Changing Community Property into Separate Property

Texas is a community property state. This means that property division issues in Texas divorce cases must conform to community property rules and principles. However, the parties can recharacterize community property as separate property and vice versa. This final installment of our blog series regarding special property division issues in Texas divorce cases explains the legal concerns that arise from what are known as transmutations.

What Is Transmutation?

Transmutation is a term that refers to changing the character of property from community to separate property or the other way around. Texas law allows a married couple, or prospective newlyweds, to enter into an agreement to treat community property as separate property, or to characterize what would otherwise be separate property as community property.

The Texas constitution specifically recognizes a couple’s right to perform transmutations to change the community or separate character of property. Specifically, Article XVI, Section 15 of the Texas Constitution provides that spouses can divide their property by written instrument:

Section 15 also allows spouses or prospective spouses to turn their community property interests into separate property:

“…[P]ersons about to marry and spouses, without the intention to defraud pre-existing creditors, may by written instrument from time to time…exchange between themselves the community interest of one spouse or future spouse in any property or the community interest of the other spouse or future spouse in other community property then existing or to be acquired, whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property and estate of such spouse or future spouse.”

Therefore, a valid transmutation of property must meet the following criteria:

Transmutations must be in writing
Transmutations must be agreed to between spouses or prospective spouses
Transmutations must not be intended to defraud creditors

Transmutation from Community to Separate Property

The transmutation of property from community property to separate property is also explicitly recognized under Texas Family Code § 4.102.

Transmutations are often executed in premarital agreements—also known as prenuptial agreements—or post-marital agreements. Imagine that someone who already owns a small business gets married. Sometimes, the growth the spouse’s separate business experiences can be treated as community property. A premarital agreement can provide that the growth of the spouse’s separate business will not constitute community property.

Section 4.102 also provides that the “future earnings and income arising from the transferred property” are also treated as separate property.” For example, a marital agreement can provide that a couple’s vacation home will constitute the wife’s separate property. If the wife decides to use the home as a vacation rental during the winter, the rents she collects may also qualify as her separate property.

Transmutation from Separate to Community Property

Article XVI, Section 15 of the Texas Constitution also allows spouses to recharacterize what would otherwise be their separate property as community property: “…[S]pouses may agree in writing that all or part of the separate property owned by either or both of them shall be the spouses’ community property.”

Texas Family Code § 4.103 specifically recognizes that spouses can enter into a written agreement allowing the parties to change separate property to community property: “At any time, the spouses may agree that the income or property arising from the separate property that is then owned by one of them, or that may thereafter be acquired, shall be the separate property of the owner.”

For example, a spouse’s separate property business can be treated as community property if the married spouses sign a partnership agreement where both spouses are recognized as business partners with equal ownership and control of the company.

Transmutation to Defraud Creditors

The community property of a married couple can be reached by creditors to satisfy the community debts the couple incurred. However, the separate property of a spouse generally cannot be used to satisfy community debts of the marriage. As a result, a valid premarital agreement can prospectively transmute certain community property as separate property for the purposes of asset protection.

However, a transmutation is not valid if intended to defraud creditors. For example, a transmutation that attempts to classify a community property home that is subject to a mortgage undertaken by the community (where the couple led their creditor to believe that the home is community property) as separate property could be found invalid.

Furthermore, a transmutation cannot be used to avoid existing community tort liability to an injured third-party. For example, if a couple was found liable for a neighbor’s slip-and-fall injuries, they cannot execute a transmutation that turns all community property into their separate property, depriving the injured neighbor of the ability to reach community assets to satisfy their damages award.

Ask Coker, Robb & Cannon for Legal Advice

To learn whether a premarital or post-marital agreement with transmutation provisions is appropriate for you and your marriage, you should consult an experienced attorney from Coker, Robb & Cannon, Family Lawyers. We can help determine the full extent of your rights and assess how transmutations affect you and your spouse’s legal interests.

Call us at (940) 293-2313 or contact us online to schedule a consultation about your case today.