When you are married you have community property and separate property in Texas. Each spouse has full testamentary power (the ability to say who gets which of those assets in their will) over their own separate property, but they have testamentary power only over one half of the community property in the relationship. And if you die without a will then the state determines exactly who gets your separate assets and who gets your half of the community assets. So how assets get labeled, community or separate, is very important.
Community property includes:
Earned income from either spouse during the marriage.
Dividends, interest and capital gains earned on community property.
Dividends and interest earned on either spouse’s separate property during the marriage.
Property purchased with income earned during the marriage.
Separate property includes:
Earned income from the work of either spouse before the marriage.
Capital gains on separate property.
All gifts and inheritances received by either spouse before or during the marriage, including joint gifts.
Some important things to remember:
Texas follows ‘the inception of title rule’ which means that a particular asset gets classified as community or separate at the moment that a spouse first acquires the right to claim title to it. And later events do not change the classification. As an example, if you bought a car before you got married and then you sold that car after you got married, then the cash you received from that sale would still be considered separate property.
However, it’s very important that you don’t commingle separate property with community property, because there is a presumption in Texas that property possessed during the marriage is community. The spouse claiming anything as separate property has the burden of proving that that property is truly separate. And if separate assets are mixed in (commingled) with community assets, then it can be hard to trace those separate assets sufficiently to overcome this presumption.
In the prior example with the car, again the cash received from the sale is considered separate property. However, if you put that cash in a bank account that perhaps receives all of your paychecks, then that separate property cash from the sale of the car will get commingled with community property cash from your paychecks. Cash is cash, so it’s going to be a tough if not impossible burden to prove what is separate and what is community. If you want to better protect the classification of that cash from the sale of the car as separate, then it’s important that you keep it away from community funds. One way would be to open an account just for separate funds.