Texas is 1 of only 9 states in the U.S. that have “community property” laws. If you are asking yourself what community property is, then you are either new here, or newly married! Either way, keep reading to find answers to your most frequently asked questions about community property laws:
Q: What is Community Property?
Answer: Community property is defined, in Texas, as all property acquired by spouses during a marriage. Each spouse owns a one-half undivided interest in the community property (in other words, they own it 50/50). Texas does not care how a married couple takes title to the property–whether they put a house, bank account, or car in one spouse’s name, or both. The general rule is a presumption in favor of community property. In other words, Texas considers all property a couple purchases during a marriage and all income each spouse earns during a marriage to be community property. Any spouse claiming otherwise, has the burden of proving it.
Q: Is Community Property Like Right of Survivorship?
Answer: No. Many states have “right of survivorship” by default, but Texas does not. A “right of survivorship” gives a surviving owner of jointly-owned property, the right and title to the whole property upon the passing of the other owner. But community property in Texas does not include an automatic right of survivorship. Instead, we have many complex laws that determine when a spouse has a right to community property, and under what circumstances.
To create a “right of survivorship” in Texas, joint owners must include certain required language in the property deed or contract. In other words, joint property owners must take some intentional act that follows specific state law to create a “right of survivorship”. The most common form of a “right of survivorship” in Texas are bank accounts with transfer on death, or beneficiary designations. In such case, joint owners of a bank account sign a contract with the bank (e.g., the “signature card” for the account) that allows the surviving owner to become sole owner of all funds left in the account upon the death of the other owner.
Q: Can a person “Will” their Community Property?
Answer: Yes! Because each spouse owns an undivided one-half interest in the community property, they are free to gift their one-half of the community property through estate planning tools such as a Will, Trust, or Transfer on Death Deed. However, if a spouse fails to create an estate plan that states who will inherit their one-half of the community property, Texas has a default plan for them.
Many people incorrectly assume this default plan is that the surviving spouse automatically inherits everything. But this is simply not true, especially for a blended family. Texas inheritance laws state that when a deceased spouse is survived by children who are not also the children of the surviving spouse, the surviving spouse keeps only one-half of the community property. The deceased spouse’s one-half of the community property goes to their children, instead. This can create a really uncomfortable situation for a surviving spouse, especially when the deceased spouse is survived by children under the age of 18!
Q: Can One Spouse Control All the Community Property?
Answer: Yes. We call this “separately-managed community property”. However, spouses owe fiduciary duties to one another concerning community property, just like a trustee or agent acting under a power of attorney. In Texas, a spouse who disposes of, or gifts away any part of the community property without the express written consent of their spouse, commits “fraud” on the community. This is not treated as a crime, like theft. Instead, “fraud on the community” is an actionable civil claim that provides a means for an aggrieved spouse to request that a court change the division of community property in a divorce or probate proceeding.
The most common form of separately-managed community property is a bank account, often an individual retirement account and/or employer-sponsored retirement account. That is why most financial institutions require a spouse’s signature if you try to leave a retirement account to someone other than your spouse (like an adult child, for example). Under federal law, a spouse’s signature will be required on a beneficiary designation for a 401K going to a non-spouse.
Q: If I Keep Separate Property, Separate, it Never Becomes Community Property, Right?
Answer: False. Income earned on separate property is community property in Texas. As a result, even separate property can become community property over time through the commingling of separate and community property. Consider, for example, a brokerage account that accumulates interest, dividends, and other gains over time. Separate property can also be transmuted (converted) to community property through a gift. Consider, for example, a new deed made between “husband and wife” while re-financing a home previously owned by only one of the spouses prior to the marriage.
Q: Why Should I Plan for Community Property Law?
Answer: To avoid injustice and extensive legal fees! Most married couples intend for their spouse to be the primary beneficiary of any jointly owned assets. And some couples want to keep inherited property separate, so they can pass it on to their children. Yet, many times, Texas inheritance laws assume otherwise! There are several estate planning tools that married couples can use to override specific Texas community property laws and even eliminate community property altogether. Additionally, many of these tools provide a method for happy compromise in a blended family where spouses can benefit one another during the life of the survivor, while ensuring a future legacy for a deceased spouse’s descendants.
First, the most certain method of ensuring your spouse gets your half of community property when you die, is to make a Will and/or Trust. Through a Will or Trust, you can override the Texas default plan and designate your spouse as the primary beneficiary of all your property. Second, spouses can also use beneficiary designations on bank accounts and transfer on death deeds for real property to create a “right of survivorship”. Finally, the Texas constitution gives Texas spouses the right to divide their property through a marital property agreement and even agree not to create any community property. These agreements can be made before marriage, also known as a prenuptial agreement or “prenup”, or at anytime during the marriage.
Texas community property laws are complex, and planning around these laws requires experienced and knowledgeable legal counsel. Law Office of Adriane S. Grace, PLLC has assisted many married couples with planning for community property and separate property laws through our estate planning and probate practices. If you are married and considering making an estate plan, please contact us to schedule an appointment to discuss your rights under Texas community property law.