Understanding Common Intricacies of Potential Separate Property During Divorces
During a marriage, couples often share everything, from furniture to finances. These couples will most likely commingle or “share” separate property funds and community property funds.
When spouses separate, it’s unclear as to which funds – separate property funds or community property funds – were spent or remain in the account, thus making it difficult to clearly identify potential separate property. In fact, identifying separate property throughout the marriage can be a complex task and may require tracing multiple accounts.
In a previous article, we addressed four basic considerations to identify the characterization of assets during a divorce, the second of which was identifying potential separate property. As a reminder, the basic assumption in the state of Texas is that all property is community and the burden of proof lies with the spouse claiming a separate property interest in any asset.
Identifying Potential Separate Property
A spouse may own separate property funds prior to marriage or receive funds during the marriage that would be characterized as separate property of the spouse receiving the funds. It would be easy enough to identify separate property funds if those funds were tucked away safely under the mattress or in a safe deposit box, but the reality is that these funds often are deposited into a financial institution where other community property may exist or may be created through earnings.
Complexity: What was the source and nature of the potential separate property funds?
Pursuant to the Texas Family Code §3.001, a spouse may own separate property during the marriage if:
“A spouse’s separate property consists of:
1) the property owned or claimed by the spouse before marriage;
2) the property acquired by the spouse during the marriage by gift, devise, or descent; and
3) the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during the marriage.”
This list is not representative of all separate property claims that a spouse may assert, however it is a baseline for most separate property claims.
Tracing Complexity Resolution
Identify what type of separate property assertion is being claimed based on the Texas Family Code §3 guidelines, or other generally accepted separate property claim assertions, such as earnings from oil and gas interests.
Complexity: In which financial institution were the separate property funds held?
Once separate property funds have been identified, it is important to understand where the separate property funds were being held. The financial institution where the potential separate property funds were being held will need to be traced to determine whether those funds are still in that account, have been spent, or have been transferred into another account.
Tracing Complexity Resolution
There are a few tracing resolutions that may be considered.
1. Trace the account where the potential separate property funds were held. If the account balance never fell below the separate property amount, then most likely the separate property funds are still in that account, and it would be sufficient to trace just that account to validate the separate property funds balance in that account.
2. Trace the account where the potential separate property funds were held. If the account balance ever fell below the separate property amount, then there are two likely scenarios.
a. The separate property funds were used to pay expenditures which may or may not be subject to a potential reimbursement claim. The use of the separate property funds needs to be analyzed further to determine whether or not they are subject to potential reimbursement.
b. The separate property funds were transferred to another financial institution. In this case, the secondary financial institution receiving the separate property funds would also need to be traced from the date of receipt of those separate property funds through the most current date or through the date that the separate property was still in the account. If separate property funds were transferred from this secondary account into another account, the other account also would need to be traced.
The Most Important Thing to Remember
Generally speaking, the separate property funds need to be identified, and each financial institution that held those funds also need to be traced. It is not always clear how many accounts will need to be traced after the initial traced account, but after the initial trace is done, it is clearer whether or not additional accounts will need to be traced.
Contact us to see how we can assist you with your separate property characterization needs, including the review of another experts’ 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 situations. Briggs & Veselka reserves the right to conduct asset tracing work on a case-by-case basis.