Property Characterization & Asset Tracing: Proving Separate Property in a Texas Divorce
There’s no understating the financial ramifications of divorce. Aside from potential child support or spousal support (sometimes called alimony) agreements, most divorce cases require spouses to divide marital assets and debts before finalizing the end of their marriage. If that seems like a difficult task with a lot of potential for dispute, then you already understand that it is.
At Coker, Robb & Cannon, our family law attorneys know clients have many concerns when it comes to their property division. From initial consultations and the early exploration of available options, to strategic negotiations, mediation, or even litigation, we work to ensure clients understand their rights throughout the entirety of their case, and that they have the resources, insight, and proven representation needed to protect their interests. This is especially the case in matters concerning money, property characterization, and asset tracing.
Property Division: What it Means in Divorce
Spouses may have their work cut out for them when it comes to dividing property during divorce, especially if cases involve high net worth, unique or complex assets, and other complicated financial issues. That’s due to the fact that there are several steps involved.
Though every case is different, these steps generally include:
- Taking an account of all assets and debts in the case;
- Properly classifying assets and debts as community or separate property;
- Addressing any claims (either by bringing and proving a claim, or defending against one) that certain assets should be considered separate property;
- Reaching a settlement through out-of-court negotiations, mediation, or litigation.
When boiled down to its basic elements, property division may not seem exceedingly difficult. However, these steps are very generalized, which is why you need to understand that each can pose a variety of issues and potential complications and be resolved through a number of possible solutions.
Property Characterization: Community or Separate Property
The first and most important thing you should know when just starting out is that not everything you own may be “on the table”. That’s because Texas is a community property state, meaning that only certain assets and debts are divided. Being that there are two general types of property in divorce, here’s a quick breakdown.
- Community Property – Sometimes referred to as marital property or the marital estate, community property is (generally speaking) any asset or debt which was acquired during the course of a marriage. Under Texas law, community property is subject to division in divorce in a manner that’s “just and right” but not necessarily 50-50.
- Separate Property – Separate property is not technically divided in divorce. Separate property is generally any property you: (1) owned before marriage; (2) received as a gift or inheritance; (3) certain types of personal injury or disability claims; (4) certain types of mineral interests; (5) certain types of agricultural interests. If you have a separate property, it’s (theoretically) yours to keep.
Simple enough? Trust us, it’s not always that easy. There are a few issues you’ll need to address. These include:
- Characterization – Before you can divide property, you’ll need to characterize it as community or separate property. For some assets, like a home you and your spouse bought after getting married, it may be clear. For others, more consideration may be required.
- Texas’ community property presumption – Texas law presumes that assets and debts in the marital estate are community property. If you don’t challenge this presumption, everything will be “on the table”, so to speak. If you believe you have separate property that shouldn’t be split during your divorce, you’ll have to overcome the community property presumption.
- Proving separate property – Overcoming the presumption that everything you and your spouse have is community property requires more than just saying “that’s mine.” In fact, spouses who want to prove that a certain asset should be characterized as separate property have to meet a pretty high burden of proof in order to do so. Specifically, they’ll have to prove that something is separate property by “clear and convincing evidence,” a standard of evidence that’s more rigorous to meet than the “preponderance of the evidence” (more likely than not) standard used in many civil claims. However it is less than the “beyond a reasonable doubt” standard used in criminal cases. In general, clear and convincing evidence means evidence you provide is highly probable to be more true than not.
- Quasi-community property, commingling, and mutated assets – This may be an unusual way to describe property, but it’s particularly accurate in matters of divorce and property division. In some instances, assets that were once separate property may become community property subject to division in divorce, either in part or in whole, often as a result of commingling funds, changing the names on titles or deeds, or the management of assets. For example, quasi-community property can happen when marital funds are used to support a separate property asset (like when you help your husband pay the mortgage on a home he owned before you two were married).
- Disputes and other complications – There may be additional challenges in your effort to characterize assets. That includes disputes from a spouse who says a certain asset should or should not be included in the marital estate, or that they have a right to a community property share (or reimbursement) of some portion of a once-separate-property asset. Aside from disputes and disagreement, there may also be difficulties when one spouse attempts to conceal or hide assets, withhold certain financial information, or otherwise fails to act in good faith. A good lawyer can help you overcome these types of issues.
So How Do I Characterize Assets or Prove Separate Property?
Before you get to divvying up your community property, you’ll of course need to characterize everything as either community or separate property. As we’ve noted, that can and often does become quite challenging. As such, there are proven methods to which attorneys turn to help with characterization, which can be of critical importance when disputes and other complications do arise. One such method is tracing.
Tracing, as the name implies, involves tracing back through various transactions, the development of assets and liabilities, and other issues in order to determine when an asset was acquired, and how it may have mutated or commingled with other assets during a marriage. Though tracing can be involved to some degree in a range of property division matters, it can become even more important in certain cases, especially when it must be used to:
- Establish evidence to prove claims and the separate character of a particular asset acquired before or during marriage;
- Support a claim for reimbursement, or defeat one;
- Address complicated issues of commingling;
- Relocate assets that are being hidden or concealed by a spouse; or
- Untangle complex financial holdings, investments, and other transactions in a high net worth or complicated divorce.
Tracing can be a very complex task, and one that requires not only extensive and varied experience with different assets and types of accounts, but also technology, resources, and in some cases professional experts who can testify about a particular asset or complicated transactions and documentation. Depending on the situation, one of several methods or theories of tracing may be used. Some common approaches include:
“Community funds first” rule – This method of tracing, also called the “community out first” rule, is one of the most common, and it involves the idea that when community and separate property funds are commingled in a single account, the community funds are spent before separate funds are used. This type of tracing has been developed through case law in Texas, and can be illustrated with a couple simple examples:
- Example 1: Two spouses have a joint account holding $5,000. One spouse gets an inheritance, and deposits it into the joint account. Funds from that account are then used to buy a rental home. In such a situation, this tracing method can allow the spouse with the inheritance to provide evidence of when their deposit was made and segregate the inheritance funds from the community property funds (i.e. income earned during the marriage).
- Example 2: A wife who owns her own business deposits $10k into a joint account, from which both the wife and the husband both made withdrawals totaling $11K. Because the funds generated by the wife’s business were not equal to or more than the total amount of the funds withdrawn, that evidence would support the idea that her business was not supported with the use of marital funds, but rather only her separate property.
Other methods of tracing – There are several other methods of tracing which may be used to resolve property-related matters in divorce. Though these methods can be complex in how they actually work, they may generally involve anything from tracing the title of real property (i.e. a home, a rental property, or land) to show when it was acquired, to tracing the value of a particular asset, which may be used in matters where property appreciates or depreciates (i.e. a home, a retirement or investment account, etc.), to methods that address situations when the balance of an account never dips below the amount of proven separate property (the minimum sum balance method), separate property accounts which temporarily held funds (the clearinghouse or identical sum method), and matters where debts and liabilities are assumed by both spouses, and other complex financial investigations.
Trust Proven Professionals to Protect Your Property: Call Coker, Robb & Cannon, Family Lawyers.
Our legal team at Coker, Robb & Cannon, Family Lawyers knows finances are one of the most important concerns for our clients, which is why we have developed the proven methods, resources, and experience needed to tackle even the toughest matters. Led by three Board Certified Family Law Specialists (Duane L. Coker, Kelly K.E. Robb, and Jacqueline D. Cannon, Texas Board of Legal Specialization), our practice has been widely recognized for our skill and insight, and for prioritizing the needs of the men, women, and families we serve.
To discuss a divorce case anywhere in Denton County, Collin County, or beyond, call (940) 293-2313 to set up an initial consultation.