part of protecting an asset is to first determine which estate owns the asset.
The most common type of separate property is 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. For example, 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 has retirement such as a 401k on the date of marriage (separate property), makes contributions to the 401k during the marriage (community property), and both the separate and community property earn interest (community property). This is an example of separate and community property being comingled. However, with good records, the separate and community property can be identified.
Another common example of determining separate and community property is when a martial residence (along with the mortgage) is owned by one spouse before 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), and such claims can be complex.
Many spouses create or join entities such as LLC’s, partnerships/corporations, or were involved in such entities prior to marriage. Such entities create complex marital property issues no matter the size of the entity. 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.