Episode #136: "What's Mine is Mine!" Understanding Separate Property in Texas

In this episode, Jake Gilbreath and Brian Walters unpack what legally qualifies as separate property, how to prove it in court, and what happens when separate and community property get mixed together over the years. They wrap up the episode by debunking some of the most common misconceptions they hear from clients about separate property, including why having something "in your name" doesn't automatically make it yours. 

If you're going through a divorce in Texas or just want to protect what's yours, our legal team can help. To discuss your situation with Jake or Brian, email us at podcast@waltersgilbreath.com or visit www.waltersgilbreath.com for more information on our firm. 

Transcript

SPEAKER_02 0:00

Your hosts have earned a reputation as fierce and effective advocates inside and outside of the courtroom. Our partners are experienced trial attorneys who've been board certified in family law by the

SPEAKER_00 0:22

Thanks for tuning into For Better, Worse, or Divorce podcast, where we provide you tips and insight how to navigate divorce and child custody situations, particularly in the state of Texas. So I'm Jake Gilbreth, one of the managing partners of Walters Gilbreth. Today, I'm with my business partner, Brian Walters, and we are going to discuss the concept of separate property in Texas. We're going to talk about what qualifies as separate property, how it's proven in court to either a judge or a jury, and why it can, of course, become a major point of contention in a divorce. So we'll also try, if we have time at the end, to try to unpack some of the common questions and concerns we get from clients, particularly when they're coming in on intake about what is separate versus community property and how it's going to affect their case. So, Brian, before we started talking and recording this podcast, we were making the comment, which is correct, that we could probably present and talk for hours upon hours about separate property in the state of Texas. I think probably when it comes to the property aspect of a divorce. When you see cases go to trial or where there's lots of litigation or contention, I think a lot of times it's driven, most of the time probably going to be driven by a separate versus community question. Sometimes you have valuation disputes that can lead to different experts having different opinions and making cases difficult to settle. Sometimes you have some fraud claims, reimbursement claims that make cases difficult to settle. But separate versus community is a very common issue, particularly in the state of Texas, and can lead to making cases a little more difficult to settle. Do you agree with that?

SPEAKER_01 2:08

I agree. It's confusing and complex, and there's plenty of areas that there can be reasons to litigate. I agree.

SPEAKER_00 2:17

Yeah. Well, let's talk about the basics, right? just the raw definition, turn to Section 3.001 of the Texas Family Code. A spouse's separate property consists of, one, property owned or claimed by the spouse before marriage, two, property acquired by the spouse during marriage by gift, device, or descent, and three, the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earnings capacity during the marriage. Right. So I usually rattle off three relatively quickly when I explain separate property clients. I have had cases, I don't know about you, Brian, I've had cases where you do see separate property from the recovery for personal injuries, which is not as common, but I've seen that in some cases pop up over the years. Have you seen that as well? Yeah, I've got

SPEAKER_01 3:15

one right now that's got that issue, but I agree they're pretty rare. Even if they existed, they're usually not either not a large amount or they've kind of dissipated or been spent over the years or it's unclear whether it was for lost wages or personal injury or things like that. All those things can muddy the waters.

SPEAKER_00 3:37

Yeah, just pause really quick. I was going to make that point. It's a practice tip for anybody listening out there or any personal injury lawyers that are out there. It's a lot of times people come to us and they've received a personal injury settlement and the lawyers have not broken it out of what's for loss of earnings, what's for property damage, what's for pain and suffering. And like we'll talk about in a second, everything's presumed community property unless you prove that it's separate. So you could have problems there if it's not handled correctly. But like you were saying, Brian, it's not what you see most of the time. Typically you see Property, people come, you know, their separate property claims are property owned before marriage or property by gift or inheritance. Inheritance, a big one. Owned before marriage, a big one. You know, almost, I would say 99.999% of divorce petitions filed in the state of Texas have a claim of separate property. Sometimes people freak out when they see that when they've been married 20 years and they go, what do you mean? What does he mean? Does she mean that she has separate property? Everybody's got a little bit of separate property, right? Like your wedding ring is your separate property, little gifts and stuff. That's your separate property. And so it can range from that, right? My wedding band is my separate property. All the way you can see multimillion dollar separate property claims. You can see a $20 million estate and 99.9% of it's separate or claimed to be separate, depending on the situation. So I guess, Brian, talk to us now. We sort of defined separate property. Why is it important to what happens if I prove that something's my separate property? We'll talk about burning a proof in a second, but... why am I trying to accomplish proving what my

SPEAKER_01 5:23

separate property is in a divorce? Because you get 100% of it, and the court doesn't have any discretion about it. They have to give you 100% of it if you prove it's your separate property versus dividing it in some nebulous manner, in a fair and just manner. So that's a big deal.

SPEAKER_00 5:40

Yeah, and it's like you're saying, the court is without discretion. It's in the Texas Constitution. A court can't devise you of your separate property. So if I prove it, even if it's a quote unquote unfair result, right? We've been married for 20 years and 99% of it's my separate property. Maybe it's because I formed a business two seconds before I got married. And then now it's worth something. So now it's worth substantially more. That's where a bulk of our wealth is. If I can prove it by clear and convincing evidence, which we'll talk about in a second, it could lead to an unjust result or what some people would perceive to be an unjust result. And the court can't sit there and go, well, that's not fair. I'm not going to do that. I don't care that you've proved that it's your separate property. The court, she's going to have to, if you prove it, your court's going to have to confirm that it is your separate property. So the way I describe it to clients and, you know, whenever coming in in the consults and talking about how divorce works, I always try to get them to start thinking about a spreadsheet. Right now, I say, you know, what we're going to do is put everything that you own on a spreadsheet of substance. Right. House, vehicles, brokerage accounts, 401ks, you know, whatever is all the way down to furniture. We're not going to totally put like the lamp on there, but we're going to put what you own substantially, what you own on the spreadsheet. And then question number one, is it community or is it separate? everything, the family code says, everything is presumed to be community property. In other words, we're presuming that we're going to divide it up. We're presuming it's going to go on that spreadsheet. But if I can prove something is my separate property, essentially falls off the spreadsheet, we call it below the line. So it's basically not being divided, but it falls off the spreadsheet if I can prove that it's my separate property. Of course, in step two is what's the value of everything. Step three is of the community. And then step three is Let's divide it. So Brian, how do I go about, first of all, what's my burden to prove something is my separate property and how do I go about doing that?

SPEAKER_01 7:45

Yeah, the burden's clear and convincing evidence. So, you know, it would be nice, I think, if they gave us a percentage, right? So the lowest burden of proof is preponderance of the evidence, which is for most things, I'd say that's basically 51%. that you're more likely than not you've shown that. The one in criminal law that you hear about is beyond reasonable doubt. That's not defined as a percentage either. I've always thought that's probably 99% or 95%. This is clear and convincing. And so and I think the second question was about, you know, what how do we prove it or what are the kind of things that that we use to prove. So it depends a lot on the type, right? You used the example of forming a business before the marriage, although forming can be an interesting debate. But let's say that it's clear you did, you know, that might be the incorporation papers, or if you have a piece of real estate that you own before the marriage, you know, it would probably be the deed, you know, the title and deed and closing documents showing when you purchased it. So those type of things can be relatively straightforward. to show or prove, partly because they stick around forever. For financial things like accounts, generally you'd want to have the statement, let's say it's a 401k that you had before the marriage that you've continued to add to, which is pretty common. We'd want to see the statement, you know, the month before you got married or right before you got married. And then we'd probably also want to see if possible all of the yearly or monthly statements since that time to tell us what's occurred. So those are examples of of the type of proof that you would have in common cases.

SPEAKER_00 10:02

Yeah. And what's consistent about all the examples you gave, Brian, is that it comes with documentary evidence, right? There are situations, I think, where you can prove separate property via testimony, right? It's like, my mom gave me this car, gave me this ring or the boat. I had a client once gift a yacht. And that had testamentary evidence that he gave the wife a yacht. I think there's also a picture with a bow, giant bow, on the yacht, which kind of really supported the gift claim that wife had for the yacht. But, you know, sometimes it's testimony, right? Somebody gave this to me, and then the person that gave it, the donor comes in and testifies and said, yeah, that was a gift. And so sometimes you can prove it with testimony. Most of the time, you're going to be looking for documentary evidence, like you were saying, Brian. Deeds, bank statements, Those types of things. In some cases, most cases, I would say it's required. And there's substantial case law talking about the requirement of written proof documentary evidence is not just enough for me to say, Oh, I had this $20,000 before I got married. And then I think I put it in my Chase bank account and it sat there for a little bit. And then I remember transferring it to Wells Fargo. And then I pulled it out in cash and had that for a little bit. And then I put $10,000 in the safe and then I pulled it out. My brother held it for a little bit. And then now he purchased a vehicle for me with that $10,000. And so the vehicle is my separate property. That's not going to carry my burden, which is I think those cases that talk about me or testimonies, as the actual phraseology used in the case of mere testimony is not enough to prove separate property. And to your point on 401ks and retirement accounts and stuff, Brian, it's talking about not just the monthly statement before marriage, but every single statement during marriage. The reason why that's important, and again, we could ramble on about this for five hours, there's hours upon hours and pages upon pages from CLEs and presenting and cases on separate property. But generally speaking, it's important for people to know that in Texas, income off of separate property is community property. That's a very important principle to understand on separate property. And so it's not just enough for me to sit there and go, here's my brokerage account statement from a month before I got married. It's got $100,000 in it. And here's my brokerage account statement right now. And it's got $150,000 in it. Therefore, 50 is community and 100 separate. That does not carry your burden of proof because that brokerage account, even if you haven't contributed to the marriage, is going to have interest and dividends, which is income, which is going to be reinvested and do what we call that you hear. A lot of people hear the phrase commingling, right? There's community property, commingling in that account. And if you can't prove, which by clear and convincing evidence, if you can't prove what part of that increase is community versus separate, it's all community, it all goes on the spreadsheet, it all gets divided. So it's important to have documentary proof on that. The other thing, the other general principle that I think it's important for people to understand is So principle number one, I guess first start with what separate property is. A very important principle number one, that community income off of separate property is community property. A very important principle number two in the state of Texas is the increase in value in separate property remains separate property. I have a house that I owned before marriage. That's my separate property. I've got the deed. I can prove it. And say it was worth $500,000 when I got married. Ten years later, I get divorced. It's now worth $1.5 million because of the market increasing. That increase remains with a separate property. That house remains my separate property. Maybe there's reimbursement claims in the house, which we could spend another five hours talking about reimbursement claims. But the increased value in separate property remains separate. It's not that in every single state. in the United States. It is like that in Texas. And that, Brian, I don't know about your experience, but that can be surprising to people and it can lead to arguably unfair results in a marriage. What do you think about that?

SPEAKER_01 14:26

Yeah, I agree. I mean, you know, to use the stock example, you know, if you have, let's say, a bunch of, I think, Apple stock, for example, that generally doesn't pay dividends or interest or anything like that versus a know a utility stock which are heavily heavily dividend-based um you know over let's say over the course of a marriage you know you started with the million dollars of each one um and then at the end of the marriage there's now two million in the account Apple doubled in value. The other one paid out another million in dividends. Well, if you had the Apple stock, it's all yours. All $2 million is your separate property. If you have the utility stock that's now worth $2 million if you reinvested the dividends, now, well, millions separate property, but half of it's community property. So it's a big deal about what type of assets you have and how they grow and those type of things. And nobody really thinks about that, I suspect, when they get married or if they get a gift or an inheritance, you really don't even control it, right? You just get what you get. But it can make a big difference at the end. Yeah.

SPEAKER_00 15:34

Well, in approaching these cases, one of the most important things is Unless it's just something so simple, like I own a house before marriage, and here's the deed. I formed a business before marriage. Here's the formation documents filed with the Secretary of State or the partnership agreement before the marriage, or here's the gift letter. Unless it's something that straightforward and simple, I would say in almost every single case, you're going to be hiring a forensic accountant to do what we call tracing. where you're essentially trying to go through the documentary evidence and have an expert witness, a forensic accountant, identify what is separate and what's community. And so that way you can carry your burden of proof. And I will say, I always tell as a young associate that clients will, and understandably so, arm wrestle a lot about the idea of hiring a forensic accountant very early on a case, which I get. It's an expense in a divorce. It can be a big expense in a divorce. Sometimes people are spending more money on forensic accountants than they do on their divorce lawyers, depending on what we're doing. And there's a reticence from clients to do that, which I understand because Again, it's an expense and it's a lot of work. It is really hard to both settle a case and almost impossible to litigate a case without an expert witness. If you have a complex – a separate property claim of any level of complexity, even a tiny bit of complexity, you're going to need to have a forensic accountant. We could do a whole other podcast on forensic accountants, but you're going to need a forensic accountant. to tell everybody what's separate and what's community. I mean, at the end of the day, if the trace is done correctly, it's just data entry. I mean, it is what it is for like the 401k example that we were giving. Sometimes there's judgment calls or differences of opinions in a trace of separate property. That's pretty rare though. Usually it's just, this is what the documents say. It's just a matter of going through the documents and identifying what's community and separate and providing an opinion. And I'm not going to do that. I guess I could. I wouldn't pay my hourly rate or Brian's hourly rate to do that. We're hired to litigate the case and provide advice to the clients and present the claim. But the forensic accountant's the one. He or she's going to be going through and tracing it. And then if you have a solid trace – And it is what it is. Right. And it's easier, much easier to settle a case as opposed to going to mediation without forensic accountants and saying, well, guys, I think my separate property is this and I'm pretty sure I'm going to be able to prove it. I haven't proved it yet. I haven't done the work, but I'm going to get there. And so let's let's settle the divorce now. Some people can do that. That's hard. That's really hard. And so while it is an expense to get a forensic accountant, it's more of an expense where we sit around talking about what we might be able to prove. What are your thoughts

SPEAKER_01 18:34

on that, Brian? Yeah, I agree. I mean, our role is as advocates. We're not – I mean, if – forensic accountants, generally, by the way, they're not that many of them. And they're the ones that do exist and that are reputable. Their reputation in a courtroom and to other lawyers is really important to them. It's also their licensure can be affected by things. So they can't just start, you know, making things up or leaning in one direction consistently, or they'll lose their reputation and potentially even their license. Versus if we do the trace or we I mean, that's our role, actually, is to advocate. So it really puts us in a difficult situation and an impossible one. Plus, you and I are not CPAs. We wouldn't know how to do that. I mean, sure, we could probably do it, especially a simple trace. But yeah, it's just not proper. And I agree with you. It can be a difficult conversation with clients. I had that conversation with two different clients yesterday. And it's, yeah, why should I have to spend money to prove what's already mine? It's my separate property. Well, I think we've explained that in this discussion so far, but if your lawyer's recommended, it's probably worth doing.

SPEAKER_00 19:48

Yeah, and I can give example after example, war story after war story of times where we've been on the side of where somebody hasn't carried their burden of proof and they're coming into trial and they haven't retained an expert or their expert messed up the trace or what have you. And then us being good advocates are going in there and saying they haven't proved it. They haven't proved it by clearing convincing evidence. So it's all community property. It all goes on the spreadsheet and we're dividing it up. And so it can have devastating effects on your case if you don't trace it or if you hire somebody because they're not everybody's good at what they do. If you hire somebody that doesn't know what they're doing and the trace is done incorrectly. So it's a conversation, you know, thinking from the client's perspective. The second it comes out that maybe I have some separate property that I need to prove, you need to have that conversation with your lawyer about a forensic accountant. And frankly, you need to have the conversation with your lawyer or who you're thinking about hiring. Have you litigated this before or dealt with complex separate property issues? Because not everybody has. And sometimes the lawyers are not handling it correctly or don't understand the problems that they have. And, you know, I could again, we're not going to tell war stories, but there's a prominent case that we did out of this office a few years ago that, you know, essentially we busted a trace done by an expert, expert in quoting marks, but expert on the other side and went up on appeal. And our position was affirmed on appeal. The expert on the other side got the burden of proof wrong. I mean, that's how he started his testimony was saying it was preponderance of the evidence rather than clear and convincing. And it was kind of all downhill from there. And the lawyer who had that expert should have been able to say, my expert doesn't even know what the burden of proof is. I've got problems here that I need to go fix it or find somebody who knows what they're doing. So from the client's perspective, have that conversation first. with your lawyer about whether or not he has litigated these types of cases before. Last thing I'll say, Again, we could talk for hours. Last thing I'll say before we turn to some common questions that we get is it's surprising to people, but it's good to know that this issue can be presented to a jury. That's one of the jury issues that can be presented in a divorce in the state of Texas if a proper demand is made. And that's really surprising to some people, particularly lawyers who practice outside the state of Texas, that we could have 12 or six, depending if you're in district or county court, 12 or six citizens of your respective county deciding whether or not you have met your clear and convincing evidence burden of proof in proving your separate property. So that's just something out there that's important to know and a strategic point that needs to be discussed with your lawyer, whether or not you're presenting a separate property claim or defending against a separate property claim. Let me ask some questions. Kind of basic questions, Brian, but we get a lot in consults or we hear a lot from the other side. Does it matter how things are titled? For example, if I come to you and say, well, I've kept this bank account in my name only all through the marriage, so it's my separate property.

SPEAKER_01 23:17

Does that matter? No. Just whose name on it doesn't really matter. Now, I guess I would clarify that a bit. Let's say you had a home in your name that you owned before the marriage, and then you later put your spouse's name on it. That's going to raise questions about, was it a gift? What was the intent? That type of thing. And you... That could be an issue. And I suppose you could say the same thing about a bank account that was once in your name, that was your separate, and then you added your wife to it or whatever. But just having it in your known name is not going to get you over the hump.

SPEAKER_00 23:52

Yeah. Calling something mine or putting it just in my name does not make it my separate property. I think another common thing that we get – We hear that I hear from consults a lot from the other side of somebody going, well, it's commingled. So it's all community. It's all commingled and commingled. I think kind of gets overused because it is true. You know, if I've got an account with both community and separate in it, presumed to be community. And so if I can't pull out my separate, then, yeah, it's commingled. It's all community. But, you know, if you can line item trace it, like we talked about with forensic account accountants, the account may be commingled, but we can then go trace and figure out what's separate and what's community with proper documentary evidence, which is a lot easier, you know, these days to sound old. These days, it's a lot easier than maybe 15 years ago, 20 years ago, because everything's electronic. It used to be. You had clients, if you're going to prove a separate property claim, you have to go get the physical bank statements or get something on Microfish or something, or maybe a bank doesn't have statements going back as far as you need to prove your separate property. And it's a lot easier now because things are electronic. It's a lot easier to get bank statements. It's a lot easier to trace. So co-mingling is a thing, but that's where you have your forensic accountant do line item tracing. Okay. So I guess last, Brian, do you ever have clients come in or potential clients come in that maybe they're not thinking about a divorce, but they are looking to protect their assets or they're having an inheritance, for example, coming in, and they're looking for advice of how to – sealed it um in in case there is a divorce or i guess there's probate issues there community versus separate do you ever do those consultations

SPEAKER_01 25:43

yeah quite quite a bit that comes up and it could be the other way around hey my wife got a big inheritance and you know she dropped it into the joint checking account what does that mean so those things do come up um And yeah, I mean, we advise them, you know, I mean, generally speaking, if you get an inheritance or a gift or something like that, yeah, I'd probably, I mean, I think that's right. Try to keep it in an account just in your name. And we just said earlier, just keeping something in your name by itself doesn't automatically mean anything, but that's a good start. So there's no confusion about the intent behind it if it does start to get moved around. for example. But yeah, it's a complex issue. You could also do a postnuptial agreement if you're married or a prenuptial agreement that address these kind of things ahead of time. And you can make whatever rules you want to with that, but that's a discussion for another day on another podcast. So another long discussion.

SPEAKER_00 26:38

Yeah, like I said, it's a very broad overview. Every single case has its different complexities. It needs to be a conversation in virtually every single divorce consult because Like we started by saying, like we started the podcast, almost everybody, if not everybody, has a little bit of separate property. And so it needs to be addressed whenever you're going through a divorce. But that's a broad overview. We hope that's helpful. So that's what we're going to do for today. As always, if you like what you've heard today, please do us a favor and leave a review. We appreciate all feedback, especially when it helps us better the podcast. If you have any questions about what we've talked about, about us, about family law, or just interested, you're interested in talking to one of us about your family law situation, you can reach out to us at podcast at waltersgilbert.com. You can find us online at www.waltersgilbert.com. Again, I'm Jake Gilberth. I'm joined by Brian Walters, and thank you all for listening.

SPEAKER_02 27:39

Until next time. Bye.