Here is an example of a scenario I see often:

In 2005, Spouse 1 (who is single at the time) begins contributing to his employer-sponsored 401(k). Spouse 1 and Spouse 2 get married in 2012. At the time of marriage, the balance of Spouse 1s 401(K) is $100,000. Unfortunately, Spouse 2 files for divorce in 2019. At the time of trial, the balance of the 401(k) is $250,000. How much of the 401(k) is separate property and how much is community property?

The answer to that question can get pretty complicated (however, if Spouse 1 had read my blog article entitled “How to Keep Your Separate Property Separate,” it could have been a lot easier). Let’s start with the basics.  The Texas Family Code defines separate property as property acquired before marriage, or after marriage by gift, devise or descent. Community property is any property that is not separate property. Marital property is presumed to be community property, and separate property must be proved by clear and convincing evidence. Moreover, income from separate property generally is community property, including cash dividends.

Based on that rationale, it seems like the 401(k) contains $100,000 of Spouse 1s separate property and $150,000 of community property. If Spouse 1 kept good records, he/she may be able to show the Court the 401(k) statement from the date of the marriage proving the balance of $100,000. Most clients (and even some family lawyers) think that is sufficient to prove separate property by clear and convincing evidence. Unfortunately that is not the case, as the analysis goes deeper.

To properly answer the question, there are a few other rules to keep in mind. For example, stock dividends retain the character of the stock from which they originated. In other words, if a separate property stock issues stock dividends, the stock dividends are considered separate property.

Also, the appreciation in value of an asset retains the character of the asset. For example, if a separate property share of stock is valued at $50 at the date of marriage and increases to $100 at the time of divorce, the entire $100 share of stock is still separate property.

Under Texas Law, the term “Clear and convincing evidence” is defines as “the measure or degree of proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established.” This is a higher degree of proof than the usual preponderance of the evidence standard, which is simply more likely that not.

 Just showing the Court the statement from the date of marriage still leaves a lot of questions in the air. What were the transactions inside the 401(k) during the marriage? What stocks did it invest in during the marriage? What stocks were bought and sold? Were there dividends? If so, were the dividends reinvested inside the 401k? Were the dividends cash or stock? How much of the increase in value is attributed to stock appreciation? How much of the increase in value is attributable to Spouse 1’s contributions during the marriage?

As you can see, to accurately determine how much of the 401k is separate property, you would probably need detailed statements during the entire marriage, so that a financial expert can trace every transaction. Unfortunately, most spouses do not keep good enough records for this tracing to happen. If it cannot be traced, the presumption of community may apply.

If you have more questions about separate property and how to protect it, contact Gregory S. Beane at Webb Family Law Firm. He can be reached by phone at 214-693-6543 or by email at [email protected].