Chapter 2-1 Community Property

• Jurisdiction: United States

2-1 Community Property

Texas has been a community property state ever since its inception. This system of community property originated in Continental Europe. It was brought to the Americas by the early French and Spanish settlers who came from that part of Europe. When Texas adopted its Constitution in 1876, the state adopted the community property system to govern marital and family property issues.¹ Today, eight other states use the system: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin. Two other states, Alaska and Tennessee, offer a community property option.²

2-1:1 Definition and Fundamental Principle

The fundamental principle of community property is that during marriage all earnings of the spouses, and property acquired from those earnings, are community property, belonging equally to both spouses.³ Unless the spouses agree to separate ownership or some other ownership arrangement exists, a presumption exists that the spouses own the community property together, with each spouse owning an undivided one-half interest in the community estate.⁴ The death of one spouse dissolves the community. If the deceased spouse dies testate, this half of the community estate will pass pursuant to the terms of the decedent's Last Will and Testament; if he or she dies intestate, this half of the community estate will descend pursuant to the provisions of the Texas intestacy statute.⁵

2-1:2 Separate Property

Property that is not community property is the separate property of one spouse or another. This includes any items (such as income or property) the individual spouses owned before they got married and which they kept separate during the marriage.⁶ Additionally, each spouse is entitled to have and to hold the following as his or her separate property:

1. any items he or she acquires after marriage through gift or inheritance;⁷
2. any recovery he or she is awarded for personal injuries sustained during the marriage (except for any recovery for loss of earning capacity during the mar-riage);⁸ and
3. any appreciation of separate property, such as appreciated stock.⁹

2-1:2.1 Exception: Investment Income Earned on Separate Property

Notwithstanding the treatment given to the aforementioned examples of property, any investment income earned on separate property is, by definition, community property.¹⁰

For example, suppose Thomas, married to Jane, has a certificate of deposit (CD) he owned before he was married. The CD is separate property. However, the interest income earned on the CD—the capital gain—is community property. As the CD continues to earn more interest income and the separate property (the original investment) continues to be commingled with the community property (the capital gains income), it will at some point become difficult to know just where the separate property component ends and the community property component begins. It is then that a written agreement between the spouses to change the rules—either as a premarital agreement or as a spousal partition agreement—would be useful. Fortunately, Texas law provides for that. We shall discuss the provision in Section 2-1:4.

2-1:2.2 Capital Growth of Separate Assets: Separate Property

When a married person owns a separate asset that grows in intrinsic value, the growth usually remains separate property.¹¹ This capital growth is distinguishable from income produced by the separate asset.

For example, assume that a spouse has some shares of stock she owned before she was married. The stock is separate property. Growth of the stock is intimately part of the separate stock, and under most circumstances, that growth remains separate property.

2-1:2.3 Growth in Asset Value Not Intrinsic to Asset: Value Increase is Community Property

In circumstances where the growth in the asset's value is not intrinsic to the asset, the result is different. Consider the following: If the value of the separate property increases because of the owner's personal efforts—such as repairs or improvements—the value increase is community property.¹²

Consider the following: Marcus, married to Elza, owns a separate property house valued at $175,000. The house increases in value to $200,000. Is the $25,000 increase in value community property, or separate property? We do not know; it all depends on the cause of the increase. If the value increased simply because the market was good, then the increase is separate property. If, on the other hand, the value increased because Marcus repaired the house or improved it in some way, using his time and earnings, the value increase is community property.

2-1:3 "Equitable Interest" Property

Texas Marital Property Law also recognizes a third type of property interest: the equitable interest. The legislature devised this property interest primarily as a method to divide values in a divorce.¹³ The enabling statutes explicitly address two situations: where funds of one martial estate are expended to reduce the principal amount of secured debt on another marital estate and where funds are expended to make improvements on property of another marital estate. However, Family Code § 3.406 recognizes that an equitable claim for reimbursement based on case-developed principles can arise in other situations.¹⁴

The statutes also provide that the inception of title rule applies to the characterization of assets as separate or community property, and that a claim for economic contribution—which matures on dissolution of the marriage or the death of either spouse—does not create an ownership interest and does not affect the rules governing the management of marital property.¹⁵ Either party can waive a claim for economic contribution under a premarital or...