The Texas Family Code defines community property as “the property, other than separate property, acquired by either spouse during marriate.”

In Texas, property at the time of divorce is characterized as either separate property, community property, or mixed property.

Separate property is property that does not owe its existence to the marriage. Rather, it is acquired or created apart from the marriage and is owned individually by each spouse. Significantly, in Texas divorces, the Court is prohibited by law from divesting a spouse of title to his or her separate property by awarding it to the other spouse. Therefore, a spouse who has separate property must be awarded such property in the divorce. Separate property includes –

1. Property acquired by a spouse before marriage.
2. Property acquired by a spouse by devise or descent (e.g. inheritance).
3. Property acquired by gift.
4. Certain types of personal injury settlement received by a spouse during the marriage; and
5. Property acquired by agreement (e.g. premarital or partition agreement).

Community property is property that is acquired or created during the marriage by either spouse that is not separate property. Only community property and the community portion of mixed property can be divided between the spouses during a Texas divorce. If a spouse has separate property, that spouse must be awarded his or her separate property and it cannot be awarded, in any part, to the other spouse.

Mixed property is property that consists of both separate and community property. When both separate and community funds are used to purchase property, that property has a mixed character in proportion to the amount paid with the separate and community funds.
The community estate is all community property and debts of the marriage, including the community property portion of mixed assets, which the Court will divide between the spouses upon divorce.

The Texas legal standard for dividing community property in a divorce is: all community property must be divided in a just and right manner, having due regard for the rights of each party and any children of the marriage. This standard is applied on a case-by-case basis, so the specific facts of the parties’ marriage will be considered when dividing their community property upon divorce. In some situations, it will be a just and right division for one spouse to receive more than half of the parties’ community property in the divorce.

It is a common misconception in a Texas divorce that both spouses will receive an equal or proportional share of every community property asset. In many cases, it will not be best to divide each community property asset between the spouses. Rather, when dividing the community property estate between the spouses, it may make more sense that certain assets are awarded to one spouse or the other. This may be especially true if the community property includes complex assets.

It is important that all assets and debts existing in the name of either spouse will be accurately and properly identified, characterized, and valued. An experienced divorce attorney is vital to ensuring these three steps are taken so you are able to participate in informed settlement discussions, and you will receive a property settlement that is specific to your needs and will be in your best interest.

There are factors for A Disproportionate Division of community property and debts. In some cases, a just and right division of the community estate will be one spouse receiving more than fifty percent of the community estate, which is called a “disproportionate division”. Texas Courts consider a list of non-exhaustive factors in determining whether a community estate should be divided disproportionately to one spouse.

• Each spouse’s capacities and abilities
• Each spouse’s business opportunities
• Disparity in the spouses’ earning incomes
• The nature of the marital property
• The size of the spouses’ separate estates
• Tax consequences relating to the division of property
• Each spouse’s education
• Each spouse’s age and health
• Each spouse’s financial obligations
• A spouse’s need for future support
• Which spouse will be the primary conservator of the children
• Fault in the breakup of the marriage
• The benefits that the party not at fault would have derived from the continuation of the marriage
• A spouse’s dissipation or depletion of the marital estate
• A spouse’s misuse of marital property
• Gifts to a spouse during the marriage or excessive community property gifts to others

The characterization of property is critical because the court must divide the spouses’ community property and confirm each spouse’s separate property.

At the time of divorce, a spouse who is claiming that certain property is his or her separate property must present “clear and convincing evidence” of the separate character of the property.

To meet this heightened evidentiary standard, a spouse generally will have to provide both testimony and documentary evidence to prove his or her claims of separate property.

Inception of Title rule is one way to prove a property’s separate character. Under the inception-of-title rule, a property’s character is based on the time and manner in which a person first acquires an ownership interest in the property. Once the property’s character is established under the inception-of-title rule, that character will not change because of mutations in the property’s form (i.e., being sold or exchanged for other property).

Generally, if a person first acquires an ownership interest in property before marriage, the property is considered separate property regardless of the manner in which it was acquired. Or, if a person first acquires an ownership interest in property during marriage, the property is considered community property unless evidence of the manner in which it was acquired would make the property separate (e.g., property acquired by gift, inheritance, or agreement).

Tracing is another avenue to prove a property’s separate character. Tracing is a method used to reinforce the inception-of-title rule. To elaborate, once property gets its character under the inception-of-title rule, the property will always retain that character even though it may go through several mutations. When separate property has mutated since its inception of title, the party claiming that the property is separate must clearly trace the original property through all of its mutations to the particular property on hand at the time of divorce. If a party cannot clearly and convincingly trace separate property through all of its mutations since its inception, the property will be characterized as community property.

Generally, the documents needed to prove a spouse’s separate property claims should show the time and manner in which the property was acquired and all of its mutations, to show that the property has maintained its separate character. The specific documents that a spouse will need to prove his or her separate property depends on what types of property that spouse is claiming as separate property.

A Forensic CPA may be necessary to help prove the separate character of the property, especially if the property has a significant value. Most commonly, a spouse will hire a forensic CPA to prove by the tracing method the separate property character of certain assets. For brokerage accounts, retirement accounts, and other investment accounts, a forensic CPA will review and analyze the deposits into the account, the changing investments of the account, and income and increases of the account, to trace and confirm the separate property in the account.

A Business Valuation may likely be necessary when the spouses own a community interest in a business. There are three main approaches that will be used to value a business during divorce: (1) the asset-based approach; (2) the market approach; and (3) the income approach. When a business is valued, all of the assets will be considered in the valuation, including the business’ “goodwill”. A business’ goodwill is the business’ value apart from the tangible assets owned by the business. There is personal goodwill and enterprise goodwill. Personal goodwill is the value of the business tied directly to an individual working for the business. Enterprise goodwill is attached to the business itself, regardless of whether an individual works for the business. Texas Courts have decided that personal goodwill is not community property that can be divided in the divorce. However, enterprise goodwill is community property and therefore should be valued as part of the business valuation.

If you or your spouse has any Complex Property, there may likely be more involved to characterize and value that property in the divorce. The following are some examples of complex property:

• Business interests
• Stock options and restricted stock units
• Oil and Gas interests
• Pensions and other defined benefit plans
• Certain types of executive compensation, including deferred compensation