Texas Community Property Agreements, Separate Property Agreements, and Premarital Agreements
Information provided by a Houston Premarital Attorney
Let me give you a little background on Texas community and separate property law, and then explain how premarital agreements may alter a party’s common law rights.
In Texas, all property acquired during the term of the marriage is considered to be community property, save and except property that was owned by a party prior to marriage, or acquired during the term of the marriage by a gift or inheritance. Once it is commingled it is considered community property. Sometimes it is possible to trace separate property from one source to another; however, it is usually necessary to hire a forensic accountant to trace property.
All appreciation on separate property remains a person’s separate property. All income from separate property is considered to be community income. Items such as interest income and stock dividends are considered to be community income.
All wages, salaries, and other earnings for personal service are considered to be community property. The significance of community/separate property really comes into play upon divorce. People have the popular misconception that upon divorce community property is divided 50/50. That is not the case. Texas law provides that upon divorce, the community estate of the parties shall be divided in a manner the court deems just and right having due regard for the rights of the parties and any children of the marriage. There are about 20 different factors that a court can utilize in dividing community property unequally. The primary ones seem to be education, income, future income, and health. I am aware of one case many years ago where the man was disabled, the lady had a good income, and the court awarded approximately 90% of a certificate of deposit to the husband. In the vast majority of cases, the courts will divide the property 50/50, if everything is equal between both parties. If there is a disparity of earning between the parties, the court moves more toward a 60% division toward the low income person and 40% toward the high income person. Once in a rare while, the court will award one party more than 60%.
In a divorce, the court is not permitted to divest a spouse of his or her separate property. This is true, even if a person’s separate property has appreciated substantially in value.
However, the burden is upon a party to trace their separate property by “clear and convincing” evidence. This is sometimes difficult to do.
Furthermore, you have many situations in a divorce where the lines between separate property and community property have become blurred. For example, people frequently start out with a house that is clearly community property because it is acquired during the term of the marriage, and then one party uses their separate property to either reduce the mortgage, or enhance the value of the house by making substantial renovations. Upon divorce, does the person who put their separate property money into a community house get reimbursed? What about the appreciation in the house because of additions? There are a number of equitable remedies that the courts have used over the years to solve the problem. Also, you have many situations arise where it is clear that a party had some separate property at the beginning of the marriage, but community income or community property was added to it, and the property has become hopelessly commingled.
Also, in Texas, a homestead is a very significant factor in the law. For example, if a husband owns a 100 acre farm prior to marriage, that is clearly his separate property. His wife moves on to his property, and then the husband dies. The wife has a widow’s homestead right to continue living on that property for her life. Of course, this frequently messes up people’s ability to structure their wills the exact way they want.
Because of the separate/community nature, the uncertainty regarding division, and homestead rights, prior marriages, and prior divorces, many couples are entering into Houston prenuptial agreements so that their rights are clearly defined, and the courts have very limited or no discretion should a divorce ensue.
Many premarital agreements have a clause that provides that no community property will arise during the marriage. It means exactly what it says, that no matter how long the parties are married, there will never been any community property between the two of them.
Another common provision of premarital agreements is to provide that all earnings, wages, salary, and commissions earned through personal work and efforts (which would normally be community) become the separate property of the parties who earned the money. Again, this is part of the overall plan that no community property will ever exist.
In premarital agreements, couples frequently want to eliminate claims for reimbursement. Let’s take a hypothetical example. Right before marriage, wife buys a new house that is worth one million dollars, pays $200,000.00 down, and takes out a mortgage in her name for $800,000.00. Then several years later, husband inherits from his long-lost aunt, $600,000.00; husband takes that money and applies it to wife’s mortgage. The minute the husband pays a part of wife’s mortgage, the husband has a claim for reimbursement or economic contribution. If the premarital agreement provides that there is no claim for reimbursement or economic contribution than when the husband pays wife’s mortgage, he is deemed to have made a gift to her and he will not have any claim for reimbursement or economic contribution.
Frequently couples do like to include a provision in the premarital agreement for “Joint Property” and “Joint Acquisition of Assets”. I have found that many couples who enter into premarital agreements over the years do intend to acquire joint property. By spelling it out more clearly in an agreement, it eliminates the need for them to seek the services of an attorney from time to time, when they wish to acquire joint property. I have used clauses to the effect that said that if the parties open up a joint account, then anything that is put in that joint account, even if 100% from a person’s separate estate, immediately becomes joint property, and any assets acquired out of the joint account becomes joint property. I have had situations where the parties have decided to buy a lakehouse, and the lakehouse is to be funded entirely from one party’s separate property, but the parties agree that it is to be their joint property (owned 50% by each party). By simply putting the money into the joint account, writing a check out of the joint account, and taking the lake property in both party’s names, they have created jointly owned property, (not community property). Upon divorce, that jointly owned property belongs 50/50, and the divorce court has no discretion to award a spouse a disproportionate share.
Texas has a very limited form of alimony or post divorce maintenance. Most couples include a provision in the premarital agreement waiving any right to alimony or post divorce maintenance. Sometimes one person of substantial wealth is marrying a person who has very little property; in these situations it is not uncommon to provide for alimony at a predetermined amount for a predetermined length of time.
Also, under federal law, a widow or widower frequently has certain retirement benefit rights in connection with 401(k)s, 403(b) plans, pension plans, etc. For example, if a wife has a pension that will pay her $5,000.00 per month when she reaches age 65, the pension usually provides that she can either elect to receive the $5,000.00 per month for her life only, or she can elect a so-called survivor’s benefit, whereby the pension company will pay out a lesser sum (say $4,000.00 per month) for her life, plus after her death, will continue to pay that amount to her spouse for his life. In a premarital agreement such right may be altered or waived. If you have questions or doubts, please contact our Houston prenuptial agreement lawyer.