Yours, Mine and Ours: Characterization of Property in Family Law

From the day you say “I do”, you and your spouse begin to accumulate community property. In the United States there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Community property is presumed to be anything that is acquired after you marry, whether assets or debts. So if it’s not community property, what is it? There are two main types of property in family law, community property and separate property. Why is that important? In the event of divorce the type of property will determine what the Court can fairly divide between the spouses. Texas courts can divide community property in a “just and right” division between spouses, but they cannot award your spouse your separate property, regardless of the facts.

Community Property

Community property can be anything you acquire after marriage, including (but not limited to): real property (generally referred to as land and immovable homes) vehicles, bank accounts, businesses, partnerships, lottery tickets, oil and gas rights, animals, and yes, even the kitchen sink. Community property can even include intellectual property such as an idea for a new app or web site if the idea was conceived during the marriage. If you or your spouse acquires the property during the marriage by purchasing it with money you’ve made during the marriage, the item is considered community property. It sounds simple enough but characterization of community assets can be complicated. For example, it’s easy enough to determine that the salary from your job after marriage is community income, but did you know interest on a certificate of deposit you acquired before you married is also considered community property? In contrast, the increased value of a stock you owned before the marriage remains your separate property.  If you owned a home prior to the marriage and decide to rent it after the marriage, the income from the rent is also characterized as community property.

Separate Property

Separate property is any property that is owned or claimed by a spouse prior to marriage. It is also property acquired by the spouse during the marriage by a gift or inheritance. Any recovery for personal injuries sustained by the spouse during the marriage, except for any recovery for loss of earnings during the marriage, is also separate property.

Commingled Property

Now that you know the definitions, it’s easy to see how separate and community property can become commingled during a marriage. For example, if one of the spouses has a certificate of deposit before the marriage and income from the CD is “rolled into” the CD upon maturity, the separate property CD has been commingled with community property interest. In more complex situations, accountants may be retained to trace commingled bank accounts or other assets to determine the source of the funds deposited. If shown by clear and convincing evidence, the portion of the asset that is community and the portion that is separate can be determined. In addition, the source of funds used to purchase certain assets may be traced even if the result is an asset that has a “mixed” character of partially community and partially separate property.

What are reimbursement claims?

Reimbursement claims can be best described by examples. If a husband owns a house prior to marriage, the house is his separate property even if during the marriage the married couple used their community funds to build a $20,000 pool on the property. A reimbursement claim allows the community estate to recover the money it spent for the capital improvement on the husband’s separate property house. Since the husband’s house always remains his separate property, the only way to get the $20,000 of community funds back, or at least have the expenditure recognized, is a reimbursement claim. Principles of equity (fairness) contained in the Family Code give the judge the authority to decide whether to recognize a claim for reimbursement, how to value it and what to do about it. Claims for reimbursement can go either way – a separate estate can make a claim against the community or the other separate estate, but usually a reimbursement claim in a divorce involves a community estate claim against the separate estate of one of the spouses. Reimbursement claims are sometimes determined by calculation of a “dollar for dollar” credit to the reimbursed estate, and sometimes the value of the claim is determined by the increase in value to the benefited estate.