In the beginning, there was the word, and that word was "separate property." Technically, that’s two words, but who’s counting anyway. To those readers who, as kids, sharpened their crayons so they would never color outside the lines—this article is for you! Unfortunately, that group also stopped reading after the whole word/words debacle in the first sentence, so we probably should have thought through the opening a bit more. Nevertheless, despite the distinct possibility of having already lost our target audience, we will press forward to our topic: protecting and maintaining your separate property.
What Is Separate Property in a Divorce?
In order to protect something, you should probably have an idea of what that something is first. Let’s start by defining Separate Property, which we will refer to as “SP” for the remainder of this article. SP includes the following: (1) property owned before marriage; and (2) property acquired during marriage by gift or inheritance.
Separate vs. Community Property in Texas
Unlike community property, the SP 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 SP 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 SP can quickly become an expensive undertaking. Here are a few quick tips to remember that will hopefully help you avoid some of the more expensive mistakes we commonly see married parties make in the management of their SP funds.
1. Avoid Commingling
If hypothetical husband David deposits $100,000 he received as an inheritance from his mother’s estate into a joint account he holds with hypothetical wife Deborah that already has $100,000 of community property, David’s SP 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. Not only does this typically require a forensic financial expert, if the SP deposit was made in 2007 and the divorce is filed in 2020, but David is also going to have a difficult time tracking down statements going back thirteen years. And the law generally requires that he have each statement for each month of the entire period.
To avoid this, the following steps can be taken:
- Do not comingle your SP with your spouse’s property. Set up an SP account (or accounts) solely in your name. Do not set your spouse up as a signatory on the account. And even though the name of the account doesn’t establish the SP 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 SP, and you handle it accordingly.
- If you receive an inheritance, you should set up a new SP account with those funds (or you can put them into an already existing account which is titled as an SP account.
To be clear, we are not saying that you cannot enjoy your money. If you want to use some of that inheritance/separate property to take your family on that dream vacation, go for it. Just do not expect that amount to be paid back to you as your separate property if you find yourself in a divorce case, and we would rather a potential litigant know this before making the decision to take that dream vacation.
2. Interest-Sweeping Accounts
In the hypothetical set out above, David should have set up a separate account and deposited his $100,000 inheritance there. But even then, David risks unintentionally commingling because the funds will likely bear interest. That interest is considered income, and income from SP is considered CP (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 SP is SP, then your SP accounts should be set up so that interest is transferred 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 SP.
3. Dueling Dividends
If David had instead taken his $100,000 over to “Mike the Money Manager” and used it to buy stocks or bonds, David still risks unintentionally commingling his SP 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 CP.
As such, over the years, David might have unintentionally commingled what he thought was an SP brokerage account, and he would need to trace those individual stocks and bonds in order for a court to find it to be his SP. Sometimes, even with all the records, this is very difficult or impossible to do:
- Once again, the stocks or bonds need to be set up so that the dividends are swept into a CP account (unless you have a premarital or post-marital agreement that sets out that the dividends are SP).
- If you inherit stocks or bonds, those accounts need to be set up so that the dividends are swept into a CP account (unless you have a premarital or post-marital agreement that sets out that the dividends are SP).
4. Premarital & Postmarital Agreements
A prenuptial agreement can be an effective tool for securing and protecting SP. For example, it can provide that income from SP will remain SP, 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 SP.
There are far too many twists and turns on the road to protecting SP. Whether you own a home prior to marriage that is being sold, or you inherited a fortune from your Uncle Charlie during your marriage, you should contact a Dallas family lawyer for advice on how to effectively manage and protect your SP. More often than not, mistakes are made throughout the course of a marriage that make confirmation of your SP 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.