Understanding the Distinction Between Community and Separate Property

Texas is one of nine states that are considered “community property” states, meaning generally that property acquired during the marriage is considered owned equally by both spouses. The other states that are considered community property states are:

--Arizona
--California
--Idaho
--Louisiana
--Nevada
--New Mexico
--Washington
--Wisconsin

In Texas, all property (including cash) is classified as community or separate based on when and how it was acquired. Texas (as does some other states) has what is known as the “Inception of Title” rule, which basically states that the characterization of the property is determined at the time the property is acquired. Further, all property acquired during a marriage in Texas is presumed to be community property unless it can proven otherwise.

Converting an asset into cash and back again does not affect the classification. For example, if a separate property asset, such as real estate, is sold during the marriage, the proceeds of that sale and anything purchased with the proceeds will remain separate property. However, you must be able to "trace" the proceeds from each sale to each purchase to prove that the property is separate property. Unless you keep excellent records, this can be difficult.

Under the Texas Family Code, community property is actually negatively defined. That is, Section 3.001 of the Family Code defines what separate property is, and then Section 3.002 states that community property is any property acquired by either spouse during the marriage that isn't separate property.

Separate property (under the Family Code) is defined as follows:

1. Property owned or claimed by the spouse before marriage;
2. Property acquired during the marriage by gift, devise or inheritance; and
3. The recovery for personal injuries sustained by a spouse during the marriage (but not any recovery for loss of earning capacity, which is considered community)

Thus, some examples of separate property might be:

1. Earned income from the work of either spouse before the marriage.
2. Capital gains on separate property (e.g., Joe buys 100 shares of ExxonMobil stock before he marries Sue at $50/share, and after his marriage, the stock goes up to $75/share. The increase in the value of the stock is still considered separate property);
3. Gifts and inheritances received by either spouse during the marriage, including joint gifts (e.g., if Dad gives Son and Son’s wife a piece of real property worth $100,000, Son and Son’s wife each have a 50% separate property interest in the property). Likewise, if Dad dies and leaves that same property to Son and Son’s Wife, the same is true—Son and Son’s wife each have a 50% separate property ownership in the property).

Since, by definition, everything else acquired during the marriage is community property, that means that anything other than the above ought to be classified as such. As you can probably guess, it usually is never quite that simple. However, some examples of community property are as follows:

1. Earned income from the work of either spouse during the marriage.
2. Dividends, interest, and capital gain earned on community property.
3. Dividends and interest earned on either spouse's separate property during the marriage.

Notice that last one? The rule in Texas is that income from separate property is considered community property, and the only way to get around that is to have an agreement in writing. Texas Family Code Section 4.103 allows a couple to agree that the income from separate property will remain separate. The agreement must be in writing and signed by both parties.

A couple can turn community property into separate property by executing a partition or exchange agreement. It must be in writing and signed by both parties. The one thing to note if you execute this type of agreement is that the income and earnings from the separate property will now remain separate unless you actually agree in the partition that the income will continue to be community property.

It used to be the law that you could not create community property out of separate property, but ever since January 1, 2000, a couple can now agree in writing that separate property of one spouse can be converted into community. The writing has to be very specific about what is being converted, and that it is being converted to community property. Further, there can be no consideration for entering into the agreement. That is, it has to be totally voluntary on the part of both spouses, and it is considered a gift by the one spouse who owned the separate property to the spouse who is receiving the new community property interest. Section 4.205 of the Family Code provides disclosure language that must be contained within the agreement to provide for a rebuttable presumption that the agreement was fair and reasonable.

The distinction between separate and community property is a very important one, especially when a couple divorce, because the Texas Constitution and codified law provides that no separate property of one spouse can be awarded by a judge to the other spouse in the division of assets. The identification of an asset as separate or community is also important on a person’s death, especially if the person did not have a Will. Separate and community property pass by intestacy differently, as I discussed in a previous post.

It would be helpful, as part of your estate planning, to make sure you can easily identify which of your assets are separate and which are community. If you have difficulty in doing so, you should confer with your accountant or attorney about how to trace those assets back to their origin. Doing so may be of some benefit to you in the future.

Providing for the Disposition of Your Body at Death

In my last post, I discussed making organ donations at your death. Hopefully you will take advantage of making such organ donations to give others an opportunity for a longer lifespan.

But prior to your death, another matter to consider is whether you will be buried or cremated, and what happens if you do not make that election. Who has the right, and who does not, to decide what happens with your body upon your death?

There are basically three scenarios:

1. The decedent during his or her lifetime.

The Texas Health and Safety Code provides, Section 711.002(g) that a person may leave written instructions for the disposition of his or her remains in a Last Will and Testament, a prepaid funeral contract, or a written instrument signed and acknowledged by the person. As noted in my post about organ donations, it is generally not wise to leave such instructions in a Will, as the Will may not be examined prior to the disposition of the body.

The written instructions can impose various requirements, such as the disposition of the body, where the body is to be disposed, how much to spend on the funeral or memorial service, and even where the ashes are to be scattered following cremation (as well as who has the right to scatter the ashes). You will be surprised as to how often these issues are debated among family members. In fact, one of the first battles following the death of J. Howard Marshall was not over the money, but whether his son or Anna Nicole Smith would have the right to bury or cremate the body and who could dispose of the ashes.

2. A person appointed by the decedent.

The Health and Safety Code also provides in Section 711.002(a)(1) that a person may appoint an agent to control the disposition of his or her remains. This designation must be in writing and signed and acknowledged by the decedent before a notary. The designation must be in substantially the same form as the form provided in Section 711.002(b). That statutory form can be found at this link. You should note that a funeral home or cemetery has a right to rely on the document without liability unless it has received actual notice of any modification or revocation of the form.

3. Persons in a Priority List Provided in State Law.

Finally, the Health and Safety Code provides in Section 711.002(a) that if the decedent did not leave written instructions for the burial or disposition, nor named an agent to make such an arrangement, then there is a priority list of the persons who have a right to control the disposition of the body, in this order:

(1) The decedent’s surviving spouse;

(2) Any one of the decedent’s surviving children;

(3) Either one of the decedent’s surviving parents;

(4) Any one of the decedent’s surviving adult siblings; or

(5) Any adult person in the next degree of kinship in the order named by law to inherit the estate of the decedent.

Now you should note that there is nothing in the above list that allows for an unmarried partner (straight or gay) of the decedent any right to control burial or cremation. Persons who want an unmarried partner to have this right will need to execute the statutory appointment.

In addition, there is nothing that distinguishes which of the surviving children or parents have the right to make this decision. What if divorced parents disagree about the burial of a child, or siblings disagree over the burial of a parent? A funeral home in such an instance can require a court order before accepting a decedent’s remains. Section 711.002(k) of the Health and Safety Code provides that the funeral home or cemetery has no liability for refusing to accept remains without a court order in the event of a dispute.

One final note of interest—if a spouse is found criminally responsible for the death of the decedent, then their right to control the disposition of the body can be removed under Texas Probate Code Section 115. The interesting aspect of this is that only the surviving spouse’s right is addressed and no other person. Theoretically, the way the law is currently written, a child could be criminally involved in the death of a parent, and then have the parent’s body cremated. I would argue that this law needs to be broadened to provide a restriction on any person responsible for the decedent’s death.

Because the disposition of your body at death can lead to disagreements (and even legal action) during a very emotional and trying time, it is best that you set out in writing exactly how you want this handled. While difficult to face, doing so now will make everything flow much more smoothly after your death.