Jul 05

Defaults in the Absence of a Marital Property Agreement

Digest

In Texas, without a marital property agreement, spouses each own an undivided half interest in community property, while separate property includes assets owned before marriage and gifts or inheritances. The post explains that income from separate property becomes community property and distinguishes sole‑management and joint‑management property.

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While it might feel unromantic, marital property agreements, whether prenuptial or postnuptial, outline the rules for how property owned before and acquired during a marriage will be treated. These agreements allow you and your spouse to decide if the property you own in community versus separate property, modifying what Texas law would otherwise say.

If there was no marital property agreement in place, here is how your property would be treated:

• Each spouse is the owner of an undivided one-half interest in the community property. 
• Property that a spouse owned prior to marriage will be his or her separate property. In addition, property that a spouse receives during the marriage (from anyone) by gift or inheritance is also separate property.   
• If a separate property asset is used to purchase another asset (a “mutation” of separate property), then the new asset is also separate property.   
• If a separate property asset increases in value (the “appreciation” of separate property) (e.g., real estate or shares of stock), then the entire increased value of the asset continues to be separate property. In other words, gains on separate property are separate property. 

• However, if a separate property asset generates income after the parties are married (e.g., rental income from real estate, or income and dividends from bank accounts or securities), then that income is community property. So, if there is a separate property account with securities in it, and the dividends and income are routinely reinvested in that account during marriage, then the account becomes commingled with separate property (the original securities) and community property (the securities purchased with the community property interest and dividends).  However, capital gains and proceeds from the sale of separate property is separate property. 
• All earnings during marriage are community property.  
• There are two types of community property: (1) sole management community property and (2) joint community property.
  • Sole management community property is defined by the Texas Family Code as “the community property that the spouse would have owned if single,” such as personal earnings, revenue from separate property, and recoveries for personal injuries. 
  • Both spouses control joint community property, but each spouse has sole management, control, and disposition of his or her sole management community property.  
  • However, unlike separate property, the sole management community property of Spouse A would (absent agreement) be available to fulfill the liabilities of Spouse B if the Spouse B’s separate property and sole management community property are insufficient.   

While the idea of a prenuptial agreement might seem a bit drab, it is a practical step towards ensuring that both parties are fully aware what is considered community versus separate property. For the best way to effectively design your marital property agreement, call us at (512)374-4922 or email hello@hardiealcozer.com to speak with one of our attorneys.