4 Basic Considerations Used to Identify Characterization of Assets During Divorces
The topic of divorce is rarely a welcome one during an average conversation.
However, for some people, divorce is something they are going through and they’re seeking answers, or it’s their job to help make that life-changing situation a bit less difficult for those in the thick of it.
Ascertaining the characterization of assets between a spouse’s separate property estate and what’s considered the community property estate can be tricky – and is often a big point of contention during divorce proceedings.
This is when Briggs & Veselka enjoys being part of a divorce conversation.
What This Means in Texas
Texas is a community property state, which generally means that all assets and liabilities existing during the marriage are considered assets and liabilities of both spouses jointly (i.e., the community estate).
If one spouse believes that assets belong wholly or in part to him/her as his/her sole separate property, then the burden of proof lies with that spouse to prove the separate property assertion.
If they can’t prove this, the assets are considered community property and therefore belong to both spouses jointly.
How to Determine Community vs. Separate
As experts, one of the ways we determine ownership characterization between the separate estate of a spouse and the community estate is to perform a trace of the assets.
The asset-tracing process includes identifying:
- Potential separate property asset
- Date of acquisition of that asset
- Any other documentation supporting (or rejecting) the separate property claim (i.e., wills, public records, tax returns, legal agreements, etc.)
To begin the tracing characterization process, be prepared to provide the following information to your asset tracing expert or to your attorney to coordinate on your behalf.
Give Date of Marriage
The date of marriage is essential in the characterization process because it denotes the day on which earnings, assets, and liabilities incurred from that date forward are characterized as community property activity.
Note: There are some exceptions to this general characterization that would allow for separate property to be acquired after the date of marriage, such as receiving a gift or inheritance, and certain types of income derived from separate property assets such as those related to oil and gas royalties.
Identify Potential Separate Property
The accounts containing – or at one time contained separate property – need to be identified.
We highly recommend that an expert review any and all bank/brokerage accounts that potential separate property funds were either directly deposited into or may have been transferred into from other accounts.
Note: In order to accurately characterize between a spouse’s separate estate and the community estate – using the generally accepted tracing methods – we highly recommend reviewing all accounts that may have contained the separate property, whether the separate property is believed to still be in that account or not.
Gather Bank/Brokerage Statements
We highly recommend obtaining all contemporaneous, consecutive bank/brokerage statements that may have contained separate property for the entire period in which the separate property existed.
For example, if the separate property claim is based on funds owned by a spouse prior to the date of marriage, then the asset tracing expert typically will request statements from the period immediately preceding the date of marriage (i.e., day, month, quarter) through the most recent statement.
If the separate property was acquired during the marriage, then only the statements from the receipt of the separate property through the most recent statement are needed.
Note: If it isn’t possible to gather all these statements, we can “bridge” the gap for those missing statements.
However, this bridge is a weaker separate property assertion since we must make assumptions about the activity of those missing statements instead of using factual data that typically would be pulled from the actual bank/brokerage statement.
This bridge doesn’t negate the separate property claim but simply makes it slightly weaker than if the actual statement data was used.
Provide Additional Documentation
It’s always good to have any other documentation that supports a separate property claim.
This additional documentation can include:
- A will that details the separate property bequeathed to the spouse making a separate property claim
- A Form 709 Gift Tax Return detailing a gift of certain property to the spouse making a separate property claim
- A Form 706 Estate Tax Return detailing a gift of certain property to the spouse making a separate property claim
- Pre-nuptial agreement
- Post-nuptial agreement
- Partition agreement between the spouses
- Public records identifying ownership, such as county tax records with regard to real property
- Entity formation documents with regard to closely held business entities
- Copies of canceled checks that might identify the intention of a “gift”
- A copy of divorce decree if one of the spouses was previously married and received certain property incident to the divorce
- Any other documents/correspondence that may support a separate property claim (e.g., emails, text messages, pictures, etc.)
The Most Important Thing to Remember
The main takeaway is that Texas is a community property state, so the burden of proof lies with the spouse asserting a separate property claim.
The more evidence supporting the separate property claim, the stronger the claim will be.
Contact us to see how we can assist you with your separate property characterization needs, including the review of another expert’s separate property characterization claim.
Please note this article provides information that is accurate to the best of the authors’ knowledge as of the date of publication.
It should not be read as advice or opinion. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situation.
Briggs & Veselka reserves the right to conduct asset tracing work on a case-by-case basis.