Under Texas law, the income from separate property is considered community property. However, appreciation of or the increase in value of separate property remains separate property. For example, if a spouse owned a rental property prior to marriage, the property itself and any appreciation in the value of that property is considered that spouse’s separate property. However, the rents derived from the property are considered community property.
Under certain circumstances, the concept of economic contribution may come into play. This concept allows one spouse to share in the increase in value of the other spouse’s separate property if the first spouse can show that his or her economic contribution played a role in increasing the value of the other spouse’s separate property.
If community property has been used to enhance the value of one spouse’s separate property, a claim for reimbursement can be made. In other words, if the spouses use money from a joint account to renovate the rental property (separate property) of one spouse, the other spouse may be entitled to be reimbursed for a portion of increase in value to the property that resulted from the renovation.
The Texas Family Code authorizes a judge to divide property equally or to take into consideration other factors such as:
- The earning capacity of each spouse
- The educational background of each spouse
- Who has primary responsibility for raising children
- The age and health of each spouse
- Who was at fault in the break-up of the marriage
- Whether the property is subject to taxation and, if so, when the taxes will become due and payable
With regard to retirement, employment benefits, and other benefits, including insurance plans, the Texas Family Code gives the court the power to determine the rights of each spouse to those benefits. There are complicated formulas which the courts use to determine how these types of benefits should be divided. Once a judge enters an order dividing a 401k or other pension or retirement plan between spouses, he must also sign a Qualified Domestic Relations Order (“QDRO”) which the plan administrator must also approve. The QDRO gives the plan administrator specific instructions about how the 401k or pension or retirement plan should be divided.
Another important factor that comes into play in divorces is the division of debt. If a couple designates a piece of real estate as their homestead, regardless of whether it is community or separate property, it is exempt exempt from the claims of creditors.
Moreover, Texas law fully exempts retirement plans and the cash surrender value and proceeds of insurance policies from the claims of creditors. Like homestead property, retirement plans and insurance policies are exempt from creditors’ claims regardless of whether they are separate or community property.