Property Division Texas

Community Property

Community property consists of the property, other than separate property, acquired by either spouse during marriage.  Property possessed by either spouse during or on dissolution of marriage is presumed to be community property. If community property and separate property are commingled and cannot be segregated, then the community property presumption prevails. Property purchased on credit during the marriage is presumed to be community property. This presumption is rebutted if the lender expressly agrees to look solely to the separate estate of the purchasing spouse for satisfaction of the indebtedness. The court may consider many factors in deciding on an unequal division of the community property.

Separate Property

The Texas Constitution defines separate property as follows:   All property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise or descent, shall be the separate property of that spouse.  The Texas Family Code defines separate property as follows:

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 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 marriage.

If no community funds are available, then spouses must use their separate funds to support the family with no future right of reimbursement. Generally property possessed by either husband or wife during, or on dissolution of marriage is presumed to be community property, and it makes no difference whether the conveyance is to the husband, to the wife, or to both. However, a presumption of separate property arises when (1) one spouse is the grantor and the other spouse is grantee; (2) one spouse furnishes separate property consideration and title is taken in the name of the other spouse; or (3) the instrument of conveyance contains a "separate property recital" or a "significant recital." Where one spouse uses separate property to pay for property acquired during the marriage, and takes title to the property in the name of the other spouse or both spouses jointly, the presumption is that a gift is intended.

Mixed Property

The community estate and one or both separate estates can own property together. Each estate owns the property in proportion to the percentage contributed by each to the total purchase price.

Presumption of a Gift

It has long been the law that when one spouse conveys property to the other spouse, there is a rebuttable presumption of a gift even absent a recital in the instrument of conveyance. One spouse may convey the other spouse his community property interest and the property becomes the recipient spouse's separate property. When one spouse furnishes separate property consideration and title is taken in the name of the other spouse, a rebuttable presumption of gift arises. When the conveyance is from the husband to the wife as grantee, and contains no separate property recital, the normal community property presumption is replaced by the presumption that the husband is making a gift to the wife, in the absence of parole evidence to rebut the presumption of gift. However, the presumption of gift might be overcome by a spouse's testimony that no gift was intended. Also, certain statutes may override this common law gift presumption.

Personal Injury Recovery

A recovery for personal injuries to a spouse, including disfigurement and past and future physical pain and suffering, is the separate property of that spouse. However, recovery for medical expenses during the marriage is community property. [Graham v. Franco, 488 S.W.2d 390, 397 (Tex. 1972).]

During the marriage, recoveries from tangible or economic damages in Texas are community property and include:

1. Medical expenses during marriage
2. Loss of services of other spouse during marriage
3. Loss of earning capacity during the marriage

Failure of a spouse to show which part of settlement proceeds are separate and which part are community (lost wages or medical expenses) results in presumption that all proceeds are community property. A professional degree earned during marriage is not property subject to division upon divorce.

Stock Options

Stock options earned during marriage may be community property subject to a just and right division upon divorce whether vested or not. If individual stocks, bonds, or securities (not held in brokerage accounts) are awarded to one of the parties, then the certificates must be endorsed so that the shares can be transferred to the party awarded those shares. Keep in mind that transfers of securities often require a "guaranteed" signature, which is not the same as a notarized signature. You can have a signature "guaranteed" only by officers of certain financial institutions, such as bank and savings institutions, and the party must sign the appropriate instrument in the presence of the financial institution officer.

Reimbursement and Economic Contribution

Equitable Reimbursement

A spouse may be entitled to reimbursement for time and effort on behalf of the community which enhances the value of the other spouse's separate property. Claims for reimbursement for a portion of the community estate's improvement to the other spouse's separate property are measured by the enhancement in value to the separate property. The trial court may impose an equitable lien on the separate property of a spouse to secure the other spouse's right of reimbursement for community improvement to that property.

A claim for reimbursement includes:

1. Payment by one marital estate of the unsecured liabilities of another marital estate; andBenefits for the use and enjoyment of property may be offset against a claim for reimbursement for expenditures to benefit a marital estate on property that does not involve a claim for economic contribution to the property.
2. Inadequate compensation for the time, toil, talent, and effort of a spouse by a business entity under the control and direction of that spouse.

Benefits for the use and enjoyment of property may be offset against a claim for reimbursement for expenditures to benefit a marital estate on property that does not involve a claim for economic contribution to the property.

Joint Ventures

If one is not able to establish that a marriage exists, it may be possible to establish that the parties have a joint venture.
Although a joint venture must be based on an agreement, this agreement may be implied. Although a joint venture is in the nature of a partnership, its operation is usually limited to a single transaction. In determining whether there is sufficient evidence of a joint venture, the participation, activities, and objectives of the parties may all be considered.

Non-Reimbursable Claims

The court may not recognize a marital estate's claim for reimbursement for:

1. The payment of child support, alimony, or spousal maintenance;
2. The living expenses of a spouse or child of a spouse;
3. Contributions of property of a nominal value;
4. The payment of a liability of a nominal amount; or
5. A student loan owed by a spouse.

Statutory Definitions of Economic Contribution

"Economic contribution" is the dollar amount of:

(1)    The reduction of the principal amount of a debt secured by a lien on property owned before marriage, to the extent the debt existed at the time of marriage;
(2)    The reduction of the principal amount of a debt secured by a lien on property received by a spouse by gift, devise, or descent during a marriage, to the extent the debt existed at the time the property was received;
(3)    The reduction of the principal amount of that part of a debt, including a home equity loan:
(A)    Incurred during a marriage;
(B)    Secured by a lien on property; and
(C)    Incurred for the acquisition of, or for capital improvements to, property;
(4)    The reduction of the principal amount of that part of a debt:
(A)    Incurred during a marriage;
(B)    Secured by a lien on property owned by a spouse;
(C)    For which the creditor agreed to look for repayment solely to the separate marital estate of the spouse on whose property the lien attached; and
(D)    Incurred for the acquisition of, or for capital improvements to, property;
(5)    The refinancing of the principal amount described by Subdivisions (1)-(4), to the extent the refinancing reduces that principal amount in a manner described by the appropriate subdivision; and
(6)    Capital improvements to property other than by incurring debt.
            "Economic contribution" does not include the dollar amount of:
(1)    Expenditures for ordinary maintenance and repair or for taxes, interest, or insurance; or
(2)    The contribution by a spouse of time, toil, talent, or effort during the marriage.

Claims for Economic Contribution or Reimbursement

A spouse seeking economic contribution and/or reimbursement has the burden to both plead and prove his or her claim.  Counsel must evaluate and confirm that a claim exists, and then properly plead for the specific relief. If both types of claims arise, then economic contribution will prevail and relief is limited to what is allowed under the economic contribution claim. A trial court must impose a lien subject to foreclosure on any property owned by the benefited estate, whether it is separate or community interest. However, if the real property is the separate property homestead of the benefited estate, the court may not impose a foreclosable lien, unless the subject real property was the property which actually benefited from the contribution. This lien may be imposed on any non-homestead separate property of the benefited party.
The court's equitable power still exists for reimbursement claims, but not for economic contribution claims.

The economic contribution statute was enacted in 2001. The former claim for reduction of a purchase money debt, known as reimbursement, is now a claim for economic contribution. Subject to homestead restrictions, an equitable lien may be imposed on the entirety of a spouse's property in the marital estate and is not limited to the item of property that benefited from an economic contribution. The rules of procedure require that the judgment conform to the pleadings.

A court of appeals must remand the entire community estate for a new division when it finds reversible error which materially affects the trial court's "just and right" division of the property. The Texas Constitution prohibits foreclosing on a lien placed on a homestead except for purchase money, taxes, or work and material used in constructing improvements. A court does have authority to place an equitable lien on one spouse's homestead if that lien secures the amount awarded the other spouse for his or her interest in the homestead.

Equitable liens can be imposed upon a spouse's separate real property to secure the other spouse's right of reimbursement, although such liens may not be imposed to ensure a just and right division. A lien can be imposed upon a spouse's separate property homestead to secure the other spouse's right of reimbursement only if the award compensates the spouse for taxes, improvements, or purchase money payments.

Orders for Economic Contribution or Reimbursement

The Family Code provides that courts shall dispose of claims for economic contribution or reimbursement in the following ways:

1. In a decree of divorce or annulment, the court shall determine the rights of both spouses in a claim for economic contribution ... and in a manner that the court considers just and right, having due regard for the rights of each party and any children of the marriage, shall:
   
   
   1. Order a division of a claim for economic contribution of the community marital estate to the separate marital estate of one of the spouses;
   2. Order that a claim for an economic contribution by one separate marital estate of a spouse to the community marital estate of the spouses be awarded to the owner of the contributing separate marital estate; and
   3. Order that a claim for economic contribution of one separate marital estate in the separate marital estate of the other spouse be awarded to the owner of the contributing marital estate.
   
   
2. In a decree of divorce or annulment, the court shall determine the rights of both spouses in a claim for reimbursement ... and shall apply equitable principles to:
   
   
   1. Determine whether to recognize the claim after taking into account all the relative circumstances of the spouses; and
   2.  Order a division of the claim for reimbursement, if appropriate, in a manner that the court considers just and right, having due regard for the rights of each party and any children of the marriage.

By the term "shall ... order" this section implies that the court must order a division of an economic contribution claim. However, the discretionary terms "in a manner that the court considers just and right," remain. It therefore appears that the court is without discretion as to whether to grant a valid claim for economic contribution.
No economic contribution was allowed where a husband and wife bought a house with a $12,850 cash payment and the execution of the $60,000 purchase money note, even though $5,000 of the cash payment came from the husband's grandparents, and the grandparents made a gift of $40,000. There was no evidence that the husband did not intend to make a gift of the $12,850 to the community.

An equitable lien against a homestead cannot be enforced. In the Arnold case, the ex-wife filed motion to enforce property award entered in divorce action, which had awarded ex-wife $20,000 and secured that amount with equitable lien against parties' homestead. The District Court, determined the amount owed, granted final judgment, ordered foreclosure of ex-wife's lien, and awarded attorney fees. The ex-husband appealed and the case was reversed and remanded.

Tracing

A trial court has broad discretion in dividing the marital estate in a manner that the Court deems just and right. The rule of inception of title determines the character of property at the time the right to own or claim the property arises.  A claim for economic contribution does not create an ownership interest in property, but does create a claim against the property of the benefited estate by the contributing estate. The claim matures on dissolution of the marriage or the death of either spouse. Generally, Certified Public Accountants make appropriate tracing experts. A tracing expert must possess an intimate understanding of procedures and methods that are generally recognized as appropriate in tracing separate property. The expert must also be aware of the appropriate statutes and court cases. To be effective, the expert must understand the tracing process necessary to meet the "clear and convincing" burden of proof. The expert must be made aware of deadlines and scheduling orders. The expert has an obligation to the attorney to meet all court-imposed deadlines. Tracing must be complete and provided to opposing counsel prior to any mediation in order to facilitate the settlement process. A tracing expert must be informed that every document in his or her files, including preliminary drafts, calculations, and even letters to the attorney, are discoverable by the opposing party.

Tracing Methods

Clearinghouse Method

The clearinghouse method assumes that after one or more identifiable sums of separate funds go into an account, identifiable withdrawals are the withdrawals of the separate funds and are therefore separate property themselves. The clearinghouse method loses its persuasiveness if long periods of time separate the transactions.

Minimum Sum Balance

The minimum sum balance method is used when an account with separate property funds has community funds deposited in it and there have only been a few identifiable transactions. This theory presumes that only separate property remains after all other withdrawals are made.

Community First Out Rule

If there have been deposits and withdrawals in an account, one seeking to establish the separate character of the funds may apply the "community first out" rule. Under this rule, withdrawals from a mixed separate and community fund are presumed to be community to the extent that community funds exist. Withdrawals are presumed to be from separate funds only when all community funds have been exhausted.

Pro Rata

Under the pro rata approach, if mixed funds are withdrawn from an account, the withdrawal should be pro rata in proportion to the respective balances of separate and community funds in the account. This may be presented as the easiest approach because it does not require an analysis of the character of each withdrawal.

Value Tracing

Value tracing consists of tracing cash assets to determine the character of cash at the dissolution of marriage. Each deposit and each check must be accounted for.

Item Tracing

In item tracing an item of separate property at the dissolution of the marriage must be traced to its inception of title. The proponent of the separate property characterization must establish by clear and convincing evidence that the item was either acquired as separate property before marriage or by gift, devise or descent during marriage, or by the use of separate property funds or separate property credit.

REAL ESTATE DOCUMENTS

In real estate documents the person's name should have a marital designation. However, this is generally not practical in a divorce. Be sure that the divorce decree orders the parties to sign the specific documents that are necessary to affect the parties' agreements. The order should have a specific date to be enforceable (e.g., "parties shall sign said documents within 10 days of the date of this decree").  The family law practitioner will find himself or herself saying many times, "divorce does not affect third party creditors." When the husband and wife have signed documents obligating themselves to a third party, those obligations continue in affect after the divorce unless the property can be refinanced. Creditors are reluctant to refinance in many situations. Counsel can take precautions to protect the client's interest as much as possible given the client's situation.

Contracts Near the Time of Marriage or Divorce

If a person entered into an earnest money contract to purchase realty before marriage but the deed is not delivered until after the person is married, the inception of title occurred at the signing of the earnest money contract. The realty is the person's separate property because the right of claim acquired by the purchase money contract occurred before the marriage. If realty is acquired under a contract for deed or an installment land contract, the inception of title relates back to the time the contract was entered into, not when the title was ultimately conveyed. Rent, revenue, interest on and other income from separate property that accrues during the marriage is community property. However, a contrary provision in a premarital agreement is an exception to that rule.

Special Warranty Deed

Family law cases are one of the few times that a "Special" Warranty Deed will be desirable.
If real estate was owned by the parties and was paid in full and no pay-out is owed to either spouse (e.g., the parties have divided other assets to make up for the equity in the property), the only document necessary is a Special Warranty Deed conveying the property from one spouse to another. (However, it is the rare case where only one document is necessary.) A Special Warranty Deed limits the warranty to "when the claim is made by, through, or under the grantor, but not otherwise" (the deed should include this language). This is the most frequently used deed in family law cases. A Special Warranty Deed may also be used when the grantor only wants to insure title since he purchased the property and not the title of anyone before him.

Deed of Trust to Secure Assumption

When the buyer assumes payment of a debt for which the seller is liable at the time of sale, the assumed debt and lien are evidenced by a Deed of Trust. Thus, if the real estate has not been paid for, it is necessary to prepare a Deed of Trust to Secure Assumption. The primary function of the document is to give the seller adequate recourse if the buyer defaults in payment of the debt secured by the first lien. The document secures the loan to the third party, and puts others on notice when they review the title documents as to the parties' intentions. The buyer is the grantor in the deed of trust to secure assumption, and is the grantee in the accompanying special warranty deed. The seller is the beneficiary in the deed of trust to secure assumption, and is the grantor in the special warranty deed. The seller may also be the maker and the grantor in the note and deed of trust assumed (see front page of Deed of Trust to Secure Assumption). Fill out the Deed of Trust to Secure Assumption as follows:

• Under "Note and Deed of Trust Assumed: Date:" put the date that the property was originally bought;
• Under "amount" put the amount paid at the original purchase;
• Under "Payee & Beneficiary" put who the property was originally purchased from by the seller.

Real Estate Lien Note and Deed of Trust

If one party will pay the other party's interest (i.e., when one spouse retains the house and pays the other spouse equity), it is necessary to prepare a Real Estate Lien Note and a Deed of Trust. The Real Estate Lien Note is evidence of a debt secured by a lien on real property. It defines the terms of payment and rights and responsibilities of the parties. This document does not need to be filed in the county clerk's office. The buyer (spouse retaining possession) is the maker in the Real Estate Lien Note. The party fronting the money (spouse to be paid) is the payee in the Real Estate Lien Note. The Deed of Trust allows the non-possessing spouse to conduct a non-judicial foreclosure in the event the spouse possessing the property fails to abide by the agreement. The Deed of Trust conveys to a trustee whatever legal title the grantor (owner) has in the property so that the trustee can hold it in trust for the beneficiary (lender or mortgagee). This allows a remedy of foreclosure by a trustee's sale without the necessity of judicial action.

Warranty Deed With a Vendor's Lien

In real estate transactions, superior title remains in the grantor and will be vested automatically in the grantee on payment of the purchase money. If the grantee defaults in payment of the purchase money, the grantor may rescind the transaction and repossess the property. There are two remedies: immediate rescission and reclaiming of land, or judicial foreclosure (e.g., sale with seller financing). A vendor's lien is usually found in other documents (e.g., a Warranty Deed with a Vendor's lien). When preparing a Deed of Trust to Secure Assumption in a divorce situation, you need to retain the vendor's lien in the Special Warranty Deed. You can state that you have the vendor's lien in the Deed of Trust to Secure Assumption, but it is actually created in the deed. The Special Warranty Deed should cite the divorce decree and the decree should have the party receiving the property assuming the debt. You can leave the vendor's lien language in the Deed of Trust to Secure Assumption and the Special Warranty Deed even when the spouse giving up the property is not to receive any money from the other spouse because there is no equity in the property. If there is no debt to be assumed, leave out the language of an underlying Deed of Trust and insert the language regarding the debt between the spouses. If the client insists that they do not want interest to accrue on the note, inform them that the IRS will generally impute interest of at least six percent. If the client still desires to insist that no interest be paid, leave in the portion that states "interest on matured, unpaid Amounts: the highest allowable by law."

Quitclaim Deed

The use of a quitclaim deed is rare. This document conveys no interest at all. It may be appropriate if the spouses have entered into a contract for deed. However, title companies generally do not accept quitclaim deeds. Proceed with caution.

A spouse who does not want to continue living on the property will sign a quitclaim deed in favor of the other spouse. There is no need to file the quitclaim deed unless the contract for deed has been filed. Reference the contract for deed in the divorce decree. Counsel should not prepare Contracts for Deed
Filing the Decree in Lieu of Real Estate Documents

You may find that you have a difficult opposing client who refuses to sign any of the closing documents after the divorce (usually this is a party that is unrepresented by counsel). Try to avoid this if possible by having the transfer documents ready at the time of the final hearing and ask the Court to order the opposing spouse to sign the documents in the Court's presence. If this is not possible, consider obtaining a certified copy of the Decree of Divorce and filing it with the County Clerk. It will be more expensive, as the cost is per page, but it may prove to be invaluable to your client in the future.