Texas has adopted the community property system. Only eight other states have such a system: California, Arizona, New Mexico, Louisiana, Washington, Idaho, Nevada and Wisconsin. Under the community property system, all property on hand at the date of marriage, or acquired thereafter by gift or inheritance, is “separate property.” Any property acquired with separate property is also separate property. All other property acquired during marriage which is not separate property is “presumed” to be community property. Community property is divisible between a husband and wife upon divorce where separate property is not. The process of defining and classifying the marital properties and liabilities of divorcing parties is called “characterization.”
In order for the attorneys for both spouses, and those working in conjunction with their efforts, to properly discharge their professional responsibilities, they must be able to characterize the marital property of the parties. Such characterization depends on the time and circumstances of an acquisition. And, the relevant circumstances include the sources and amounts of funds received from each estate (community or separate) and any agreements of the spouses between themselves or with third parties. These concepts are accompanied by dozens of “rules” established primarily by case law. Although helpful, the application is oftentimes difficult, uncertain and laborious in actual cases.
“Commingling” refers to a situation in which separate property and community property is mixed. Sometimes property is commingled to such an extent that is considered hopelessly commingled and becomes community property. “Tracing” is a process by which separate property, particularly mutations of separate property, are identified to overcome the presumption that all property on hand at the date of dissolution of the marriage is community property. In many instances, the tracing responsibility is handled by a professional who does the work and is available to testify if necessary.
The presence of separate property adds complexity to divorce. The result often is that divorce takes more time and expense. Experienced and knowledgeable financial people are needed to help gather all the relevant information and prepare the analysis and tracing models.