No one expects to get divorced when they marry, but half of all American marriages end in divorce. Because Texas is a community property state, all marital property is divided during a divorce. Without careful planning, proceeds from of your separate property could be characterized as community assets and divided during the divorce. There are steps you can take to avoid this problem, if you know what to do. The best strategy is to avoid getting divorced, but that’s not always possible. Well over 75 percent of Texas divorces are filed by women. There are steps you can take to protect your separate property from divorce if you plan ahead. For example, don’t commingle separate and community property, invest in assets that are likely to appreciate, own mineral interests, establish a trust for your separate property, and draft a post-nuptial partition agreement to convert community income into separate property.
You commingle assets when you place community and separate funds in the same account. Texas law presumes that all assets owned at the time of divorce are community property, so if you mix separate and community funds, you must show by clear and convincing evidence that a portion of the account is your separate property. Tracing is much more difficult if you commingle funds. To avoid this problem, hold separate assets in separate accounts so tracing is simple.
Invest for Appreciation
Normally, all income from separate property is community property. This means that interest payments or cash dividends produced by separate property during the marriage automatically become community property when earned. However, stock dividends, stock splits, new stock from a merger, or cash received from liquidation of separate property shares remain separate property. Most important, any increase in the value of a separate asset retains its separate property character. Therefore, you should invest your separate property in assets that appreciate or produce stock dividends, such as real estate or shares of fast growing businesses, rather than buying interest bearing bonds or stocks that produce large cash dividends.
Oil and gas are considered a part of the corpus of the land and have the same character as the surface real property, because extracting oil and gas depletes the corpus. Royalty and bonus payments received for the production of oil and gas also have the same character as the land because they are presumed to be a piecemeal sale. However, rental payments are compensation for the passage of time, so they are characterized as community income.
Assets in Trust
Assets held in a trust may be community or separate, depending on whether the funds originally placed in trust were community or separate property. A distribution of trust corpus retains the character of the original assets used to fund the trust. The characterization of income from the corpus of a trust is more complicated. The income from a third party funded trust retains its original character if the income isn’t distributed. On the other hand, income from a grantor-funded trust is usually community property. If a spouse has a beneficial interest in the trust, the character of undistributed income depends on whether distributions from the trust are mandatory of discretionary on the part of the trustee. If distributions are mandatory, then the undistributed income is community property, while if the distributions are discretionary, undistributed income remains separate property.
The Texas Constitution makes it possible for a couple to partition community property between themselves and convert it into separate property by executing a post-marital agreement. Normally, all income produced by separate property is community property. However, a partition agreement can specify that all income from separate property retains its character as separate property. There are strict requirements for drafting and executing a valid post-nuptial agreement, however.
Since half of all U.S. marriages end in divorce, it makes sense to plan your finances to avoid the consequences of a divorce. Otherwise, you may inadvertently commingle funds and transform separate property into community property during your marriage. If you commingle separate and community funds in the same account, the commingled separate funds will be characterized as community property and divided during the divorce unless you can prove the funds were separate assets by clear and convincing evidence. Take steps to protect your separate property in case of a divorce by not commingling separate and community funds, investing in assets that are likely to appreciate, owning mineral interests, establishing a trust for separate property, and drafting a post-nuptial partition agreement. See a competent divorce/estate planner to discuss how to protect your separate property during a divorce.