Pre- and post-marital agreements are commonly used to prevent the formation of “community property” during a marriage. In other words, anything brought into the marriage remains the separate property of the respective spouse. That said, a couple is always free under Texas law to convert separate property to community property by making a written agreement.
Refinancing Did Not Convert Husband’s Home Into Community Property
Section 4.203 of the Texas Family Code establishes the requirement for an agreement to convert property. The agreement must be signed by both spouses and make an express declaration that a specific item of property “is being converted to the spouses’ community property.” The “mere transfer” of title does not, in and of itself, legally convert the property.
Consider this recent divorce case from San Antonio. The husband and wife married in 2003. Sometime thereafter, they signed a postnuptial agreement. The couple agreed “there would be no community property” into the marriage. They also agreed that one spouse would have to “indemnify” or compensate the other “if the separate property debt of one spouse was paid with the separate property funds of the other.”
This indemnification clause became an issue after the wife filed for divorce in 2012. Initially, she challenged the legal validity of the postnuptial agreement itself. The court rejected that argument. But this ended up working in the wife’s favor, as the judge awarded her more than $450,000 in indemnity, less a credit for temporary spousal support already paid by the husband.
The husband appealed that decision. And while the appeals court upheld roughly half of the indemnity award, it did reject the wife’s claim for two payments totaling more than $231,000, which related to the refinancing and ultimate sale of a home owned by the husband. In this case, the husband indisputably owned the house prior to the marriage. It remained separate property under the terms of the postnuptial agreement. But in 2005, the husband and wife jointly signed a document to refinance a loan on the property for approximately $131,000. A year later the husband sold the property to a family-owned company and deposited the sale proceeds of $100,000 into a joint checking account he held with his wife.
The wife claimed that she was entitled to indemnity for the one-half of her proceeds from these two transactions, since they were used to pay the husband’s debts. In effect, the wife alleged the house had been converted from separate property to community property. The district court agreed with this reasoning, but the appeals court did not.
Under Texas law, the appeals court noted, “the character of property does not change” just because both spouses sign a loan document related to the property. Nor was there any evidence the husband ever expressly “gifted” one-half of the house to the wife. She was therefore not entitled to indemnification on either the proceeds of the loan or the sale.
Need Advice on a Texas Pre- or Postmarital Agreement?
Pre- and postmarital agreements are designed to prevent disagreements over property in the event of death or divorce. But both spouses need to understand how such agreements can affect their rights under Texas law. If you need advice from a qualified Houston family law attorney on this or any related subject, contact the Law Offices of Tad Nelson & Associates today.