Microsoft Word - Handbook on Texas Marital Property Law Advanced Estate Planning & Probate SBOT San Antonio June 2016

HANDBOOK ON TEXAS MARITAL PROPERTY

LAW FOR ESTATE ADMINISTRATION AND

PLANNING

Thomas M. Featherston, Jr.

Mills Cox Professor of Law

Baylor University

School of Law

Waco, Texas

Advanced Estate Planning & Probate

State Bar of Texas

San Antonio, Texas

June 22, 2016

Handbook on Texas Marital Property Law

For Estate Administration and Planning

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TABLE OF CONTENTS



I. INTRODUCTION ............................................................................................................... 1

II. MARITAL PROPERTY CHARACTERIZATION ............................................................ 1

A. Article XVI, Sec. 15 ......................................................................................................... 1

B. The Test for Community .................................................................................................. 2

C. Community Presumption.................................................................................................. 2

D. Traditional Means of Creating Separate Property ............................................................ 3

E. 1980 Amendment ............................................................................................................. 3

F. Mixed Characterization .................................................................................................... 4

G. Commingling .................................................................................................................... 4

H. Life Insurance ................................................................................................................... 5

I. Quasi-Marital Property ..................................................................................................... 5

J. Personal Injury Recoveries ............................................................................................... 5

K. Observations ..................................................................................................................... 6

III. MARITAL PROPERTY MANAGEMENT ........................................................................ 6

A. Matrimonial Property Act, 1967 ...................................................................................... 6

B. Texas Family Code ........................................................................................................... 6

C. Special Community Property ........................................................................................... 6

D. Presumptions .................................................................................................................... 7

E. Record Title ...................................................................................................................... 7

IV. MARITAL PROPERTY LIABILITY ................................................................................. 8

A. Statutory Rules ................................................................................................................. 8

B. Other Factors .................................................................................................................... 9

C. Child Support ................................................................................................................... 9

D. The Necessaries Doctrine ............................................................................................... 10

E. Spousal Necessaries Cases ............................................................................................. 10

F. No Community Debt ...................................................................................................... 11

G. Summary ........................................................................................................................ 11

H. Key Questions ................................................................................................................ 11

V. EFFECT OF DIVORCE .................................................................................................... 12

A. Claims for Reimbursement ............................................................................................. 12

B. Fraud on the Community................................................................................................ 12

C. Liabilities ........................................................................................................................ 13

D. Court Ordered Child Support ......................................................................................... 13

E. Redesignation Statutes ................................................................................................... 13

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VI. DEATH OF SPOUSE ........................................................................................................ 13

A. Marital Liabilities ........................................................................................................... 14

B. The Court’s Explanation ................................................................................................ 14

C. Probate v. Nonprobate .................................................................................................... 15

D. Chapter 101 .................................................................................................................... 16

E. Deceased Spouse’s Debts ............................................................................................... 16

F. Administration of Community Property ......................................................................... 17

G. Intestate Death ................................................................................................................ 17

H. Testamentary Power ....................................................................................................... 18

I. Express or Implied Election ............................................................................................ 18

J. Protection for Surviving Spouse ..................................................................................... 18

K. Authority of Surviving Spouse – No Personal Representative ...................................... 19

VII. ADMINISTRATION OF DECEASED SPOUSE’S ESTATE.......................................... 20

A. Section 453.009 .............................................................................................................. 20

B. Authority of Representative ........................................................................................... 20

C. Executor’s Elective Power ............................................................................................. 20

D. Comparing Family Code and Estates Code Provisions .................................................. 20

E. Authority of the Surviving Spouse ................................................................................. 21

F. Allocation of Liabilities after Death ............................................................................... 21

G. Closing the Estate ........................................................................................................... 22

VIII. SURVIVING SPOUSE’S DEBTS .................................................................................... 23

A. Section 101.052 .............................................................................................................. 23

B. Secured Debts ................................................................................................................. 23

C. Unsecured Debt .............................................................................................................. 24

D. The Rationale ................................................................................................................. 24

E. Summary ........................................................................................................................ 24

F. Another Argument .......................................................................................................... 25

IX. CREDITORS’ RIGHTS DURING THE MARRIAGE ..................................................... 25

A. Joint and Several Liability.............................................................................................. 25

B. Tort Debt of One Spouse ................................................................................................ 25

C. Contract Debt of One Spouse ......................................................................................... 25

D. Observations ................................................................................................................... 26

E. Equitable Principles ........................................................................................................ 26

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X. KEY MARITAL PROPERTY CONCEPTS .................................................................... 26

A. The Community Presumption ........................................................................................ 26

B. Community Claims for Reimbursement ....................................................................... 26

C. Special Community Property ......................................................................................... 27

D. Fraud on the Community................................................................................................ 27

E. Marital Liabilities ........................................................................................................... 27

F. Death of a Spouse ........................................................................................................... 27

G. Fraud/Reimbursement Claims ........................................................................................ 28

H. Claimant as the Surviving Spouse .................................................................................. 28

I. Closing the Estate ........................................................................................................... 28

J. Non-Pro Rata Distributions ............................................................................................. 29

XI. CONSEQUENCES OF MARRIAGE ................................................................................ 29

A. Existing Assets ............................................................................................................... 29

B. Future Acquisitions ........................................................................................................ 29

C. Unilateral Gifts/”Fraud” ................................................................................................. 29

D. Reimbursement Issues .................................................................................................... 29

E. Debts............................................................................................................................... 29

F. The Necessaries Doctrine ............................................................................................... 30

G. Possible Divorce ............................................................................................................. 30

H. Eventual Death of First Spouse ...................................................................................... 30

I. Portability ........................................................................................................................ 30

J. To He_ _ (Double Hockey Sticks) With This! ............................................................... 31

XII. UNILATERAL PLANNING ............................................................................................. 31

A. Segregated Accounts ...................................................................................................... 31

B. Avoid Inadvertent Commingling ................................................................................... 31

C. 401(k) Plans.................................................................................................................... 32

D. Earmark Future Holdings ............................................................................................... 32

E. Family Entities ............................................................................................................... 32

F. Closely Held Business Interests ...................................................................................... 32

G. Asset Protection Trusts ................................................................................................... 32

H. Fraud on the Community/Reimbursement Issues .......................................................... 33

I. Take Advantage of Portability ........................................................................................ 33

J. Legal Fees ....................................................................................................................... 33

XIII. PREMARITAL AGREEMENTS – FORMALITIES ....................................................... 33

A. Uniform Premarital Agreement Act .............................................................................. 33

B. Formalities ...................................................................................................................... 34

C. Burden of Proof .............................................................................................................. 34

D. The Opponent’s Burden ................................................................................................. 34

E. Statute of Limitations ..................................................................................................... 35

F. Disclosure/Assistance of Counsel ................................................................................... 35

G. Re-execution Once Married ........................................................................................... 35

Handbook on Texas Marital Property Law

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XIV. PREMARITAL AGREEMENTS – SUBSTANCE .......................................................... 36

A. Mere Agreement Rule .................................................................................................... 36

B. Constitutional Amendments ........................................................................................... 36

C. Sec. 4.003, Texas Family Code ...................................................................................... 36

D. Standard Provisions ........................................................................................................ 37

E. Income from Separate Property ...................................................................................... 37

F. Wages, Salaries, Personal Earnings ............................................................................... 37

G. Partition and Exchange ................................................................................................... 38

H. Community Free Marriage ............................................................................................. 38

I. Division of Property upon Divorce ................................................................................. 40

J. Contracts Concerning Succession ................................................................................... 40

K. Homestead, Exempt Personal Property and Allowances ............................................. 40

L. The Universal Community ............................................................................................. 41

M. Preserving Portability ..................................................................................................... 41

N. Addressing the Mutual Duty of Support ........................................................................ 42

XV. EFFECTIVENESS OF THE PRENUPTIAL AGREEMENT .......................................... 42

A. Necessaries ..................................................................................................................... 42

B. Child Support ................................................................................................................. 42

C. Tax Liability ................................................................................................................... 42

D. Spousal Torts .................................................................................................................. 42

E. Joint Ventures ................................................................................................................. 43

F. Preexisting Creditors ...................................................................................................... 43

G. U.F.T.A. and the Bankruptcy Code ............................................................................... 43

H. ERISA Plans ................................................................................................................... 43

I. Trap for the Unwary ........................................................................................................ 44

J. Future Legislative Changes ............................................................................................. 44

K. Lost Income Tax Basis ................................................................................................... 44

XVI. WAIVING SPOUSAL SUPPORT .................................................................................... 44

A. Texas Premarital Agreement Act ................................................................................... 45

B. The Community-Free Marriage ..................................................................................... 45

C. Effect of Support Waiver ............................................................................................... 45

D. Reimbursement Between Spouses ................................................................................. 46

E. “Spousal Support” .......................................................................................................... 46

F. But Texas Doesn’t Have Alimony! ................................................................................ 46

G. Texas Maintenance ......................................................................................................... 46

H. UPAA Comments ........................................................................................................... 47

I. Other States’ Laws .......................................................................................................... 47

J. UPAA – Texas Version .................................................................................................. 47

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XVII. AGREEMENTS DURING MARRIAGE ......................................................................... 48

A. 2003 and 2005 Legislation ............................................................................................. 48

B. Formalities ...................................................................................................................... 49

C. Transmutation ................................................................................................................. 49

D. Survivorship Agreements……………………………………………………………. 51

XVIII. FAMILY BUSINESS PLANNING ................................................................................... 51

A. Entity Theory .................................................................................................................. 51

B. Distributed Profits .......................................................................................................... 52

C. Comparison to Corporations .......................................................................................... 52

D. Corporate Veil Piercing .................................................................................................. 52

E. Texas Pattern Jury Charge .............................................................................................. 53

F. Convert Sole Proprietorships .......................................................................................... 53

G. Partnership Formation .................................................................................................... 53

XIX. MARITAL PROPERTY RIGHTS IN IRREVOCABLE TRUSTS ................................. 54

A. The Private Express Trust .............................................................................................. 54

B. Beneficial Ownership ..................................................................................................... 55

D. Settlor’s Retained Interest .............................................................................................. 56

E. Interests of the Non-Settlor Beneficiary ......................................................................... 57

F. Spendthrift Trust ............................................................................................................. 58

G. Powers of Appointment .................................................................................................. 58

XX. PLANNING FOR DESCENDANTS ................................................................................ 59

A. Segregated Accounts ...................................................................................................... 59

B. Avoid Inadvertent Commingling ................................................................................... 59

C. Separate Investments ...................................................................................................... 59

D. Family Entities ............................................................................................................... 60

E. Asset Protection Trusts ................................................................................................... 60

XXI. NON-PRO RATA DISTRIBUTION OF THE COMMUNITY ........................................ 60

A. Non-Pro Rata Division ................................................................................................... 61

B. Effect on Nonprobate Assets .......................................................................................... 61

C. Tax Consequences .......................................................................................................... 61

D. IRS Income Tax Position ............................................................................................... 61

E. Marital Agreement Approach ......................................................................................... 62

F. The Revocable Trust Approach ...................................................................................... 62

G. Safe Harbor Approach .................................................................................................... 62

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XXII COMMUNITY PROPERTY IN ........................................................................................ 63

THE REVOCABLE TRUST ............................................................................................. 63

A. Professional Responsibility ............................................................................................ 63

B. Creation and Funding ..................................................................................................... 63

C. Distributions ................................................................................................................... 64

D. Power of Revocation ...................................................................................................... 64

E. Subsequent Incapacity of a Settlor ................................................................................. 65

F. Effect of Subsequent Divorce ........................................................................................ 66

G. Death of First Spouse ..................................................................................................... 67

H. Survivor's Interests ......................................................................................................... 67

I. Planning Considerations ................................................................................................. 67

J. Community Property Basis ............................................................................................. 68

K. Non-Pro Rata Division ................................................................................................... 68

XXIII. PLACING THE HOMESTEAD AND OTHER EXEMPT PROPERTY IN

A REVOCABLE TRUST .................................................................................................. 68

A. Exemption from Creditors .............................................................................................. 68

B. Survival of the Separate Property Homestead ................................................................ 69

C. Creditor’s Rights ............................................................................................................ 70

D. Community Property Homestead ................................................................................... 70

E. Exempt Personal Property .............................................................................................. 71

F. Allowances ..................................................................................................................... 71

G. Probate Claims Procedures ............................................................................................. 72

Handbook on Texas Marital Property Law

For Estate Administration and Planning

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Thomas M. Featherston, Jr.

I. INTRODUCTION

Preparing a handbook for marital

property issues from a Trust & Estates

perspective is a real challenge in view of the

many possible situations that can arise in

estate planning and administration. The

approach taken starts with a substantive

review of the foundational principles of

Texas marital property law (Chapter II,

characterization, Chapter III, management,

and Chapter IV, liabilities).

The next part of this paper, Chapters

V through VIII, gives an overview of what

happens when a marriage terminates by

divorce or death. The following three

chapters, Chapters IX through XI, address

areas of the law unique to Texas to be

considered prior to marriage. Chapters XII

through XVII discuss premarital and marital

planning opportunities.

Chapters XVIII and XIX discuss

family businesses and irrevocable trusts.

The outline concludes with chapters

dealing with unique planning opportunities,

including non-pro rata distributions,

revocable trusts and the Texas homestead.

II. MARITAL PROPERTY

CHARACTERIZATION

The Supreme Court of Texas in

Arnold v. Leonard, 114 Tex. 535, 273 S.W.

799 (1925) and Kellett v. Trice, 95 Tex. 160,

66 S.W. 51 (1902) made it clear to

practitioners and the legislature that it is the

Texas Constitution which ultimately defines

what is separate or community property and

not the legislature or the parties involved.

Accordingly, in order to properly

characterize marital assets in Texas, it is

necessary to understand the relevant

provision of the Texas Constitution, Article

XVI, Sec. 15 (eff. Jan 1, 2000).

A. Article XVI, Sec. 15

All property, both real and personal,

of a spouse owned or claimed before

marriage, and that acquired afterward by

gift, devise or descent, shall be the separate

property of that spouse; and laws shall be

passed more clearly defining the rights of

the spouses, in relation to separate and

community property; provided that persons

about to marry and spouses, without the

intention to defraud preexisting creditors,

may by written instrument from time to time

partition between themselves all or part of

their property, then existing or to be

acquired, or exchange between themselves

the community interest of one spouse or

future spouse in any property for 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; spouses may also from

time to time, by written instrument, agree

between themselves that the income or

property from all or part of the separate

property then owned or which thereafter

might be acquired by only one of them, shall

be the separate property of that spouse; and

if one spouse makes a gift of property to the

other that gift is presumed to include all the

income or property which might arise from

that gift of property; spouses may agree in

writing that all or part of their community

property becomes the property of the

surviving spouse on the death of a spouse;

and spouses may agree in writing that all or

part of the separate property owned by either

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or both of them shall be the spouses’

community property.

B. The Test for Community

It is important to note that the

Constitution does not define community

property. Arnold v. Leonard, supra,

explained the significance of the Texas

constitutional approach to characterization:

if an asset does not fall within the

constitutional definition of separate

property, it must be community property —

"the rule of implied exclusion." A logical

extension of this rule leads to a more

practical definition for the term “community

property”: that property of the marriage

which is not proven to be separate property.

See II, C, infra.

1. Graham v. Franco

The court in Graham v. Franco, 488

S.W.2d 390 (Tex. 1972), resorted to a more

historical Spanish/Mexican approach and

affirmatively defined community property as

". . . that property is community which is

acquired by the works, efforts, or labor of

the spouses. . . ." See also Whittlesey v.

Miller, 572 S.W.2d 665 (Tex. 1978); Bounds

v. Caudle, 560 S.W.2d 925 (Tex. 1977).

2. Income from Separate

The rationale of Graham v. Franco,

supra, would suggest that any income

generated by a spouse’s separate property

would be the owner’s separate property.

However, the general rule concerning

income from separate property is that it is

community property, placing Texas in a

minority position among the community

property states.

3. Traceable Mutations

Arnold v. Leonard’s “rule of implied

exclusion” would suggest that property

purchased with separate property during a

marriage would be community property.

However, Texas courts, going all the way

back to Love v. Robertson, 7 Tex. 6 (1855)

and Rose v. Houston, 11 Tex. 323 (1854),

have consistently held that such property is a

“traceable mutation” of the consideration

used to acquire the property. Thus, the

character of separate property is not changed

by a sale, exchange or change in form.

Texas Pattern Jury Charges, PJC 202.4

(2016).

Note: Absent an agreement of the parties

and notwithstanding some of these cases, the

author is of the opinion that "the rule of

implied exclusion" remains the general rule

for determining what is community property.

C. Community Presumption

Generally, all assets of the spouses

on hand during the marriage and upon its

termination are presumed to be community

property, thereby placing the burden of

proof on the party (e.g., a spouse, or that

spouse's personal representative, or the

heirs/devisees of the spouse) asserting

separate character to show by "clear and

convincing evidence" that a particular asset

is, in fact, separate. Tex. Fam. Code

§ 3.003.

1. Management Presumption

The fact that an asset is held in one

spouse's name only, or is in the sole

possession of a particular spouse, is not

determinative of its marital character and

only raises a presumption that the asset is

subject to that spouse's sole management

and control while the community

presumption dictates it is presumptively

community. Tex. Fam. Code § 3.104.

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2. Form of Title

The fact that record title is held in a

particular way due to certain circumstances

may cause the community presumption to

vanish in favor of a rebuttable separate

presumption. See Smith v. Strahan, 16 Tex.

314 (1856); Higgins v. Johnson’s Heirs, 20

Tex. 389 (1857); Story v. Marshall, 24 Tex.

305 (1859). The other spouse may not be

allowed to rebut the presumption if that

spouse was a party to the transaction.

Lindsay v. Clayman, 151 Tex. 593, 254

S.W.2d 777 (1952).

D. Traditional Means of Creating

Separate Property

Consequently, the first step of

characterization is ascertaining the facts and

circumstances surrounding the acquisition of

an asset – “the inception of title rule.”

Creamer v. Briscoe, 109 S.W. 911 (Tex.

1908). The second step is determining

whether evidence of those facts and

circumstances place the asset within the

definition of separate property. Prior to the

1980 Amendment to Art. XVI, Sec.15, there

were limited means of creating separate

property in Texas. Generally, separate

property was limited to:

1. Previously Existing

Property owned prior to marriage. Tex.

Fam. Code § 3.001.

2. Gratuitous Transfers

Property acquired during marriage by

gift, devise or descent. Tex. Fam. Code §

3.001.

3. Marital Partitions

Property resulting from the partition of

presently existing community property.

Tex. Fam. Code § 4.102.

4. Certain Credit Acquisitions

Property acquired on credit during

marriage is separate property if the creditor

agreed to look only to separate property for

repayment. Broussard v. Tian, 156 Tex.

371, 295 S.W.2d 405 (1956).

5. Personal Injury Recoveries

Certain personal injury recoveries

(other than for loss of earning capacity).

Tex. Fam. Code § 3.001. See II, I, infra.

6. Traceable Mutations

Property acquired during marriage

which is traceable as a mutation of

previously owned separate property. Tarver

v. Tarver, 394 S.W.2d 780 (Tex. 1965).

Note: Casualty insurance proceeds

traceable to separate property are separate

property even if the premiums were paid

with community. Tex. Fam. Code § 3.008.

E. 1980 Amendment

The 1980 amendment to Art. XVI,

Sec. 15 authorized the creation of separate

property in new ways:

1. Premarital Partitions

Persons intending to marry can partition

and exchange community property not yet

acquired. Tex. Fam. Code § 4.003.

2. Spousal Partitions

Spouses can partition and exchange not

only presently existing community property

but also community property not yet in

existence into the spouses' separate

properties. Tex. Fam. Code § 4.102.

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3. Income from Separate Property

Spouses may also agree that income

from one spouse's separate property will be

that spouse's separate property. Tex. Fam.

Code § 4.103.

4. Spousal Donations

A gift by one spouse to the other spouse

is presumed to include the income generated

by the donated property so that both the gift

and the future income from the gift can be

the donee spouse's separate property. Tex.

Fam. Code § 3.005.

F. Mixed Characterization

Property acquired during marriage

may be part separate property of one or both

spouses and part community property. Such

an item may be part separate property of

each spouse. Certain assets, like bank

accounts, may be brought into a marriage,

but take on mixed characterization during

marriage.

1. Inception of Title

If the community estate of the spouses

and the separate estate of a spouse have an

ownership interest, the respective ownership

interests are determined by the inception of

title rule. Tex. Fam. Code § 7.006. For

example, when the consideration used to

acquire an item of property consists of both

community property and traceable separate

property, the item is both separate and

community property.

2. Calculation

The part that is separate property is the

percentage of the purchase price paid with

separate property or “separate credit” (i.e.,

the creditor agreed to look to separate

property for payment. See II, D, 4, supra.)

To calculate a separate property interest, one

can divide the separate property contribution

by the total purchase price. The percentage

interest remaining after all separate property

interests have been deducted is community

property. Texas Pattern Jury Charges, PJC

202.6 (2016).

3. Part Gift, Part Purchase

Property may be acquired partly by gift

and partly by purchase. In such a case, the

portion acquired by gift is separate property.

The portion acquired by purchase can be

separate, community or both, depending on

the source of the funds or credit used to

make the purchase. Texas Pattern Jury

Charges, PJC 202.6 (2016). For calculation,

see II, F, 2, supra.

G. Commingling

An item of property that might have

mixed characterization is presumptively

community, meaning the party asserting the

separate character of an interest in the item

must prove the separate interest is separate

property by clear and convincing evidence.

The failure to meet that burden of proof

results in the interest being community

property.

Certain types of assets are particularly

susceptible to this result. They are bank

accounts, brokerage accounts, IRA accounts

and even ERISA defined contribution

retirement plans. Texas Family Code

Section 3.007 provides that the separate

property interest in a defined contribution

retirement plan may be traced using the

same tracing and characterization rules that

apply to other assets.

In these types of assets, the failure to

meet the burden of proof results in a

“commingling” and the accounts and/or

plans being community property.

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H. Life Insurance

Unlike the defined contribution plans

and financial accounts discussed in II, G,

supra, the characterization of most life

insurance policies is dependent on the

application of the inception of title rule.

If a policy was acquired before

marriage or the initial premium was paid

during marriage with separate property, the

policy is separate property, even if

subsequent premiums were paid with

community property. McCurdy v. McCurdy,

372 S.W.2d 381 (Tex. Civ. App. Waco 1963

writ ref’d). The payment of premiums with

community property may give the non-

owner spouse a claim for reimbursement.

Note: If the policy is a group life policy

offered by an employer for employees, the

policy is a form of compensation and likely

to be found to be community property once

the employee is married; similarly, a simple

term policy may also take the

characterization of the last premium paid.

I. Quasi-Marital Property

According to the Texas Family Code,

the separate property of a spouse which was

acquired while the spouses were not residing

in Texas, but what would have been

community had they resided in Texas at the

time of acquisition, will be treated in a

divorce proceeding as if it were community

property. Tex. Fam. Code § 7.002. See

Cameron v. Cameron, 641 S.W.2d 210

(Tex. 1982). A 2003 amendment to Sec.

7.002 treats as separate property any

community property that was acquired while

the couple resided in another state that

would have been separate had they resided

in Texas at the time of its acquisition.

Quasi-community property is still treated as

separate if the marriage terminates by reason

of a spouse’s death. Hanau v. Hanau, 730

S.W.2d 663 (Tex. 1987). Presumably

“quasi-separate” property would be treated

as community property if the marriage

terminates by reason of a spouse’s death, if

the reasoning of the Hanau case, supra, is

followed.

J. Personal Injury Recoveries

Personal injury recoveries for loss of

earning capacity during marriage are defined

as community property. Tex. Fam. Code

§ 3.001(3). Notwithstanding this statutory

provision, the author is of the opinion that

actual "lost earnings" should be deemed

community property while "loss of earning

capacity" should be considered separate

property. Lost earnings are properly

characterized as community property since

the community estate will be liable for

payment of medical expenses and will suffer

as a result of losing one spouse's community

earnings.

However, characterizing the recovery

for lost earning capacity as community

property requires a presumption that the

husband and wife will remain married

indefinitely. In reality, should the spouses

divorce following the injury, community

recoveries will be divided on a just and right

basis; or should the non-injured spouse die,

his estate will be entitled to one-half of the

entire recovery. Since the primary purpose

of a personal injury recovery is to

compensate the injured spouse, classifying

lost earning capacity as community property

and giving the non-injured spouse a one-half

interest therein may leave the injured spouse

with only a fraction of the amount awarded.

The potential for such a situation clearly

warrants a distinction between lost earnings

and lost earning capacity which

characterizes the former as community and

the latter as separate.

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Note: The same rationale suggests a

distinction should also be made for incurred

medical expenses and future medical

expenses.

K. Observations

Today, in order to properly characterize

the assets of a marriage in either an estate

planning or administration situation, the

practitioner will need to be thoroughly

familiar with the ever changing rules of

characterization and be alert to the

possibility that in either a premarital or

marital agreement the parties changed the

legal result. For example, income from

separate property is not always community

property. See II, E, supra.

III. MARITAL PROPERTY

MANAGEMENT

Unlike characterization, rules

relating to the management of marital

property are within the rulemaking authority

of the legislature. Arnold v. Leonard, 273

S.W. 799 (Tex. 1925). The Texas Family

Code now prescribes which spouse has

management powers over the marital assets

during the marriage.

A. Matrimonial Property Act, 1967

Historically in Texas, the husband

managed not only the community property

of the marriage but also the separate

property of both spouses. A women’s rights

reform movement began in 1913 with the

gradual expansion over the next fifty years

of the wife’s right to manage her own

separate property and personal earnings.

One of the early changes was to grant to the

wife the right to manage her own personal

earnings and the income from her separate

property. This reform movement

culminated when both spouses were granted

separate but equal rights in the management

of their respective separate properties in the

Matrimonial Property Act of 1967. The Act

also granted women for the first time equal

rights with their husbands in the

management of their community property.

These concepts were then codified as

Sections 5.61 and 5.62 of the Texas Family

Code enacted in 1969, effective Jan. 1,

2000, and are codified currently as Sections

3.201, 3.202 and 3.203 of the Texas Family

Code. See Joseph W. McKnight,

“Recodification and Reform of the Law of

Husband and Wife” (Texas Bar Journal, Jan.

1970).

B. Texas Family Code

1. Separate Property

Each spouse has sole management,

control and disposition of his or her separate

property. Tex. Fam. Code § 3.101.

2. Sole Management Community

Each spouse has sole management,

control and disposition of the community

property that he or she would own, if single,

including personal earnings, revenue from

separate property, recoveries for personal

injuries and increases and revenues from his

or her “special community property.” Tex.

Fam. Code § 3.102(a).

3. Joint Management Community

All other community property is

subject to both spouses' joint management,

control and disposition – “the joint

community property.” Tex. Fam. Code §

3.102(b).

C. Special Community Property

The term “special community

property” was originally defined by Texas

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courts as that portion of the community

estate which was under the wife’s exclusive

control and not liable for the husband’s

debts following the landmark decision of

Arnold v. Leonard, supra, where the Texas

Supreme Court held that the legislature

could not define the rents and revenue from

the wife’s separate property and her personal

earnings as her separate property, but could

exempt those assets, her “special community

property,” from his debts. Moss v. Gibbs,

370 S.W.2d 452 (Tex. 1963). Today, it is

common practice to refer to the community

assets subject to either spouse’s “sole

management, control and disposition” under

Section 3.102(a) as his or her “special

community property.”

Note: In this outline, the terms “special

community property” and “sole

management community property” are used

to refer to the same community assets.

D. Presumptions

In addition to the community

presumption of Section 3.003, an asset titled

in one spouse’s name (or untitled but in the

sole possession of one spouse) is presumed

to be subject to that spouse’s sole

management and control. Tex. Fam. Code §

3.104. Thus, an asset held in either spouse’s

name is presumed to be that spouse’s sole

management community property.

However, the actual definition of “sole

management community property” is found

in Tex. Fam. Code § 3.102(a). If an asset

does not fall within the statutory definition

of “sole, management community,” it is

“joint community,” even if held in one

spouse’s name.

E. Record Title

Whether an asset is held in one spouse’s

name or in both spouses’ names, it is

presumptively community property, thereby

placing the burden on a spouse claiming

separate status to prove why it is separate

property.

1. Presumption

The fact that title is held in one spouse’s

name (or it’s untitled, but in the sole

possession of one spouse) creates a

rebuttable presumption that the asset is the

spouse’s sole management community

property. Tex. Fam. Code §

2. Rebutting the Presumption

If the facts indicate that a community

asset is not property the “titled” spouse

would have owned, if single (e.g., personal

earnings, income from separate property,

increases and expenses from special

community property), Section 3.102(c)

indicates it is joint community.

3. Mixing Sole Management Community

If one spouse’s sole management

community is “mixed” with the other

spouse’s sole management community (or

presumably their joint community), the

“mixed” community is converted into joint

community and subject to both spouses’

debts. This result typically occurs when the

spouses deposit their respective salaries into

a joint account. If an asset is subsequently

purchased with funds from the joint account

and placed in one spouse’s name (absent

donative intent of the other spouse), the

asset is presumptively subject to that

spouse’s sole management, but may be

found to be joint community for liability

purposes due to its traceable “joint” source.

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4. The “Sole Management” Joint Account

If only one spouse deposits his or her

special community funds into a joint

account, the account is community property,

and the account agreement will dictate who

can write the checks or otherwise make

withdrawals (typically, either spouse can

write a check or make a withdrawal).

However, if the other spouse’s creditors

attempt to subject it to the contractual debts

of the non-depositing spouse, the depositing

spouse has a good argument that the account

is still the depositing spouse’s special

community property and exempt from other

spouse’s non-tort and any premarital

creditors. A joint account belongs to the

party who deposited the funds. Tex. Est.

Code § 113.102.

IV. MARITAL PROPERTY

LIABILITY

The Legislature's basic rules of

marital property liability are found in

Sections 3.201, 3.202 and 3.203 of the

Texas Family Code.

A. Statutory Rules

1. Separate Property Exemption

As a general rule, a spouse's separate

property is not subject to the debts of the

other spouse. Tex. Fam. Code § 3.202(a).

2. Special Community Exemption

As a general rule, a spouse's sole

management community property is not

subject to any debts incurred by the other

spouse prior to the marriage or any

nontortious debts of the other spouse

incurred during the marriage. Tex. Fam.

Code § 3.202(b).

3. Other Rules of Law

These two exemptions exist unless both

spouses are personally liable under "other

rules of law." Tex. Fam. Code § 3.201. See

III, B, infra.

4. Exempt Property

Of course, the family homestead and

certain items of personal property are

generally exempt from the debts of both

spouses, regardless of the marital character

of the property. Tex. Prop. Code §§ 41.001

and 42.001. The Texas Property Code and

Texas Insurance Code also create

exemptions for retirement benefits and life

insurance.

5. Creditors’ Rights

Accordingly, a spouse’s nonexempt

separate property and sole management

community property are subject to any

liabilities of that spouse incurred before or

during the marriage. Nonexempt joint

community is liable for the debts of both

spouses. In addition, the nonexempt sole

management community properties of both

spouses are subject to the tortious liabilities

of either spouse incurred during marriage.

Tex. Fam. Code § 3.202 (c) and (d). See IX,

infra.

6. Order of Execution

A court may determine, as deemed just

and equitable, the order in which particular

separate or community property is subject to

execution and sale to satisfy a judgment. In

determining the order, the court is to

consider the facts and circumstances

surrounding the transaction or occurrence on

which the debt is based. Tex. Fam. Code

§ 3.203.

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B. Other Factors

The general rules described in III, A,

supra, apply unless both spouses are

personally liable under “other rules of law.”

1. Joint Obligations

Of course, both spouses may sign a

contract or commit a tort which would make

them jointly and severally liable and thereby

subjecting the entire nonexempt marital

estate to liability. “Generally, both spouses

are jointly and severally liable for the tax

due on a joint return. Thus, a spouse may be

liable for the entire tax liability, although the

income was totally earned by the other

spouse.” Kimsey v. Kimsey, 915 S.W.2d

690, 695 (Tex. App.—El Paso 1998, pet

denied).

2. “Necessaries”

Each spouse has a duty to support the

other spouse and a duty to support a child

generally for so long as the child is a minor

and thereafter until the child graduates from

high school. Tex. Fam. Code Secs. 2.501

and 154.001. Accordingly, all nonexempt

marital assets (separate and community) are

liable for such "necessaries." See, III, D,

infra.

3. Principal-Agent

The law also defines other situations

where any person can be held personally

liable for debts of another. These situations

include the following relationships:

respondeat superior, principal/agency,

partnership, joint venture, etc. These special

relationships can exist between husband and

wife and can impose vicarious liability on an

otherwise innocent spouse. See Lawrence v.

Hardy, 583 S.W.2d 795 (Tex. App.—San

Antonio 1979, writ ref'd n.r.e.). The Texas

Family Code has codified this concept. Tex.

Fam. Code § 3.201(a)(1). However, the

marriage relationship, in and to itself, is not

sufficient to generate vicarious liability.

Tex. Fam. Code § 3.201(c). See also

Wilkinson v. Stevision, 514 S.W.2d 895

(Tex. 1974).

4. Points of Clarification

Except as provided in III(C)(1), (2) and

(3), community property is not subject to a

liability that arises from act of a spouse.

Tex. Fam. Code §3.201(b). Retirement

allowances, annuities, accumulated

contributions, optional benefits and money

in the various public retirement system

accounts which are one spouse’s sole

management community property are

generally not subject to a claim of a criminal

restitution judgment against the other

spouse. Tex. Fam. Code § 3.202(e).

C. Child Support

Prior to 2007 legislation, unless

otherwise agreed in writing or ordered by a

court, a parent’s child support obligation

ended when the parent died; now the Family

Code provides that court-ordered child

support obligations survive the obligor’s

death. Tex. Fam. Code § 154.006.

Subsequent amendments to the Family Code

also provide that the obligor’s child support

obligations can be accelerated upon the

obligor’s death and a liquidated amount will

be determined using discount analysis and

other means. Tex. Fam. Code § 154.015.

An amendment to the probate code makes

the liquidated amount a class 4 claim. Tex.

Est. Code § 355.102. The court can also

require that the child support obligation be

secured by the purchase of a life insurance

policy. Tex. Fam. Code § 154.016.

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D. The Necessaries Doctrine

A spouse’s duty of support extends

beyond the marital relationship itself. A

spouse who fails to discharge this duty is

liable to others who provide necessaries to

the other spouse. Tex. Fam. Code §

2.501(b). Accordingly, when third parties

(e.g., doctors, hospitals, nursing homes –

perhaps even lawyers) provide services

deemed reasonably necessary for one

spouse’s support, both spouses are

personally liable for the costs of such

services. While the spouse who actually

incurs the debt may be deemed to be

“primarily liable,” both spouses are “jointly

and severally” liable to the third party under

the necessaries doctrine. Tex. Fam. Code §

3.201(a)(2). A debt incurred for necessaries

exposes the entire nonexempt marital estate

(separate and community) to liability. Tex.

Fam. Code § 3.202.

Note: Parents are legally obligated to

support their children until the children

attain the age of 18 or graduate from high

school. Tex. Fam. Code § 154.001.

E. Spousal Necessaries Cases

1. Approved Personnel Serv. v.

Dallas, 358 S.W.2d 150 (Tex. App.—

Texarkana 1962, no writ) (“No case is cited

holding a contract for services of the nature

rendered here to be a necessary. There are

numerous cases in which courts have, on the

basis of facts of the particular case, held

medical, dental and legal services to be

necessaries. . . . The facts and

circumstances of a case control and mold the

meaning of the term as here used and the

formulation of a comprehensive definition is

difficult. Decision in this case must be

made on the basis that the term encompasses

such services as the husband is financially

able to and should provide for the wife’s

benefit and that are suitable to the

maintenance of the condition and station in

life the family occupies”).

2. Finney v. State, 308 S.W.2d

142 (Tex. Civ. App.—Austin 1957, writ

ref’d n.r.e.) (court held deceased wife’s

estate liable for medical bills incurred by

deceased husband while he was a patient at

three state facilities).

3. Fleming v. Oring, Civil

Action No. 3:04-CV-1303-B, 2005 U.S.

Dist. LEXIS 5062 (N.D. Tex. Mar. 29,

2005) (facts of case concern suit against

husband for funds that caretakers spent in

order to provide for basic needs of

husband’s wife; case was dismissed for lack

of personal jurisdiction.)

4. Jarvis v. Jenkins, 417 S.W.2d

383 (Tex. Civ. App.—Waco 1967, no writ)

(husband ordered to reimburse wife’s

attorney, who paid for her groceries and an

airline ticket for her to travel to Virginia to

visit family and seek medical treatment;

items considered to be necessities).

5. Turner v. Lubbock County

Hospital District, No. 07-96-0272-CV, 1998

Tex. App. LEXIS 53 (Tex. App.—Amarillo

1998, no pet.) (court found that as a matter

of law, medical services are necessaries).

6. White v. Lubbock Sanitarium

Co., 54 S.W.2d 1058 (Tex. Civ. App.—

Amarillo 1932, writ dism’d w.o.j.) (wife’s

medical expenses held to be necessaries;

husband and wife found to be jointly liable

for the medical debt).

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Note: The author’s research discovered

statements from various sources suggesting

that once one spouse has qualified for

Medicaid nursing care the other spouse no

longer has any personal liability for the

nursing care. The author appreciates Clyde

Farrell confirming this general

understanding of this complex set of

Medicaid rules. Clyde also explained that,

while the community spouse is still generally

liable for other “necessaries,” when the

other spouse is in the nursing home,

Medicaid covers most of the needs of the

other spouse. If the other spouse is

receiving Medicaid home care, Medicaid

does not pay for “necessaries” other than

medical care (including personal attendant

care). However, for the purpose of this

paper, it will be assumed that neither spouse

has qualified for Medicaid nursing care.

F. No Community Debt

The Texas Family Code’s liability

rules do not support the notion of a

“community debt.” See Tedder v. Garner

Aldrich, LLP, 421 S.W.3d 651 (Tex. 2013).

That term suggests that (i) both spouses

have personal liability for the debt and (ii)

all non-exempt community property can be

reached to satisfy the debt. Neither

statement is necessarily true. Please also

refer to Marital Property Liabilities:

Dispelling the Myth of the Community Debt,

State Bar of Texas, Advanced Estate

Planning and Probate Course, June, 2009,

and the Marital Property Liabilities:

Dispelling the Myth of Community Debt,

Featherston and Dickson, Texas Bar

Journal, January, 2010.

G. Summary

Accordingly, absent a statutory

exemption, a spouse’s separate property and

sole management community property, as

well as the joint community property, are

liable for that spouse’s debts during the

marriage. If the liability is a tort debt

incurred during the marriage, the other

spouse’s sole management community

property is also liable for the debt (the other

spouse’s separate property may be exempt

depending upon the circumstances).

If the debt is not a tort debt incurred

during the marriage, the other spouse’s

separate property and sole management

community property are exempt during the

marriage from the debt unless the other

spouse is personally liable under other rules

of law. In which event, the other spouse’s

property (i.e., that spouse’s sole

management community and separate) is

liable as well.

However, if the debt was incurred as a

reasonable expense for the support of either

spouse, each spouse has personal liability,

and the entire nonexempt marital estate

(each spouse’s separate property and their

community property) is liable.

H. Key Questions

The Texas Legislature has enacted a

logical liability process that utilizes a

multiple-step process to determine which

nonexempt marital assets of a husband and

wife are liable for which debts during the

marriage. Texas courts are finally getting it

right. See Beal Bank v. Gilbert, 417 S.W. 3d

704 (Tex. App.—Dallas 2013, no pet. h.).

The process is dependent upon the answers

to four questions:

1. When was the debt incurred? It

was incurred either prior to or

during the marriage.

2. Whose debt is it? It is either the

debt of the husband, the debt of

the wife or both spouses' debt.

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3. What type of debt is it? Or was

it tortious or contractual in nature

or was it incurred for a

“necessity”?

4. If not a “necessity,” was the

spouse who incurred the debt

acting as the other spouse’s

agent?

The ultimate answer depends on the

relevant facts and circumstances and the

specific answers to these four questions.

Note: However, the statutory liability rules

change when the first spouse dies. See VII

and VIII, infra.

V. EFFECT OF DIVORCE

In the event of a divorce, generally

any community property will be subject to

an equitable division by the divorce court

but separate property is not. In addition, any

“quasi-community” property is subject to an

equitable division. Tex. Fam. Code §§

7.001, 7.002. While contractual alimony

can be incorporated into a divorce decree,

absent such an agreement, the Texas divorce

court cannot award alimony to a spouse.

Alimony is still contrary to Texas public

policy. A limited form of alimony,

“maintenance,” is available in certain

defined situations. See Tex. Fam. Code §§

8.001-8.059.

Note: If the other spouse is awarded an

interest in the participant’s ERISA regulated

plan, a Q.D.R.O is needed. Tex. Fam. Code.

§ 9.101.

A. Claims for Reimbursement

Reimbursement between the marital

estates usually arises when a spouse’s pre-

marriage debt is later paid with community

funds or one spouse’s separate property is

improved through the expenditure of

community funds. Reimbursement may also

be applicable if separate funds are expended

to benefit community property. In addition,

the expenditure of community time, talent

and labor in excess of what is necessary to

reasonably manage one’s separate property

can give rise to a community claim for

reimbursement to the extent that excess

time, talent or labor is not compensated.

Jensen v. Jensen, 685 S.W.2d 107 (1984).

Another common reimbursement situation is

where one spouse owns separately an

insurance policy on that spouse’s life and

uses community property to pay the

premiums, and upon the insured spouse’s

death, the proceeds are payable to a third

party. See Tex. Fam. Code §§ 3.401-3.410.

The Texas Family Code directs the divorce

court on how to handle such claims. Tex.

Fam. Code § 7.007.

B. Fraud on the Community

In Arnold v. Leonard, supra, the

Court explained, “. . . that the statutes

empowering the husband to manage the . . .

community assets made the husband

essentially a trustee, accountable as such to

the . . . community.’ See also Howard v.

Commonwealth Building and Loan Ass’n.,

94 S.W.2d 144 (Tex. 1936), where the court

explained that where title to a community

asset is held in one spouse’s name, that

spouse has legal title and the other has

equitable title, explaining: “That one in

whose name the title is conveyed holds as

trustee for the other. Patty v. Middleton, 82

Tex. 586, 17 S.W. 909 (Tex. 1891).” A

breach of that fiduciary duty will likely

result in a “fraud on the community” claim

when the marriage terminates. Such a claim

may follow a gift of sole management

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community property to a child of a prior

marriage. The Texas Family Code, Section

7.009, describes the divorce court process

for handling fraud claims and creates what is

defined as the “reconstituted estate.” Tex.

Fam. Code § 7.009.

C. Liabilities

Allocation of the responsibility of

the debts of the parties is part of the “just

and right division” of the estate. Tex. Fam.

Code § 7.001. The effect of the divorce on

the rights of the creditors is uncertain.

Professor Paulsen, in his excellent article on

post-divorce liability, challenges what most

have assumed to be established Texas law;

divorce cannot prejudice the rights of

preexisting creditors. He argues that such a

rule “. . . lacks any modern legal

justification and subverts the intent of the

Texas Constitution and Family Code.” He

encourages the Texas Supreme Court to

declare that “. . . an unsecured creditor . . .

has no special rights against a former spouse

or that spouse’s property once the marriage

ends.” See James W. Paulsen, The

Unsecured Texas Creditor’s Post-Divorce

Claim to Former Community Property,” 63

Baylor Law Review 781 (2011).

D. Court Ordered Child Support

A court may order the trustees of a

spendthrift or other trust to make

disbursements for the support of a child to

the extent the trustees are required to make

payments to a beneficiary who is required to

make child support payments as provided by

the Texas Family Code. If disbursement of

the assets of the trust is discretionary, the

court may order child support payments

from the income of the trust, but not from

the principal. Tex. Fam. Code § 154.005.

Delinquent child support and child

support arrearages are treated as Class 4

claims against the estate of a deceased

parent. Tex. Est. Code § 355.102.

E. Redesignation Statutes

Sections 9.301 and 9.302 of the

Texas Family Code purport to void a life

insurance policy or retirement plan

beneficiary designation in favor of a former

spouse. However, in Egelhoff v. Egelhoff,

532 U.S. 141, 121 S. Ct. 1322 (2011), the

Supreme Court held that ERISA preempts

state redesignation statutes, like Sections

9.301 and 9.302, if the designations are

pursuant to ERISA regulated retirement

plans or group life insurance policies. See

also Keen v. Weaver, 121 S.W.3d 721 (Tex.

2003), abrogated by Kennedy v. Plan Adm’r,

555 U.S. 285, 129 S. Ct. 865 (2009).

Preemption also applies for federally created

plans and insurance. Hillman v. Maretta,

133 S. Ct. 1993 (2013).

Note: The Texas Estates Code voids

testamentary devises to former spouses and

relatives of the former spouse who are not

related to the testator. This rule has been

expanded to cover revocable trusts, certain

powers of appointment and multiple-party

accounts. See Tex. Est. Code §§ 123.001,

123.002, 123.051 – 112.055.

VI. DEATH OF SPOUSE

When a married resident of Texas

dies, the marriage terminates and their

community property technically ceases to

exist because only spouses can own

community property. As a general rule,

nonprobate assets pass to the surviving

spouse or other third party beneficiaries.

Death generally works a legal partition of

the community probate assets; the deceased

spouse's undivided one-half interest passes

to the deceased spouse’s heirs and/or

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devisees, and the surviving spouse retains

his/her undivided one-half interest therein.

Presumably, the spouse’s mutual obligation

of support also terminates. The surviving

spouse does not even have the legal duty to

bury the deceased spouse. See Tex. Est.

Code § 355.110.

Note: The general rules described above

have their exceptions. The Texas Estates

Code voids certain devises to a former

spouse and the former spouse’s relatives

who are not related to the testator. That

provision has been expanded to include

multiple-party accounts, revocable powers

of appointments, testamentary trusts and

revocable trusts. See V, E, Note, supra.

Section 804.001(3) of the Texas Government

Code terminates the community interest of a

deceased spouse in a state employee’s

retirement plan. See Rogers v. Foxworth,

214 S.W.3d 196 (Tex. App.—Tyler, 2007, no

pet.), involving teacher retirement. Sections

9.3001 and 9.3002 of the Texas Family

Code void life insurance and retirement plan

designations in favor of a former spouse.

However, as to federal preemption of

Sections 9.3001 and 9.3002, as applied to

ERISA regulated retirement plans and group

life insurance, see V, E, supra.

Note: More importantly, upon the death of

a participant in an ERISA regulated

retirement plan, the surviving spouse may

have an ERISA mandated right that

overrides the participant’s beneficiary

designation. If the spouse predeceases the

participant, the spouse may not be able to

transfer the spouse’s community interest in

the participant’s plan. See Boggs v. Boggs,

570 U.S. 833, 117 S. Ct. 1754 (1997).

Federal law may also preempt state law if

the decedent or spouse participated in a

federally created plan.

A. Marital Liabilities

But what happens to the existing

debts of a married couple when the first

spouse dies? The question sounds simple

enough. It is obvious that the debts don’t go

away. There are no community debts. Not

all of the debts were the debts of both

spouses. Prior to the first spouse’s death,

the surviving spouse may or may not have

had personal liability for the debts of the

deceased spouse, and the deceased spouse

may or may not have had any personal

liability for the debts of the surviving

spouse.

The deceased spouse’s death does not

create any personal liability on any party

that did not exist prior to the deceased

spouse’s death. The surviving spouse is still

personally liable for the debts of the

surviving spouse. The surviving spouse

does not assume personal liability for any

debts of the deceased spouse for which the

survivor did not have preexisting personal

liability. It is the deceased spouse’s “estate”

that may be liable for the deceased spouse’s

debts.

B. The Court’s Explanation

The Texas Supreme Court has

explained the legal effect of the transition of

ownership and liability by reason of the

owner/debtor’s death by and through the

decedent’s “estate.” “A suit seeking to

establish the decedent’s liability on a claim

and subject property of the estate to its

payment should ordinarily be instituted

against the personal representative or, under

certain circumstances, against the heirs or

beneficiaries.” Price v. Estate of Anderson,

522 S.W.2d 690, 691 (Tex. 1975). “Debts

against an estate constitute a statutory lien.

This lien arises at the moment of death.”

Janes v. Commerce Fed. Savings & Loan

Ass’n, 639 S.W.2d 490, 491 (Tex. App. –

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Texarkana 1982, writ ref’d n.r.e.).

“Possession, then, by an heir does not

subject him to liability. He holds the

property with the encumbrance, but he

cannot be required to relieve the estate of the

burden [sic].” Blinn v. McDonald 50 S.W.

931, 931 (Tex. 1899), Van v. Webb 215

S.W.2d 151, 154 (Tex. 1998).

C. Probate v. Nonprobate

The assets of a decedent should initially

be divided into two separate and distinct

categories. Certain assets fall within the

probate class and others are classified as

nonprobate assets. An asset is nonprobate if

during the decedent's lifetime, the decedent

entered into an inter vivos transaction, as

opposed to a testamentary transaction, that

controls the disposition of the asset at death.

1. Nonprobate Transfers

Many nonprobate dispositions are

contractual arrangements with third parties

or the intended beneficiaries, and the terms

of the contracts control the dispositions.

Tex. Est. Code § 111.052. Common

examples of these types of contractual

arrangements include joint accounts with

rights of survivorship, P.O.D./T.O.D.

accounts and trust accounts as defined in

Chapter 113 of the Texas Estates Code, most

life insurance policies and certain employee

benefits. Nonprobate assets remain liable

for the decedent’s debts unless there exists a

statutory exemption like the one for life

insurance policies under the Texas Insurance

Code or the one for retirement benefits

under the Texas Property Code. Tex. Est.

Code § 111.053(b).

Note: The surviving spouse is frequently the

designated beneficiary of the nonprobate

disposition. For example, the surviving

spouse is the named beneficiary of a life

insurance policy, a retirement account or a

multiple-party account. The couple may

have owned separate property as joint

tenants with rights of survivorship or

community property with rights of

survivorship. On the other hand, if the

deceased spouse makes a nonprobate

disposition of his/her sole management

community property to a third party, fraud

on the community issues are raised. But

ERISA may mandate the surviving spouse be

the beneficiary of an ERISA regulated

retirement plan. If it is a group life

insurance payable to a third party, the

spouse must plead and prove actual fraud.

Barnett v. Barnett, 67 S.W.3d 107 (Tex.

2001).

2. Inter Vivos Gifts

In other nonprobate dispositions, the

ownership of a future interest in the property

(e.g., a remainder interest) is transferred to

the intended beneficiary during the owner’s

lifetime, and the future interest becomes

possessory upon the death of the owner. Of

course, the typical inter vivos gift of the

ownership and possession of an asset prior

to the owner’s death can be considered a

nonprobate disposition and also subject to a

fraud on the creditors’ analysis.

Note: Likewise, such a gift of a spouse’s

sole management community could be

subject to a fraud on the community

analysis.

3. Transfer on Death Deeds

T.O.D. deeds were authorized by the

legislature in 2015. According to Sections

114.000 – 114.151 of the Texas Estates

Code, such deeds are effective to convey the

grantor’s interest to the grantee upon the

death of the grantor.

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Note: The statute’s language suggests that

a spouse could only transfer that spouse’s

undivided one-half interest in that spouse’s

sole management community property. The

Texas Family Code suggests that a spouse

may not be able to use a T.O.D. deed to

transfer that spouse’s interest in the

couple’s joint management community or

the other spouse’s sole management

community. Tex. Fam. Code § 3.102.

4. Probate

Probate assets are those assets which

are not controlled by an inter vivos or

nonprobate arrangement and pass at the

owner's death to the owner’s heirs or

devisees, subject to possible probate

administration. A married individual's

probate estate consists of the decedent's

separate probate assets and his or her

undivided one-half of the community assets

which are not subject to an inter vivos or

nonprobate arrangement. The surviving

spouse retains, not inherits, his or her

undivided one-half interest in the

community probate assets.

5. Survivorship Rights

Joint tenancies (with rights of

survivorship) are created in Texas when co-

owners of property agree to create

survivorship rights. Tex. Est. Code §

111.001. Absent such an agreement, co-

owners are tenants in common (without

survivorship). Both joint tenants and tenants

in common are presumed to own their

individual undivided interests equally. Tex.

Est. Code § 101.002. Spouses may own

separate property as tenants in common or

joint tenants. Spouses may own community

property with rights of survivorship. Tex.

Est. Code § 112.051.

Joint accounts (with or without

survivorship rights) defined in Chapter 113

of the Texas Estates Code are not joint

tenancies. Such joint accounts are owned by

the parties in accordance with their “net

contributions.” Tex. Est. Code § 113.102

D. Chapter 101

The deceased spouse’s probate

“estate” generally passes to the deceased

spouse’s heirs and/or devisees subject to the

deceased spouse’s debts. Tex. Est. Code §§

101.001, 101.053. Thus, the deceased

spouse’s separate property and undivided

one-half interest in the community property

are generally liable for the payment of the

debts of the decedent. Tex. Est. Code §

101.052. As to the liability of the surviving

spouse’s interest in the community property,

see VI, E, infra.

If appointed and qualified, the

personal representative of the deceased

spouse’s estate shall recover possession of

the decedent’s “estate” and hold it in trust to

be disposed of in accordance with the law.

Tex. Est. Code § 101.003. “As trustee, the

executor is subject to the high fiduciary

standards applicable to all trustees.”

Humane Society v. Austin National Bank,

531 S.W.2d 574,577 (Tex. 1975). If the

decedent was married at the time of death,

see VIII, infra.

E. Deceased Spouse’s Debts

Section 101.052 of the Texas Estates

Code states that the one-hundred percent

(100%) of the community property subject

to the sole control of the deceased spouse or

joint control of both spouses during the

marriage continues to be subject to the debts

of the deceased spouse. In addition, the

decedent’s one-half interest in the

community property subject to the sole

control of the surviving spouse passes to the

deceased spouse’s successors charged with

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the deceased spouse’s debts. Tex. Est. Code

§ 101.052.

Note: It is significant that Section 101.052

does not refer to the surviving spouse’s

debts. There is a reference to “the liabilities

of that spouse.” See VIII, infra.

F. Administration of Community

Property

In addition to collecting the probate

of the estate, paying the decedent's debts and

distributing the remaining assets to the

decedent's heirs and/or devisees, the

administration of a married decedent's estate

may include the actual partition of the

community probate property. While death

may work a legal partition of the community

probate assets, it is often necessary to open a

formal administration to effectively handle

the claims of creditors and/or divide the

community probate property among the

surviving spouse and the decedent's heirs

and/or devisees. See VII, infra.

Note: Absent the opening of a formal

administration, the surviving spouse can

administer the community and can pay

“community debts” and discharge the

"community obligations." See Tex. Est.

Code Sec. 453.003. That term traces its

roots back to the Texas Probate Code in

effect prior to the Matrimonial Property Act

of 1967.

Note: If the deceased spouse died intestate

and the surviving spouse is the sole heir,

there may not be a need for any type of

formal administration. Tex. Est. Code Sec.

453.002.

G. Intestate Death

1. Community Probate Property

If a spouse dies intestate, the

surviving spouse continues to own (not

inherits) an undivided one-half interest in

the community probate assets. If there are

not any descendants of the deceased spouse

surviving, or all surviving descendants are

also descendants of the surviving spouse, the

decedent's one-half undivided interest passes

to the surviving spouse, who would then

own the entire community probate estate. If

there are any descendants surviving who are

not descendants of the surviving spouse, the

decedent's undivided one-half interest in the

community probate assets passes to the

decedent's descendants per capita with right

of representation. Tex. Est. Code § 201.003.

Prior to September 1, 1993, the surviving

spouse inherited the deceased spouse’s one-

half of the community only if no

descendants of the deceased spouse were

then surviving. Tex. Prob. Code § 45 (now

repealed). The rules relating to

“representation” were modified to be

effective September 1, 1991. Tex. Prob

Code § 43 (now repealed). See Tex. Est.

Code § 201.101.

2. Separate Probate Property

If a spouse dies intestate, the

decedent's separate probate assets are

divided in the following manner: (i) one-

third of the personal property passes to the

surviving spouse and two-thirds thereof to

the decedent's descendants and (ii) the

surviving spouse receives a life estate in

one-third of the separate real property and

the descendants of the decedent receive the

balance of the separate real property. If

there are no descendants, the surviving

spouse receives all of the personal property

and one-half of the real property. The other

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one-half of the real property passes in

accordance with the rules of intestate

succession. Tex. Est. Code § 201.002.

H. Testamentary Power

Every person who is or has been

married has received a broad grant of

authority from the Legislature to dispose of

his or her probate property. There is no

forced heirship in Texas. Tex. Est. Code §§

251.001, 251.002. This broad grant of

testamentary authority is, however,

effectively limited to the testator's separate

probate property and his or her undivided

one-half interest in the community probate

property. Avery v. Johnson, 108 Tex. 294,

192 S.W. 542 (1917).

I. Express or Implied Election

If the surviving spouse is a

beneficiary under the will, the testator may

be able to effectively expand his or her

testamentary power to the entire marital

estate through an express election or the

doctrine of implied election. But the

surviving spouse’s consent is required. See

Wright v. Wright, 274 S.W. 2d. 670 (Tex.

1955).

J. Protection for Surviving Spouse

Despite the very broad general grant

of testamentary power given a married

testator and the limited rights of inheritance

given the surviving spouse when the

decedent dies intestate, there exists certain

constitutional and statutory provisions which

exist for the benefit of the surviving spouse,

whether the decedent died testate or

intestate.

1. Homestead

The Texas Constitution still exempts

the homestead from the claims of some of

the decedent's creditors. Tex. Const. Art.

XVI, Sec. 50. In addition, notwithstanding

the provisions of the decedent's will or the

rules of intestate succession, the surviving

spouse is given an exclusive right of

occupancy of the homestead so long as he or

she elects to occupy it as his or her home.

Tex. Const. Art. XVI, Sec. 52. This right of

occupancy exists whether the home is

separate property of the deceased spouse or

the couple's community property. See Ch.

102, Texas Estates Code. In the event there

is not a family home, the probate court is

required to set aside an allowance in lieu of

a homestead. Tex. Est. Code § 353.053.

2. Homestead Responsibilities

While exercising the homestead right

of occupancy, the surviving spouse is treated

like a “life tenant” and owes the decedent’s

successors in interest a duty not to commit

waste. Sargent v. Sargent, 15 S.W.2d 589

(Tex. 1929). Accordingly, the surviving

spouse is responsible for utilities, property

taxes and ordinary maintenance and repairs.

Sargent, supra, and Dakan v. Dakan, 85

S.W.2d 620 (Tex. 1935). If the homestead

is encumbered, the surviving spouse is

responsible for the interest payments, but the

underlying owners of the property (the

surviving spouse and the decedent’s

successors or the decedent’s successors in

interest) should be responsible for each

owner’s proportionate share of principal

payments. Insurance premiums should be

paid by the party with the insurable interest

in the ownership of the property. The last

two, principal payments on a mortgage and

insurance premiums, depend on whether the

homestead was separate property or

community property and whether the

deceased spouse died testate or intestate

(i.e., who owns the homestead. See

Tamborello, “A House Divided: The

Rights and Duties of Homesteaders, Life

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Tenants and Remaindermen,” 2016

Advanced Estate Planning and Probate

(S.B.O.T.)

3. Exempt Personal Property

Certain items of tangible personal

property are exempt from creditors of the

decedent if the decedent is survived by a

spouse. Tex. Est. Code §§ 353.051,

353.052. These items are described in the

Texas Property Code and generally include

the household furnishings, personal effects

and automobiles in an amount that does not

exceed $100,000. Tex. Prop. Code Sec.

42.002. In addition, during administration,

the surviving spouse can retain possession of

these items and will receive ownership of

these items if the decedent's estate proves to

be insolvent; otherwise the decedent's

interest in these items passes to his or her

heirs and/or devisees when the

administration terminates. Tex. Est. Code

§§ 353.152, 353.153. There is also an

allowance in lieu of exempt personal

property. Tex. Est. Code § 353.053.

4. Family Allowance

In addition to the allowances in lieu

of homestead and exempt personal property,

an allowance for one year's maintenance of

the surviving spouse may be established by

the probate court. Tex. Est. Code §§

353.101, 353.102. The allowance is paid

out of the decedent's property subject to

administration. Ward v. Braun, 417 S.W.2d

888 (Tex. Civ. App.—Corpus Christi, 1967,

no writ). The amount is determined in the

court's discretion and is not to be allowed if

the surviving spouse has a sufficient

separate estate. Tex. Est. Code Sec.

353.101(d); Noble v. Noble, 636 S.W.2d 551

(Tex. App.—San Antonio 1982, no writ).

5. Waiver/Election

The surviving spouse may have

waived these rights in a marital or premarital

agreement. See XIV, K, infra. A surviving

spouse may be put to an election concerning

these rights. See VI, I, supra.

K. Authority of Surviving Spouse –

No Personal Representative

When there is no personal

representative for the estate of the deceased

spouse, Sec. 453.003 enables the surviving

spouse to sue in order to recover community

property, to sell or otherwise dispose of

community property to pay debts payable

out of the community estate, and to collect

claims owing to the community estate. The

survivor may be sued by a third party in a

matter relating to the community estate.

That section also grants to the surviving

spouse the authority needed under the

circumstances to exercise such other powers

as are necessary to preserve the community

estate, to discharge obligations payable out

of community property and to generally

"wind up community affairs."

The survivor is entitled to a

"reasonable commission" for administering

the community and can incur reasonable

expenses in the management of the estate.

Like any other fiduciary, the surviving

spouse is accountable to the deceased

spouse's heirs and/or devisees who are

entitled to their share of the remaining

community assets after the debts properly

payable out of the community assets have

been paid. See Tex. Est. Code §§ 453.006-

453.008 and Grebe v. First State Bank, 150

S.W.2d 64 (Tex. 1941).

Note: In 2007, the Legislature repealed the

provisions of the Probate Code relating to

the creation, administration and closing of

an administration by a “qualified

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community administrator.” Repealed Sec.

169 directed the community administrator to

pay debts within the time, and according to

the classification, and in the order

prescribed for the payment of debts as in

other administrations. Section 160(a)

simply directed the surviving spouse to

“preserve the community property,

discharge community obligations and wind

up community affairs.”

VII. ADMINISTRATION OF

DECEASED SPOUSE’S ESTATE

The purposes of a decedent's estate

administration are to collect the assets of the

estate, to pay the decedent's debts and to

distribute the remaining assets to the

decedent's heirs and/or devisees. In

addition, the administration of a married

decedent's estate may include the actual

partition of the community probate property.

As discussed previously, death works a legal

partition of the community probate assets,

but it is often necessary to open an

administration to effectively set aside the

homestead, exempt property and family

allowance, handle the claims of creditors

and/or divide the community probate

property among the surviving spouse and the

decedent's heirs and/or devisees.

A. Section 453.009

During formal administration, the

personal representative is granted authority

to administer not only the deceased spouse's

separate property but also the couple's joint

community property and the decedent's sole

management community property. The

surviving spouse may retain possession of

the survivor's sole management community

property during administration or waive this

right and allow the personal representative

to administer the entire community probate

estate. Tex. Est. Code § 453.009.

B. Authority of Representative

The authority of the personal

representative over the survivor's one-half of

the community should be limited to what is

necessary to satisfy the debts of the

deceased spouse properly payable out of

such community assets even if the

decedent's will purports to grant to the

representative more extensive powers over

the decedent's separate assets and one-half

interest in the community.

C. Executor’s Elective Power

However, if there is a will and the

surviving spouse is a beneficiary of the will,

the surviving spouse who accepts any

benefits under the will may have elected to

allow the executor to exercise more

extensive powers over his or her share of the

community assets during administration.

D. Comparing Family Code and

Estates Code Provisions

The Estates Code’s division of

authority dovetails with the contractual

management and liability rules of the Texas

Family Code and facilitates the personal

representative's or ability to step into the

decedent's shoes and satisfy the deceased

spouse’s debts in most situations. See Tex.

Fam. Code §§ 3.102 and 3.202.

1. Contract Debts

However, if the deceased spouse’s

sole management community and the joint

management community assets in

possession of the personal representative

and available to satisfy the deceased

spouse’s contractual creditors are

insufficient for that purpose, Tex. Est. Code

§ 101.052 indicates that the deceased

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spouse’s one-half interest in the surviving

spouse’s sole management community

property can be reached to satisfy those

creditors.

Note: One hundred percent of the other

spouse’s sole management assets had been

generally exempt from the claims of the

deceased spouse’s non-tortious creditors

during the marriage (as well as any

premarriage debts).

2. Tort Debts

Prior to the deceased spouse’s death,

all nonexempt community property was

liable for the tort debts of either spouse.

Section 101.052 suggests that only the

decedent’s one-half interest in the surviving

spouse’s sole management community may

continue to be liable for any tort debts of the

deceased spouse. In other words, an

argument can be made that the surviving

spouse’s one-half interest in the survivor’s

sole management community may no longer

be liable for any tort debts of the deceased

spouse.

E. Authority of the Surviving Spouse

Generally, when a personal

representative is administering the estate of

the deceased spouse, including the surviving

spouse's one-half of the decedent's sole

management community and the couple's

joint community, the surviving spouse's

fiduciary authority over the survivor's sole

management community property enables

the survivor to exercise all the powers

granted to the surviving spouse where there

is no administration pending. Tex. Est.

Code § 453.009. This statutory language

suggests that the survivor can deduct from

the special community being administered

"necessary and reasonable expenses" and a

"reasonable commission." The survivor

shall keep a distinct account of “all

community debts” allowed or paid. See

Tex. Est. Code § 453.006.

Note: Like their predecessors in the Texas

Probate Code, Sections 160 and 168, Texas

Estates Code Sections 453.003 and 453.006

still refer to “community debts” and

“community obligations,” carry forward

from pre-1967/1971 law; however, as

Professor McKnight explained, a

“community debt” or “community

obligation” should be interpreted to mean

nothing more than some community

property, or a portion thereof, is liable for

its satisfaction, the same meaning given by

the Supreme Court in Tedder. See IV, G,

supra.

F. Allocation of Liabilities after

Death

1. Probate Assets

As pointed out previously, the Texas

Estates Code's division of authority tracks

the contractual management and liability

rules of the Texas Family Code and

facilitates the personal representative's

ability to step into the decedent's shoes and

satisfy primarily the deceased spouse's

contractual debts, but it does not specifically

address the debts of the surviving spouse

which are not debts of the deceased spouse.

It also does not address the issues related to

which assets subject to administration are

liable for which debts.

2. Nonprobate Assets

In the past, many believed in the

“urban myth”: probate assets pass subject to

the decedent's debts whereas nonprobate

assets pass to their designated beneficiaries,

free of the decedent's debts. Today, there is

a growing body of statutory rules and

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common law which negates the application

of that myth. See Tex. Est. Code §§

111.053, 113.252, 114.006.

3. General Power Theory

Even if the Uniform Fraudulent

Transfer Act is not violated, the Texas

definition of a general power of appointment

would seem broad enough to capture most

nonprobate dispositions, including joint

tenancies and revocable trusts, within its

coverage and, thereby, subject the property

in question to the liabilities of the donee of

the power, either during the donee's lifetime

or at death, unless there is a specific

statutory exemption.

4. Abatement Generally

Despite the growing need for a

comprehensive statute which would

complement Sec. 111.053 of the Texas

Probate Code and define the rights of

creditors in and to the probate and

nonprobate assets of a deceased debtor, the

Legislature has only codified the order in

which property in the probate estate would

be liable for debts and expenses properly

chargeable to the probate estate. Tex. Est.

Code § 355.109.

5. Abatement Among Community and

Separate Assets

Sec. 355.110 of the Texas Estates

Code directs a representative to pay the

deceased spouse’s funeral expenses out of

the decedent’s separate and one-half of the

community, but gives directions on how to

pay the deceased spouse’s debts. The

potential conflict of interest is obvious; the

expenditure of separate funds to satisfy a

debt will inure to the benefit of the surviving

spouse while using community funds would

accrue to the benefit of the decedent's estate.

Presumably Sec. 3.203 of the Texas Family

Code would be relevant, and the facts and

circumstances surrounding the source of the

debt should be considered. For example, is

it a purchase money indebtedness? Is it

tortious or contractual in nature?

6. General Guidelines

The author is not aware of any

definitive cases on point that offer any clear

guidance. Accordingly, it is the author’s

opinion that certain claims should be paid

out of the decedent’s separate property or

the decedent’s one-half of community

assets. These claims would include funeral

expenses, separate property’s purchase

money indebtedness, and tort claims against

the decreased spouse only. Other claims,

like debts incurred for living expenses (e.g.,

credit cards and utilities), or for community

property purchase money indebtedness,

should be paid out 100% of the community

property under administration.

Note: If there is a will, language in the will

may direct the executor to pay the

decedent’s debts out of the decedent’s

“residuary estate.” This may be interpreted

to require the executor to pay any and all

debts for which the deceased spouse had

personal liability out of the deceased

spouse’s separate property and one-half of

the community. Absent that language,

certain debts should be paid out of both

halves of the community property under

administration.

G. Closing the Estate

Upon the death of the first spouse

and while record legal title still reflects that

some community assets are held in the

decedent's name, some are held in the

survivor's name and others are held in both

names, the surviving spouse and the heirs

and/or devisees of the deceased spouse are,

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in effect, tenants in common as to each and

every community probate asset, unless the

surviving spouse is the sole distributee of

some or all of the deceased spouse's one-half

interest in such assets.

Assuming that the decedent's one-

half community interest has been left to

someone other than the surviving spouse,

the respective ownership interests of the

survivor and the decedent's distributees are

subject to the possessory rights of either a

court appointed personal representative or

the surviving spouse for administration

purposes. When administration is

completed, the survivor and the distributees

are generally entitled to their respective

undivided one-half interests in each and

every community probate asset. Tex. Est.

Code § 101.001.

Note: A non-pro rata distribution of the

community following the first spouse’s death

is a frequent topic of discussion. That issue

is addressed in XXI, infra.

VIII. SURVIVING SPOUSE’S DEBTS

This outline focuses primarily on the

Legislature’s statutory design for handling

the debts of the spouses during the marriage

and the debts of the deceased spouse during

the probate administration of the deceased

spouse’s estate. As noted earlier, the Texas

Estates Code does not specifically address

the debts of the surviving spouse (defined

herein to mean a debt for which the

deceased spouse did not have personal

liability). Many lawyers have assumed that

the death of the first spouse should not affect

the substantive rights of the spouses’

creditors. But, it does! Borrowing a phrase

from Professor Paulsen, an unsecured

creditor of the surviving spouse may not

have any special rights against the deceased

spouse’s estate. See Note V(D), supra.

A. Section 101.052

Section 101.052 of the Texas Estates

Code is captioned: Liability of Community

Property for Debts of Deceased Spouse.

Subsection (a) states that community

property subject to sole or joint control of “a

spouse” continues to be subject to the

liabilities of “that spouse.” Does the term “a

spouse” refer only to the deceased spouse or

to either spouse? In view of the caption, it is

arguable the reference is only to the

deceased spouse.

B. Secured Debts

If Section 101.052 only refers to the

debts of the deceased spouse, that

construction suggests that a creditor of the

surviving spouse who has a security interest

in former community property which is not

subject to administration (i.e., the surviving

spouse’s sole management community

property) does not have a claim against the

deceased spouse’s estate, if the deceased

spouse did not otherwise have personal

liability for the debt. The surviving spouse

still has personal liability; her nonexempt

separate property and undivided one-half

interest in the couple’s former community

property (plus whatever nonexempt property

she inherits) can be reached to satisfy the

debt. The creditor’s security interest in the

survivor’s former sole management property

remains attached to the property. However,

except to the extent of the security interest,

the decedent’s property (i.e., the deceased

spouse’s separate property and one-half

interest in the joint management community

or sole management community) may not be

reachable by the surviving spouse’s

creditors.

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C. Unsecured Debt

If the creditor is an unsecured

creditor of only the surviving spouse (i.e.,

the deceased spouse did not have any

personal liability), obviously the surviving

spouse’s nonexempt separate property and

one-half interest in the former community

property (plus whatever the surviving

spouse inherits) remain liable for the debt.

However, the statutory framework suggests

that the decedent’s separate property and

one-half interest in the former community

property may not be reachable by the

creditor unless (and to the extent) such

property passes to the surviving spouse by

reason of the deceased spouse’s death.

Other distributees of the deceased spouse’s

estate would appear to acquire their

inheritance, free of the surviving spouse’s

debts.

D. The Rationale

Consistent with Professor Paulsen’s

approach (see Note V(D), supra), the

essential argument is that the Texas Family

Code’s liability rules only apply during the

marriage. Once the marriage terminates by

reason of the first spouse’s death or divorce,

the rules change. Sometimes the changes

work in favor of a creditor. For example,

the deceased spouse’s contract creditors can

reach the decedent’s one-half of the

surviving spouse’s former special

community property. During marriage, they

could not.

Sometimes the change works against

the creditor. Under Section 101.052 only

the decedent’s one-half interest in the

surviving spouse’s former special

community is liable for the decedent’s tort

debts. During marriage, all of the

community was liable for either spouse’s

tortious debts.

The Legislature’s failure to expressly

address the debts of the surviving spouse

implies that the creditors of the surviving

spouse do not have claims against the

deceased spouse’s estate. Such creditors

were not creditors of the deceased spouse.

The deceased spouse’s estate (the decedent’s

separate property and one-half of the former

community property) passes subject to the

deceased spouse’s debts, not the surviving

spouse’s debts.

E. Summary

Using this rationale, following the

death of the first spouse, the proper analysis

should begin with the answers to the

following questions:

1. Whose debt was it? The

deceased spouse’s? The surviving

spouse’s? Or both spouses’?

2. Is the debt secured? Yes or

no? If yes, is the property securing the debt

subject to administration?

3. If an unsecured debt was

incurred by the deceased spouse, was it a

debt for a “necessity”? Or, was the

deceased spouse acting as the agent of the

surviving spouse?

4. If an unsecured debt was

incurred by the surviving spouse, was it a

debt for a “necessity”? Or, was the

surviving spouse acting as the agent of the

deceased spouse?

5. If the debt was for a necessity

of either spouse incurred before the first

spouse’s death, the surviving spouse is still

personally liable to the creditor, and the

creditor has a legitimate claim against the

estate of the deceased spouse.

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6. If a debt was incurred during

the marriage while one spouse was acting as

the agent of the other spouse, the surviving

spouse is still personally liable to the

creditor, and the creditor has a legitimate

claim against the estate of the deceased

spouse.

Recall, the marital relationship, in and to

itself, does not make one spouse the agent of

the other spouse.

F. Another Argument

However, if the reference in Section

101.052(a) to “a spouse” is to either spouse,

that section can be interpreted to mean that

the couple’s joint community property and

the survivor’s sole management community

property remains liable for the surviving

spouse’s debts. Subsection (b) still suggests

that the decedent’s sole management

community property would not be liable for

the surviving spouse’s debts.

IX. CREDITORS’ RIGHTS DURING

THE MARRIAGE

During the marriage, the rights of the

couple’s creditors are more clearly defined.

If both spouses have personal liability, the

entire nonexempt marital estate, his

separate, her separate and their community

estate, can be attached by the creditor during

the existence of the marriage. Generally,

excluded from this grouping of marital

assets would be those assets exempt from

creditors’ claims under the Texas Property

Code §§ 41.001– 42.0022 (the homestead,

certain items of personal property and

certain savings plans) and the Texas

Insurance Code §§ 1108.51-1108.53

(insurance policies and proceeds). For the

rule, refer to IV, supra.

A. Joint and Several Liability

The entire nonexempt marital estate is at

risk if the debt is the debt of both spouses

because (i) they both signed the contract; or

(ii) they both committed the tort. In

addition, both spouses may have personal

liability for the debt incurred by one spouse

because the spouse who actually incurred

the debt was acting as the agent of the other

spouse – the Principal-Agent Rule. Even if

the Principal-Agent Rule is not applicable, if

the debt is owing to a creditor who provided

goods or services deemed reasonable

necessaries for the support of one spouse (or

a child under Tex. Fam. Code § 154.001),

both spouses also have personal liability –

the Necessaries Doctrine.

B. Tort Debt of One Spouse

If the debt is, in fact, the tort debt of

only one spouse (i.e., the other spouse does

not have personal liability pursuant to III, A,

supra), the nonexempt separate property of

the spouse who committed the tort and the

entire nonexempt community estate (their

joint community property, his special

community property and her special

community) are at risk. Only the other

spouse’s separate property is exempt. If the

tort was actually committed prior to the

marriage, all of the other spouse’s special

community property is not subject to

execution.

C. Contract Debt of One Spouse

If the debt is, in fact, a contract debt by

only one spouse and the other spouse does

not have personal liability under III, A,

supra, the nonexempt separate property of

the spouse who incurred the debt and the

nonexempt special community property of

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that spouse and the joint community

property are at risk. The other spouse’s

separate property and all of the other

spouse’s special community property are not

at risk.

D. Observations

In many situations, the entire community

estate is going to be at risk of execution

because of either the nature of the debt itself

or the type of community property owned by

the spouses. Even if the debt was incurred

during the marriage by only one spouse, the

Principal-Agent Rule or the Necessaries

Doctrine may be applicable, creating joint

and several liability. Even if neither the

Principal-Agent Rule nor the Necessaries

Doctrine is applicable, most, if not all, of the

community assets may be their joint

community property, even if certain assets

are held in one spouse’s name. See IV and

III, E, supra. Perhaps more importantly,

even the other spouse’s separate property is

at risk if that spouse cannot prove by clear

and convincing evidence that a separate

asset is separate property due to the

community property presumption. Tex.

Fam. Code § 3.003. Recall that creditors

can rely on the community presumption.

E. Equitable Principles

A court is, however, directed to

determine, as deemed just and equitable, the

order in which particular assets are subject

to execution. Tex. Fam. Code § 3.203.

X. KEY MARITAL PROPERTY

CONCEPTS

Accordingly, an understanding of the

characterization/reimbursement rules and

the management/liability rules is essential

when doing joint estate planning for a

married couple, independently for either

spouse or an individual planning to marry.

However, there are, in the author’s opinion,

nine key concepts that should be considered

and perhaps even explained to the client

during the planning process.

A. The Community Presumption

Generally, all assets of the spouses

on hand during the marriage and upon its

termination are presumed to be community

property, thereby placing the burden of

proof on the party (e.g., a spouse, or that

spouse's personal representative, or the

heirs/devisees of the spouse) asserting

separate character to show by "clear and

convincing evidence" that a particular asset

is, in fact, separate. Tex. Fam. Code §§

3.001, 3.003.

B. Community Claims for

Reimbursement

Reimbursement between the marital

estates usually arises when one spouse’s

separate property is improved through the

expenditure of community funds.

Reimbursement may also be applicable if

separate funds are expended to benefit

community property. In addition, the

expenditure of community time, talent and

labor in excess of what is necessary to

reasonably manage one's separate property

can give rise to a community claim for

reimbursement to the extent that excess

time, talent or labor is not compensated.

Another common reimbursement situation is

where one spouse owns separately an

insurance policy on that spouse's life and

uses community property to pay the

premiums, and upon the insured spouse's

death, the proceeds are payable to a third

party. Tex. Fam. Code §§ 3.401 – 3.410.

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C. Special Community Property

The term “special community

property” was originally defined by Texas

courts as that portion of the community

estate which was under the wife’s exclusive

control and not liable for the husband’s

debts following the landmark decision of

Arnold v. Leonard, 273 S.W. 799 (Tex.

1925), where the Texas Supreme Court held

that the legislature could not define the rents

and revenue from the wife’s separate

property as her separate property, but could

exempt those assets, her “special community

property,” from his debts. Moss v. Gibbs,

370 S.W.2d 452 (Tex. 1963). Today, it is

common practice to refer to the community

assets subject to either spouse’s “sole

management, control and disposition” under

Section 3.102(a) as his or her “special

community property.”

D. Fraud on the Community

In Arnold v. Leonard, supra, the

Court explained “. . . that the statutes

empowering the husband to manage the . . .

community assets made the husband

essentially a trustee, accountable as such to

the . . . community.” See also Howard v.

Commonwealth Building and Loan Assn., 94

S.W.2d 144 (Tex. 1936), where the court

explained that, where title to a community

asset is held in one spouse’s name, that

spouse has legal title and the other has

equitable title, explaining: “That one in

whose name the title is conveyed holds as

trustee for the other. Patty v. Middleton, 82

Tex. 586, 17 S.W. 909 (Tex. 1891).” A

breach of that fiduciary duty will likely

result in a “fraud on the community” claim

when the marriage terminates. See Tex.

Fam. Code § 7.009.

E. Marital Liabilities

The Texas Family Code creates an

“in rem” system of marital property liability.

Tex. Fam. Code §§ 3.201 – 3.203. A

spouse’s separate property and special

community property, as well as the joint

community property, are liable for that

spouse’s debts during the marriage. If the

liability is a tort debt incurred during the

marriage, the other spouse’s special

community property is also liable for the

debt (the other spouse’s separate property is

exempt).

If the debt is not a tort debt incurred during

the marriage, the other spouse’s separate

property and special community property

are exempt during the marriage from the

debt unless the other spouse is personally

liable under other rules of law (e.g., the

“necessaries rule”). In which event, the

other spouse’s property (i.e., that spouse’s

special community and separate) is liable as

well.

Note: The marriage relationship, in and to

itself, does not make one spouse personally

liable for the debts of the other spouse

unless it is a debt for a “necessary.” Tex.

Fam. Code § 3.201.

F. Death of a Spouse

When a married resident of Texas

dies, the marriage terminates and

community property ceases to exist.

Nonprobate assets pass to the designated

beneficiaries. Tex. Prob. Code § 450.

Death works a legal partition of the

community probate assets; the deceased

spouse's undivided one-half interest passes

to his heirs and/or devisees, and the

surviving spouse retains her undivided one-

half interest therein. Tex. Est. Code §

101.001. A spouse’s testamentary power is

generally limited to that spouse’s separate

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property and undivided one-half interest in

the community property. Avery v. Johnson,

108 Tex. 294, 192 S.W. 542 (1917).

G. Fraud/Reimbursement Claims

Upon the death of the spouse who

has a reimbursement claim or claim for

fraud on the community against the

surviving spouse, the claimant spouse’s one-

half interest in the claim passes to that

spouse's heirs or devisees.

1. Duty of Personal Representative

If the heir or devisee is not the other

spouse (or if the estate is insolvent), the

personal representative has a duty to

pursue the claim against the surviving

spouse.

2. Liquidity Problems

The existence of the claim may result in

a much larger estate than had been

anticipated. The deceased spouse's

interest in the claim is included in the

deceased spouse's gross estate for estate

tax purposes and may cause an

immediate liquidity problem.

3. Conflict of Interests

The existence of the claim may create a

conflict of interest for both the personal

representative and the attorney who are

attempting to represent the entire family.

H. Claimant as the Surviving Spouse

Upon the death of the other spouse,

the asset which is the subject of the

community claim for reimbursement will

remain the owner's separate property and

pass under the owner's will or by intestate

succession; however, the claim of the

surviving spouse continues to exist, as does

any claim that the deceased spouse

committed a fraud on the community or

attempted to unilaterally transfer joint

community property prior to death, or at

death, pursuant to a nonprobate disposition.

1. Conflict of Interests

Either situation can create a conflict of

interest (i) between the surviving spouse

and the decedent's heirs or devisees or

(ii) between the heirs or devisees where

the heirs or devisees of the separate

property are not the same as the heirs or

devisees of the community property.

This potential conflict can be

particularly troublesome for the personal

representative or attorney who attempts

to represent all members of the family.

2. Election

The doctrine of equitable election may

force the surviving spouse to (i) assert

the claim and waive any and all benefits

under the will or (ii) accept the benefits

conferred in the will and forego the

claim. The doctrine of equitable election

is applied where any devisee receives a

benefit and suffers a detriment in a will.

Accordingly, the election concept might

work against any party involved.

3. Other Problems

The existence of such a claim with an

uncertain value is likely to delay the

administration of the estate and create

liquidity problems.

I. Closing the Estate

Upon the death of the first spouse

and while record legal title still reflects that

some community assets are held in the

decedent's name, some are held in the

survivor's name and others are held in both

names, the surviving spouse and the heirs

and/or devisees of the deceased spouse are,

in effect, tenants in common as to each and

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every community probate asset, unless the

surviving spouse is the sole distributee of

some or all of the deceased spouse's one-half

interest in such assets. When administration

is completed, the survivor and the

distributees are generally entitled to their

respective one-half interests in each and

every remaining community probate asset.

Tex. Est. Code § 101.001.

J. Non-Pro Rata Distributions

A non-pro rata distribution of the

community following the first spouse’s

death is a frequent topic of discussion. That

issue is addressed in XXI, infra.

XI. CONSEQUENCES OF

MARRIAGE

Absent a pre-marital agreement,

what effect is a marriage going to have on

the client’s “estate.” The first response may

be that, even absent effective planning, any

property the client owned before the

marriage can (but not necessarily will)

remain his or her separate property.

A. Existing Assets

Generally, as soon as the client

marries, each and every item of property of

either spouse will be presumed to be

community property. Each traceable asset

acquired prior to marriage, as well as any

property acquired during the marriage as

separate property (e.g., a gift or inheritance),

can remain the client’s separate property, if

the community property presumption can be

overcome by clear and convincing evidence.

B. Future Acquisitions

However, the spouses’ respective

salaries and other forms of compensation

(i.e., employer contributions to retirement

plans) will be community property. The

income being generated by their respective

separate properties will be community

property. Any other assets acquired by either

spouse during the marriage will be presumed

community property unless proven to be

separate property (e.g., traceable to clearly

identifiable separate property). Tex. Fam.

Code §§ 3.001 - 3.002.

C. Unilateral Gifts/”Fraud”

In addition, the client needs to

understand that any unilateral gifts (inter

vivos or nonprobate) of the client’s sole

management community property by the

client to a child, a child by a prior marriage,

or other third party may later be found by a

probate or divorce court to have been a

breach of a duty owing by the donor spouse

to the other spouse and a “fraud on the

community.”

Note: A unilateral attempt to transfer joint

community property may be void as a matter

of law. See Tex. Fam. Code § 3.102.

D. Reimbursement Issues

Whether the marriage eventually

terminates in death or divorce, its

dissolution will be even more complicated

due to the possibility of reimbursement

issues accruing during the marriage and

maturing upon its termination. See II, B,

and II, D, supra.

E. Debts

Further, if the spouse incurs a tort

debt during marriage, the creditor may be

able to enforce any resulting judgment

against any and all community property,

even if the client does not have personal

liability for the debt, and the creditor can

take advantage of the community

presumption. A breach of contract claim will

expose the client’s one-half interest in the

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joint community and the spouse’s special

community to liability as well. A debt,

contract or tort, incurred before marriage by

the spouse will expose the client’s interest in

any joint or the spouse’s special community

property to liability.

F. The Necessaries Doctrine

A spouse who fails to discharge his

or her duty of support of the other spouse is

liable to others who provide necessaries to

the other spouse. Tex. Fam. Code §

2.501(b). Accordingly, when third parties

(e.g., doctors, hospitals, nursing homes –

perhaps even lawyers) provide services

deemed reasonably necessary for one

spouse’s support, both spouses become

personally liable for the costs of such

services. While the spouse who actually

incurs the debt may be deemed to be

“primarily liable,” both spouses are “jointly

and severally” liable to the third party under

the necessaries doctrine. Tex. Fam. Code §

3.201(a)(2). A debt incurred for necessaries

will expose the entire non-exempt marital

estate to liability. Tex. Fam. Code § 3.202.

G. Possible Divorce

In the event of a divorce, generally

any community property will be subject to

an equitable division by the divorce court

and separate property will not. See Tex.

Fam. Code § 7.001. Sections 7.006 and

7.009 explain how the divorce court will

deal with any reimbursements or fraud on

the community claims.

Note: While contractual alimony can be

incorporated into a divorce decree, absent

such an agreement, the Texas divorce court

cannot award alimony to a spouse. Alimony

is contrary to Texas public policy. A limited

form of alimony, “maintenance,” is

available in certain defined situations. See

Tex. Fam. Code §§ 8.001 – 8.059.



H. Eventual Death of First Spouse

Upon the first spouse’s death, the

deceased spouse will only have testamentary

power over the decedent’s separate property

and one-half of the community property.

The surviving spouse can retain his or her

own separate property and one-half of the

community after the deceased spouse’s

debts are paid. The surviving spouse may

have homestead rights and/or rights to an

“allowance” or to certain exempt personal

property.

I. Portability

The Tax Relief, Unemployment

Insurance Reauthorization and Job Creation

Act of 2010 introduced the concept of

“portability” to estate and gift taxation.

Portability creates the possibility that the

surviving spouse can take advantage of the

unused tax applicable exemption amount for

estate and gift tax purposes from the estate

of a pre-deceased spouse. For a complete

discussion, see Marc Bekerman, Portability

of Estate and Gift Tax Exemptions Under

TRA 2010, Tax Management Estates, Gifts

and Trusts Journal, May/June 2011. The

American Taxpayer Relief Act of 2012

made portability “permanent.”

1. “Applicable Exclusion Amount”

The “applicable exclusion amount”

is the sum of a decedent’s basic exclusion

amount (currently $5 million plus and

indexed for inflation) plus, in the case of a

surviving spouse, the “deceased spousal

unused exclusion amount” – the basic

exclusion amount of the deceased spouse,

less the amount exemption actually used at

the deceased spouse’s death (the “DSUE

amount”).

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2. Limitations

The surviving spouse’s estate is

limited to the unused exclusion amount of

his/her most recent deceased spouse. The

surviving spouse’s estate cannot take

advantage of the deceased spouse’s unused

exclusion unless the deceased spouse’s

estate timely filed U.S. Estate Tax Return

reflecting the amount of the unused

exclusion amount.

3. Effect on Gift Tax and GST Tax

While it appears that a surviving

spouse will be able to utilize the deceased

spouse’s unused exclusion amount in

making inter vivos gifts, there are a number

of unanswered questions concerning its

application, which are beyond the scope of

this paper. Portability does not apply to the

generation-skipping transfer tax. Any

unused generation-skipping transfer tax

exemption cannot be used to increase the

surviving spouse’s exemption.

4. Overlooked Resource

Going into a second marriage, a

surviving spouse should consider any DSUE

amount from a deceased spouse as a

separate and valuable resource to be utilized

like any other separate property resource. In

addition, if the value of the prospective

spouse’s estate is likely to be less than the

basic exclusion amount, the potential benefit

of the prospective spouse’s DSUE amount

should not be ignored in the event the client

survives the prospective spouse.

J. To He_ _ (Double Hockey Sticks)

With This!

In view of all of these complications, the

client may wish to “opt out” of the Texas

community property regime, a result that

can be accomplished in a well-crafted pre-

marital agreement. Through such an

agreement, parties intending to marry can

address these issues, perhaps even create a

“community free” marriage where all

property is the separate property of one

spouse or both spouses and possibly

eliminate other spousal rights. See XIII,

XIV, infra.

XII. UNILATERAL PLANNING

Even in the absence of a pre-marital

agreement, the client unilaterally can take

steps prior to and during the marriage to

minimize the complications of a subsequent

marriage to maintain the separate character

of the client’s separate property and avoid

many other issues that would otherwise arise

during the subsequent marriage.

A. Segregated Accounts

At a minimum, the client should be

advised to “keep separate, separate” by

maintaining existing assets in the client’s

name and opening bank and brokerage

accounts in the client’s individual name

(perhaps with a designation “separate

account”) and only depositing into the

accounts separate property. Contempor-

aneous business records showing the source

of any and all separate deposits should be

retained in the event proof of separate

character of the account is later needed.

Note: The creation and funding of a

revocable trust prior to marriage may be an

effective way to maintain the separate

character of the settlor’s assets

B. Avoid Inadvertent Commingling

Since income from separate property

is generally community property, any

interest (or other income generated by a

separate investment) should be paid into a

“special community account” in order to

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avoid a “commingling” of community and

separate funds in the same account. If an

account is “commingled,” the account

becomes community property.

Note: Prior to the marriage, the client may

want to consider creating an entity, like a

family limited partnership, and exchange

some portion of the client’s estate for

interests in the partnership. The partnership

interest remains the client’s separate

property; the assets of the partnership

should be treated as partnership assets if the

partnership is properly administered.

Paying a reasonable salary for services

rendered should avoid Jensen claims. Not

making community contributions during the

marriage can avoid reimbursement and

fraud on the community claims.

C. 401(k) Plans

While Texas generally follows the

“apportionment” approach to determine the

marital property character of defined benefit

and contribution retirement plans, the

separate nature of such a defined

contribution plan brought into a marriage

can easily be lost during the marriage

through commingling. To maintain the

separate character of the plan as it existed on

the date of the marriage, the separate

property interest will have to be traced using

the same tracing rules that apply to non-

retirement assets. See Tex. Fam. Code §

3.007(a). For employer-provided stock

option plans and restricted stock plans, see

Tex. Fam. Code § 3.007(d). Defined benefit

plan characterizations depend on case law.

D. Earmark Future Holdings

Any future gift to or inheritance by

the client, or property purchased with

separate funds, should be held in the client’s

name only. Further, titled assets, especially

real estate, should be conveyed to the client

“as separate property.” Again,

contemporaneous business records can serve

as evidence of the nature of the transaction

and the separate character of the asset and

should be retained.

E. Family Entities

If the client is to become a partner in

a family partnership, a member in a family-

oriented limited liability company or a

shareholder in a closely-held corporation,

the client’s interest should be given to the

client as a gift (or purchased by the client

with traceable separate property). Again

contemporaneous business records of the

nature of the transaction should be retained.

See XVIII, infra, Family Business Planning.

F. Closely Held Business Interests

Capital contributions to any existing

or subsequently acquired separately owned

closely held business interest should be

funded with clearly documented separate

funds or structured in the form of a loan

from community funds. If the client

expends any “time, talent or labor” in the

management of the entity, reasonable

documented compensation for those services

can hopefully avoid a later reimbursement

claim by the client’s spouse. See XVIII,

infra, Family Business Planning.

G. Asset Protection Trusts

Any and all of future inter vivos or

testamentary gifts to the client by others

could be placed by the donor in an asset

protection trust for the client’s benefit. The

spendthrift provisions will help not only

insulate the interest from the claims of the

client’s creditors, but also any community

property claims of the spouse, the spouse’s

successors or creditors. The inclusion of a

statement in the trust agreement that it is the

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settlor’s intent that any and all interests of

the client, as well as any and all distributions

of the trust, are the client’s separate property

may not be conclusive, but may prove to be

persuasive in future litigation. Limiting

distributions of income and/or principal to

an ascertainable standard (health, education,

maintenance, or support) is especially

important if the client is going to be the

trustee or is going to be given general power

of appointment. If a third party is going to

serve as trustee, income distributions to the

client could be at the discretion of the trustee

or pursuant to an ascertainable standard.

Caution should be exercised in granting any

other powers to the client over the trustee or

the trust estate. Carefully planning, drafting

and administering the trust could prove to be

persuasive in maintaining the client’s

interests in the trust, as well as distributions

from the trust, as separate property. See

XIX, infra, Marital Property Rights in

Irrevocable Trusts.

H. Fraud on the Community/

Reimbursement Issues

An understanding of the concepts of

“wrongful transfers” and “reimbursement”

can minimize the risks that such issues will

become material issues when the marriage

eventually terminates. For example, the

client can avoid using community property

to make improvements to separate property

or to make principal and interest payments

on indebtedness secured by separate

property or to pay the premiums on any

separately owned life insurance policies.

Gifts to children by a prior marriage and

others should be given from separate sources

or with documented approval of the spouse

if community property is given.

I. Take Advantage of Portability

If the previous marriage ended in the

prior spouse’s death, portability allows for

the DSUE amount from the deceased

spouse’s estate to be used during the lifetime

of the surviving spouse or at the surviving

spouse’s death. Thus, portability is another

reason gifts to or for the benefit of the

client’s descendents should be considered.

J. Legal Fees

Legal fees paid by the client during

the marriage for this type of planning should

be paid by the client with separate property

to avoid any claim by the spouse that the

client misused their community property to

the spouse’s detriment.

XIII. PREMARITAL AGREEMENTS –

FORMALITIES

If the couple is open to pre-marital

planning, Texas law permits persons

intending to marry to enter into property

agreements that can result in a community

free marriage. The ability to accomplish

this result depends initially on satisfying the

formality requirements specified in the

Texas version of the Uniform Premarital

Agreement Act.

A. Uniform Premarital Agreement

Act

The 1987 Legislature enacted the

Texas version of the Uniform Premarital

Agreement Act. This legislation attempted

to define what parties intending to marry

could accomplish in a premarital agreement.

However, the power to contract in these

matters is ultimately controlled by the Texas

Constitution. See XIV, infra. The Uniform

Premarital Agreement Act did affect the

formal requirements and enforceability of

premarital agreements. Among other

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technical changes, there was a dramatic shift

in the burden of proof when the validity of

an agreement is placed in question.

B. Formalities

As under prior law, a premarital

agreement must be in writing and signed by

the parties. It need not be witnessed,

acknowledged or sworn to. It is enforceable

without consideration. Tex. Fam. Code §

4.002. It becomes effective on marriage.

Tex. Fam. Code § 4.004. It can be amended

by a written agreement of the parties. Tex.

Fam. Code § 4.005.

C. Burden of Proof

Under prior law, the burden of proof

was imposed on the party seeking to enforce

the agreement to establish by clear and

convincing evidence that the other party

gave “informed consent” and that the

agreement was not obtained by fraud, duress

or overreaching. Now, the burden of proof is

placed on the party asserting the

agreement’s invalidity. Tex. Fam. Code §

4.006.

D. The Opponent’s Burden

The party opposing the agreement

must now prove that (i) the agreement was

not entered into voluntarily, or (ii) it was

unconscionable when it was executed and

the opponent was not provided with a fair

and reasonable disclosure of the proponent’s

financial situation, or did not waive such

disclosure and did not have adequate

knowledge of such situation. In other words,

there is a statutory presumption of validity.

1. Involuntariness

The issue of involuntariness (i)

relates to the issue of whether the opponent

entered into the agreement “freely” and (ii)

incorporates effectively the possible

contractual defenses of competency, fraud,

misrepresentation, duress and coercion as

evidenced by the terms of the agreement or

the surrounding facts and circumstances.

Other relevant factors may be the

opponent’s understanding of the agreement

at the time it was executed and whether the

opponent had adequate time to consider the

terms of the agreement prior to execution.

See Fullenweider and Rainey, “Litigating

Premarital Agreements,” Advanced Family

Law Course, State Bar of Texas (1988).

2. Unconscionability

Section 4.006(b) of the Texas Family

Code provides that the issue of

unconscionability is a question of law to be

decided by the court, not the jury. The

relevant factors for the court to consider

may include the negotiating atmosphere, the

relative bargaining abilities of the parties,

and over-reaching by a party, as well as the

legality of the contract and whether or not it

violates public policy. Fullenweider and

Rainey refer to the Uniform Premarital

Agreement Act, 9(b) UCA 20, to include

factors such as concealment of assets and

sharp dealing not consistent with the

obligation of marital partners to deal fairly

with each other. See Fullenweider, supra.

However, it is important to remember that,

according to Sec. 4.006(b), even an

unconscionable agreement can be enforced

if it was entered into voluntarily by an

opponent who was either provided fair and

reasonable disclosure or who waived such

disclosure or who did not already have

adequate knowledge of the financial

situation of the proponent.

3. Waiver

Generally, in order to be valid, a

waiver of a statutory right must be a

voluntary and intentional release of the

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right. It must be clear, specific and

unequivocal. The party signing the waiver

must have full knowledge of its

consequences.

4. Fairness

Notwithstanding the discussion of

involuntariness and unconscionability, it is

important to remember that there is no

requirement that a premarital agreement be

fair to be enforced. In Chiles v. Chiles, 779

S.W.2d 127 (Tex. App.–Houston [14th

Dist.] 1989, writ denied), overruled on other

grounds by Twyman v. Twyman, 855 S.W.2d

619 (Tex. 1993), the court held: “Parties

should be free to execute agreements as they

see fit and whether they are ‘fair’ is not

material to validity.” Accordingly, Texas

law currently appears to require only that a

premarital agreement be fairly entered into

and not that it be fair in application to both

parties.

5. Common Law Defenses

In Daniel v. Daniel, 779 S.W.2d 110

(Tex. App.–Houston [1st Dist.] 1989, no

writ), the court discussed whether old Sec.

5.46’s comparable section for marital

agreements, old Sec. 5.55, abolishes

common law contract defenses (e.g. such as

fraud, duress and competency), and

concluded that it did not. However, the

predecessor to Sec. 4.006 eliminated the

common law defenses for agreements

executed on or after September 1, 1993, but

they still appear to be incorporated into the

concepts of involuntariness or

unconscionability.

6. Cases

In Sheshunoff v. Sheshunoff, 172

S.W.3d 686 (Tex. App.–Austin 2005, pet.

denied), the court discussed the premise that

premarital agreements are presumptively

enforceable, even if they are

unconscionable, unless they were entered

into unfairly. Other courts have followed

this presumption that premarital agreements

are enforceable. See Larson v. Prigoff, 2001

WL 13352 (Tex. App.—Dallas, Jan. 8,

2011).

E. Statute of Limitations

The statute of limitations applicable

to any breach of the agreement is tolled until

the marriage is terminated. Equitable

defenses, such as laches and estoppel, are,

however, preserved. Tex. Fam. Code §

4.008.

F. Disclosure/Assistance of Counsel

The law does not require that the

parties be represented by separate legal

counsel at the time of the agreement;

however, the lack of independent counsel

representing the party opposing the

agreement’s enforcement is likely to be an

important factor in determining an

agreement’s enforceability. Failing to fully

disclose the client’s financial situation can

be problematic even if a waiver of such

information is obtained from the other party.

G. Re-execution Once Married

Some practitioners follow the

practice of having the couple re-execute the

premarital agreement following the

wedding, a practice which is not necessary,

in the author’s opinion, if the original

agreement is a properly drafted “partition

and exchange agreement.” Further, the

Texas Family Code states that a premarital

agreement actually becomes effective upon

marriage.

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XIV. PREMARITAL AGREEMENTS –

SUBSTANCE

Prior to 1987, the Texas Family

Code granted blanket authority to parties to

enter into such agreements as they desired,

subject, of course, to the limitations of the

Texas Constitution and other public policy

concerns. The Uniform Premarital

Agreement Act, which includes a laundry

list of subjects that can be addressed in a

premarital agreement, was adopted in 1987.

Today, the parties can still enter into such

property agreements as they may desire, but

the agreement is still subject to the

limitations of the Texas Constitution and

certain public policy concerns.

A. Mere Agreement Rule

In 1902 the Texas Supreme Court

announced what became known as the mere

agreement rule: “The question whether

particular property is separate or community

must depend upon the existence or

nonexistence of the facts, which, by the

rules of law, give character to it, and not

merely upon the stipulations by the parties

that it shall belong to one class or the other.”

Kellet v. Trice, 95 Tex. 160, 66 S.W. 51

(1902). The net effect of the mere

agreement rule is that the constitutional

definition of separate property limits the

flexibility of spouses and those about to

marry in their property agreements.

Note: The mere agreement rule today can

be summarized as follows: The provisions

of an agreement which attempt to change

the character of property in a manner not

authorized by Art. XVI, Sec. 15, are void.

B. Constitutional Amendments

The 1948 amendment to Art. XVI,

Sec. 15, permitted spouses to partition and

exchange presently existing community

property. The 1980 amendment to Art. XVI,

Sec. 15 authorized the creation of separate

property in more ways:

1. Premarital Partitions

Persons intending to marry can

partition and exchange community property

not yet acquired. See also Tex. Fam. Code §

4.003.

2. Spousal Partitions

Spouses may now partition and

exchange not only presently existing

community property but also community

property not yet in existence into the

spouses' separate properties. See also Tex.

Fam. Code § 4.102.

3. Income from Separate Property

Spouses may also agree that income

from one spouse's separate property will be

that spouse's separate property. See also

Tex. Fam. Code § 4.103.

4. Spousal Donations

A gift by one spouse to the other

spouse will be presumed to include the

income generated by the donated property so

that both the gift and the future income from

the gift are the donee spouse's separate

property. See also Tex. Fam. Code § 3.005.

Note: The 1999 amendment to Art., XVI,

Sec. 15 permitted spouses to convert by

agreement separate property into

community property beginning on January

1, 2000.

C. Sec. 4.003, Texas Family Code

Currently, parties to a premarital

agreement are authorized by statute to

contract with respect to:

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1. The rights and obligations of each of

the parties in any of the property of

either or both of them whenever and

wherever acquired or located.

2. The right to buy, sell, use, transfer,

exchange, abandon, lease, consume,

expend, assign, create a security

interest in, mortgage, encumber,

dispose of, or otherwise manage and

control property.

3. The disposition of property on

separation, marital dissolution, death,

or the occurrence or nonoccurrence

of any other event.

4. The modification or elimination of

spousal support.

5. The making of a will, trust, or other

arrangement to carry out the

provisions of the agreement.

6. The ownership rights in and

disposition of the death benefit from

a life insurance policy.

7. The choice of law governing the

construction of the agreement.

8. Any other matter, including their

personal rights and obligations, not

in violation of public policy or a

statute imposing a criminal penalty.

D. Standard Provisions

It is common for premarital

agreements to simply confirm the status of

certain assets under Texas law. For

example, the parties agree that certain

itemized assets brought into the marriage

and their mutations are to remain the

owner’s separate property. They may also

confirm that anything acquired during

marriage by gift, devise or descent will be

separate property. They may even agree that

such separate property will not be subject to

an equitable division at divorce. Eggemeyer

v. Eggemeyer, 554 S.W.2d 137 (Tex. 1977)

and Cameron v. Cameron, 641 S.W.2d 210

(Tex. 1982).

E. Income from Separate Property

Parties may wish to agree that

income from separate property is the

owner’s separate property. Since the

Constitution expressly authorizes only

spouses to make such agreements and not

persons intending to marry, it may be

advisable to draft such an agreement as a

partition, since both spouses and persons

intending to marry can partition community

property not yet in existence (i.e., future

income from separate property).

Accomplishing this result through a

partition, however, may not be necessary

since by statute a premarital agreement

becomes effective on marriage; thus,

spouses are really making the agreement.

Tex. Fam. Code § 4.004. On the other hand,

the Constitution does distinguish between

parties intending to marry and spouses. See

Fanning v. Fanning, 828 S.W.2d 135 (Tex.

App.–Waco 1992), rev’d in part on other

grounds, 847 S.W. 2d 225 (Tex. 1993);

Dokmanovic v. Schwarz, 880 S.W.2d 272

(Tex. App.–Houston [14th Dist.] 1994, no

writ).

F. Wages, Salaries, Personal

Earnings

Following the passage of the 1980

amendment, some practitioners questioned

whether the parties to a premarital

agreement could agree that wages and

salaries and other personal earnings would

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be the acquiring spouse’s separate property.

For example, Professor Sampson noted:

It remains to be seen whether revising

the type of agreement entered into here

to contemplate a present partition of

future earnings will suffice to take the

parties completely out of the

community property system.

Generally, I hope not, although I also

tend to believe that folks ought to be

able to do what they want with their

property. On the other hand, an

agreement such as this between a

doctor and his to be housewife seems

clearly abusive and overreaching.

Editor’s note, Family Law, State Bar

Section Report, Vol. 87-6, Fall 1987,

pp. 35-36.

Professor Sampson’s comments followed a

discussion of Bradley v. Bradley, 725

S.W.2d 503 (Tex. App.–Corpus Christi

1987, no writ), where the court held that a

particular premarital agreement did not

effectively partition the parties’ future

earnings. It should be noted that the Bradley

agreement itself was not drafted to

accomplish a direct partition of future

earnings, but was an agreement to partition

future earnings once the earnings came into

existence.

G. Partition and Exchange

Notwithstanding these initial

concerns, Art. XVI, Sec. 15 of the Texas

Constitution appears to clearly authorize the

partition and exchange of any and all

community property not yet in existence,

including, but not limited to, personal

earnings, retirement benefits, I.R.A.s, trust

income, income from separate property, and

property acquired on credit; so does the

legislature. See Sec. 4.001(2) of the Texas

Family Code. The cases of Fanning v.

Fanning, supra, and Winger v. Pianka, 831

S.W.2d 853 (Tex. App.–Austin 1992, writ

denied) have confirmed this viewpoint.

H. Community Free Marriage

It is, therefore, the “partition and

exchange” agreement which can be

effectively used to create the “community

free marriage.” By eliminating community

property from the marriage, wrongful

transfer issues, like “fraud on the

community” are also eliminated. This type

of agreement also allows the couple to

address some otherwise troubling issues.

1. Reimbursement

If there still exists the possibility of a

community claim for reimbursement, it

would be advisable to address specifically

any such potential claim in the premarital

agreement. For example, perhaps the

nonowner spouse could agree to waive the

claim for reimbursement. Stoker v. Stoker,

2008 WL 4837084 (Tex. App.–Houston [1st

Dist.] 2008), involved a premarital

agreement that waived economic

contribution claims by the nonowner spouse.

The court held that this was permissible

under Tex. Fam. Code § 3.410. However, it

may be advisable for the couple to “partition

and exchange” claim in a manner which

would at least limit the exposure the owner

spouse would have by reason of the

community claim for reimbursement.

Note: Even if a community-free marriage is

created, a spouse may have a “separate

claim for reimbursement.” This possibility

could be addressed in the pre-nup.

2. Quasi-Community Property

Separate property acquired by a

couple while residing in a common law state

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that would have been community had they

been residing in Texas can be divided by a

Texas divorce court on a just and right basis.

Tex. Fam. Code § 7.002. The Family Code

does not convert such asset into community

property, but allows for it to be treated as

such in a divorce proceeding. This concept

is not available in probate. See Hanau v.

Hanau, 730 S.W.2d 663 (Tex. 1987). Since

such property is merely quasi-community

and not actually community property, can it

be subject to a partition and exchange

agreement as authorized by the constitution

and the statutes? Is this a right that the

nonowner spouse can waive in a premarital

agreement? There does not appear to be a

good answer to this question, but it is an

issue that should be addressed specifically in

this agreement, if relevant.

3. Quasi-Separate Property

A 2003 amendment to Sec. 7.002

treats as separate property any community

property that was acquired while the couple

resided in another state that would have

been separate, had they resided in Texas at

the time of its acquisition. Presumably

“quasi-separate” property would be treated

as community property if the marriage

terminates by reason of a spouse’s death, if

the reasoning of the Hanau case, supra, is

followed. Since such property is merely

quasi-separate and not actually separate

property, this category of community

property should be subject to a partition and

exchange agreement.

4. Professional Degrees, Licenses

In view of the trend in some states to

treat professional degrees and licenses as

property and therefore capable of division

by the divorce court and possible partition

by the probate court, the possibility of such

a result in Texas should be anticipated

although the only case in Texas to date on

point has held to the contrary. See O’Brien

v. O’Brien, 489 N.E.2d 712 (N.Y. 1985) and

Frausto v. Frausto, 611 S.W.2d 656 (Tex.

Civ. App.–San Antonio 1980, writ dism’d

w.o.j.). If professional degrees and licenses

are eventually found to be property in Texas

and consequently community property, if

acquired during marriage, they should be

treated as such in the agreement and could

be subjected to a partition and exchange, if

the parties so agree.

5. Certain Personal Injury Recoveries

Personal injury recoveries for loss of

earning capacity during marriage are defined

as community property. Tex. Fam. Code §

3.001(a)(3). Notwithstanding this statutory

provision and Graham v. Franco, supra, the

author is of the opinion that actual “lost

earnings” should be deemed to be

community property, while “loss of earning

capacity” should be considered separate

property. Lost earnings are properly

characterized as community property since

the community estate will be liable for

payment of medical expenses and will suffer

as a result of losing one spouse’s community

earnings. However, characterizing the

recovery for lost earning capacity as

community property requires a presumption

that the couple will remain married

indefinitely. In reality, should the spouses

divorce following the injury, community

recoveries will be divided on a just and right

basis; or should the non-injured spouse die,

the estate will be entitled to one-half of the

entire recovery. Since the primary purpose

of a personal injury recovery is to

compensate the injured spouse, classifying

lost earning capacity as community property

and giving the non-injured spouse a one-half

interest therein may leave the injured spouse

with only a fraction of the amount awarded.

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The potential for such a situation clearly

warrants a distinction between lost earnings

and lost earning capacity which

characterizes the former as community and

the latter as separate. In view of current law

possibly creating such an inequitable result,

possible personal injury recoveries could be

addressed in a partition and exchange

agreement.

Note: The same distinction can be made

between actual medical expenses and future

medical expenses.

6. Personal Service Contracts

About a “pre-nup,” wages and

salaries earned during the marriage are

clearly community property, but the

characterization of money earned during the

marriage pursuant to a contract signed

before marriage, or money received after the

marriage pursuant to a deferred

compensation agreement signed during the

marriage, can be complicated. Even if

wages and salaries generally are not going to

be partitioned, these other issues could be

addressed in the premarital agreement to

avoid future confusion and litigation.

I. Division of Property upon Divorce

The parties should be able to agree

as to a certain division of any community

and their respective separate properties in

the event of divorce instead of awaiting an

“equitable division” of the community by

the divorce court. Of course, such an agreed

to division cannot affect a parent’s child

support obligations. Such an agreement may

also affect the determination of whether an

agreement is unconscionable or not.

J. Contracts Concerning Succession

The parties to a premarital agreement

may also agree that they will not assert

inheritance rights upon the first spouse’s

death or that one spouse is to leave to the

other spouse certain assets in the event the

marriage terminates by reason of the

obligor’s death. Sec. 59A of the Texas

Probate Code was amended in 2003 in order

to confirm that a contract to make a will or

devise can be established by either (i)

provisions in a will stating that the contract

exists and the material provisions of the

contract, or (ii) the provisions of a written

agreement that is binding and enforceable.

Even without the addition of the latter

provision, this author is of the opinion that

Section 59A, currently Section 254.004 of

the Texas Estates Code, was never intended

to apply to an agreement whereby a spouse

is required to leave property to the other

spouse pursuant to a premarital agreement.

This situation is not one where there are

reciprocal testamentary promises but one

where there is current consideration in

exchange for a testamentary promise.

K. Homestead, Exempt Personal

Property and Allowances

In Williams v. Williams, 569 S.W.2d 867

(Tex. 1978), the Texas Supreme Court

approved the provisions of a premarital

agreement whereby one party waived his

right following the first spouse’s death to

occupy the other party’s separate property

home, to utilize the exempt personal

property and to claim a family allowance.

1. Selection and Abandonment

The premarital agreement presents

the opportunity for a couple to agree which

of their homes will be the homestead and

what process should be followed to abandon

and select a new one.

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2. Sale or Encumbrance

The Williams case involved the

surviving spouse’s rights following the

owner’s death. Sec. 5.001 of the Texas

Family Code prohibits the owner of the

homestead from selling or encumbering it

during the marriage without the joinder of

the non-owner spouse. Can this right of the

non-owner be waived in a premarital

agreement? Sec. 4.003(a)(2) appears to

authorize it.

3. Liability

So long as the owner is alive, the

homestead and certain items of personal

property continue to be exempt from the

claims of certain creditors. Tex. Prop. Code

§§ 41.001 and 42.002. However, if the non-

owner has waived the right of occupancy

and possession upon the death of the owner,

will such property continue to be exempt

from most creditors following the owner’s

death? Presumably yes, if the owner also

was survived by a minor child. But if the

only constituent family member surviving

the owner is the spouse who previously

waived these rights, the answer is not so

clear.

Note: Prior to 2005, Texas case law

appeared to grant the exemption from

creditors if the owner was survived by an

unmarried child living at home. 2005

amendments to Sections 271 and 272

eliminated that exemption. See Tex. Est.

Code § 102.005.

L. The Universal Community

Can the parties to a premarital

agreement agree that the property they are

bringing into the marriage and/or the

property to be acquired during marriage by

gift, devise or descent are to be community

property? In other words, can those

intending to marry agree to an “all

community” marriage? Notwithstanding the

1999 amendment, such an agreement would

still appear to violate the Texas Constitution,

which does not expressly offer a procedure

for parties intending to marry to accomplish

the result. Tittle v. Tittle, 148 Tex. 102, 220

S.W.2d 637 (1949). Of course, once

married, one spouse may give the other

spouse one-half of the donor’s separate

property, thereby making them tenants in

common, and spouses over a period of time

can allow their separate estates to become

commingled and, therefore, community

property. In addition, since January 1, 2000,

spouses can enter into a transmutation

agreement once they are married. Or, is a

premarital agreement really a marital

agreement since it becomes effective upon

marriage?

M. Preserving Portability

The parties should consider a

provision in the agreement that requires that

the first spouse to die is to direct the

personal representative of his or her estate to

elect to transfer to the surviving spouse the

deceased spouse’s DSUE amount by filing a

United States Estate Return whether one is

otherwise required to be filed or not. As

consideration for the agreement, the

surviving spouse may be required to

reimburse the estate of the deceased spouse

for any expenses that would not otherwise

be incurred by the deceased spouse’s

personal representative. See Portability and

Prenuptials: A Plethora of Preventative,

Progressive and Precautionary Provisions,

George K. Karibjanian and Lester B. Law,

Probate Property (May/June 2013).

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N. Addressing the Mutual Duty of

Support

Notwithstanding a spouse’s duty of

support and the necessaries doctrine,

increasingly lawyers with clients

considering marriage but concerned with the

potential overwhelming costs of caring for

an elderly spouse are focused on the Texas

version of the Uniform Premarital

Agreement Act, specifically Section

4.003(a)(4) of the Texas Family Code,

which states that the parties to a premarital

agreement may contract with respect to “the

modification or elimination of spousal

support.” Can a Texas couple by an

agreement eliminate the spouses’ mutual

obligation of support and a third party’s

rights under the necessaries doctrine? See

XVI, infra.

XV. EFFECTIVENESS OF THE

PRENUPTIAL AGREEMENT

Assuming a valid, enforceable

agreement has been executed in order to

create a “community free marriage,” have

the goals of insulating each spouse’s

separate estate from the claims of the other

spouse and the other spouse’s creditors and

successors been accomplished? The answer:

“Maybe!”

For one thing, since everything is his

or her separate property, each spouse is free

generally to manage his or her property

without interference from the other spouse.

However, absent an effective waiver, the

homestead rules will still prohibit a transfer

or encumbrance of the home without the

joinder of the other spouse.

Further, the separate assets of one

spouse are generally exempt from the

creditors of the other spouse. In the event of

divorce, there is no community property to

divide on a just and right basis; and upon the

death of a spouse, the decedent’s estate

passes to the decedent’s heirs and devisees,

and the surviving spouse retains his or her

estate untainted by the claims of the

decedent’s heirs and devisees.

However, the situation may not be as

perfect as it may appear.

A. Necessaries

Generally, each spouse still has the

legal duty to support the other spouse and

their children for so long as the children are

minors and thereafter until they graduate

from high school. Tex. Fam. Code §§ 2.501

and 154.001. Therefore, both spouses’

separate properties are liable for such

necessaries unless the mutual duty of

support can be waived by the spouses in the

agreement. See XVI, infra.

B. Child Support

As would be expected, an agreement

between spouses to limit either’s child

support obligations would be against public

policy. This concept has been codified in

Sec. 4.003 of the Texas Family Code.

C. Tax Liability

For any tax year that the spouses file

joint income tax returns, each spouse

remains jointly and severally liable for any

tax liability arising from that year’s tax.

D. Spousal Torts

Will public policy prevent the

anticipatory waiver of spousal tort claims in

premarital agreement? Should there be a

different rule for negligence and intentional

torts? In general, see “Releases: An Added

Measure of Protection from Liability,” 39

Baylor L. Rev. 487 (1987).

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E. Joint Ventures

A spouse remains personally liable

for the acts of the other spouse if the other

spouse is an agent or otherwise innocent

spouse. Tex. Fam. Code § 3.201. Although

the marital relationship itself does not create

a principal/agency relationship among the

married couple, their being engaged together

in a business venture or other joint action

can create vicarious liability and expose

each spouse’s separate property to any

liability arising therefrom.

F. Preexisting Creditors

Section 4.106 of the Family Code

says that a partition and exchange agreement

is void with respect to the rights of

preexisting creditors whose rights are

intended to be defrauded therein. It is

interesting to note that it is not clear whether

this provision applies to premarital partition

and exchange agreements. Also, such

provision does not by its own terms apply to

spousal income agreements under Sec.

4.102.

G. U.F.T.A. and the Bankruptcy

Code

Creditors may avoid and recover

fraudulent transfers. The trustee in

bankruptcy can avoid transfers deemed

fraudulent under the Texas version of the

Uniform Fraudulent Transfer Act. This

means that certain prepetition transfers of

community property by a filing spouse to a

nonfiling spouse, by way of gift or partition,

can be avoided because the transfer acted to

deprive creditors of property that would

otherwise be available to creditors as part of

the bankruptcy estate. But do these concepts

apply in a premarital partition and exchange

situation?

Each type of transfer must be

analyzed under the fraudulent transfer

theory to determine if assets otherwise

within the reach of a creditor have been

pulled beyond the creditor’s reach by virtue

of the challenged transfer. For example, a

spouse might impermissibly transfer his own

interest in existing community property by

way of a partition. Yet the same spouse

could probably renounce, by way of a

premarital partition, an interest in

community property to be acquired in the

future since the parties to the partition had

no vested interest in the future community

property absent the partition. Of course,

these sections of the U.F.T.A. and the

Bankruptcy Code also invalidate transfers

involving actual or constructive fraud.

H. ERISA Plans

ERISA “shall supersede any and all

State laws insofar as they may now or

hereafter relate to any employee benefit

plan…” 29 U.S.C.A. Sec. 1144. Further,

ERISA requires for many qualified

retirement plans that the participant’s spouse

receive a mandatory death benefit upon the

death of the participant or a joint and

survivor annuity upon the retirement of the

participant, regardless of the marital

property character of the participant’s

interest in the plan. Of course, the spouse

may waive these statutory rights in a consent

procedure described by statute. 29 U.S.C.A.

Sec. 1055(c).

Several cases have held that these

ERISA granted rights of the participant’s

spouse cannot be waived in a premarital

agreement. In Manning v. Hayes, 212 F.3d.

866 (5th Cir. (Tex.) 2000), cert. denied, 121

S.Ct. 1401 (2001), language in a premarital

agreement was not sufficiently explicit to

result in a waiver of an ex-wife’s beneficiary

status under an ERISA plan. In Hurwitz v.

Sher, 789 F.Supp. 134 (S.D.N.Y. 1992),

aff’d by 982 F.2d. 778 (2nd Cir. 1992), cert.

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denied 508 U.S. 912 (1995), the decedent

and his spouse executed a premarital

agreement waiving any rights with respect to

the other’s separate property and the court

held that the wife had not waived her rights

to the plan benefits to which she was entitled

because only a spouse, not a fiancé, can

waive such rights under federal law. A

similar result was reached in Nellis v.

Bowing Co., 1992 WL 122773, 15

Employee Benefits Vas. 1651 (D. Kan.

1992); further, the court noted that language

in the agreement stating that the agreement

was to take effect upon marriage did not

save the agreement. In Zinn v. Donaldson

Co., 799 F.Supp. 69 (D. Minn. 1992), the

court even held that a constructive trust

could not be imposed on the surviving

spouse to equitably enforce the premarital

agreement. A similar result was affirmed by

the Sixth Circuit in Howard v. Branham &

Baker Coal Co., No. 91-5913, 968 F.2d

1214 (table), (6th Cir. 1992) (text in

Westlaw).

I. Trap for the Unwary

Accordingly, a properly prepared or

premarital agreement under Texas law may

ensure that the employee’s interest in the

retirement plan is separate property in the

event of divorce, but such a result, in and of

itself, does not negate whatever rights the

spouse may have under ERISA at the time

of the employee’s retirement or death absent

an effective ERISA waiver of those rights.

J. Future Legislative Changes

The potential impact of future state

and federal legislation (e.g., amending

ERISA or adopting the concepts of quasi-

community property at death, or a statutory

share system, or even permanent alimony)

should be considered and addressed in the

agreement. Of course, these potential rights

could be expressly waived in the premarital

agreement, but is the waiver of a right that is

not yet in existence enforceable? Generally,

to be enforceable, a waiver of statutory

rights must be clear, specific and

unequivocal, and given by a party who has

full knowledge of its consequences. In any

event, the issues should be addressed and

identified as specifically as possible.

K. Lost Income Tax Basis

To the extent property is held as

community property, both halves receive a

new income tax basis upon the death of the

first spouse under Sec. 1014(b)(6) of the

Internal Revenue Code. This tax advantage

is lost if community property has been

partitioned into separate property. Of

course, during the marriage, the couple can

enter into a transmutation agreement and

convert separate property into community

property. See XVII, C, infra.

XVI. WAIVING SPOUSAL SUPPORT

Some commentators have suggested

that a couple can, by agreement, avoid joint

and several liability by waiving their mutual

duty of support. The treatise Texas Family

Law: Practice and Procedure, VI, 130,

Waiver of Spousal Support During Marriage

(Matthew Bender & Company 2012), states

that the parties to a premarital agreement

can modify or eliminate “the duty of spousal

support.” It further states that, in the

premarital agreement, the parties “. . . may

waive the right of spousal support, limit it to

a certain amount, or provide that the duty of

support arises only if one spouse becomes

disables or unemployed.” Similar language

is found in Matthew Bender’s Texas

Transaction Guide – Legal Forms, § 93.230

(2012). Unfortunately, the only authority

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cited for the assertions is Tex. Fam. Code §

4.003(a)(4).

A. Texas Premarital Agreement Act

Section 4.003(a)(4) of the Texas

Family Code states that the parties to a

premarital agreement may modify or

eliminate spousal support. It does not state

that the parties can modify or eliminate the

duty of support. In addition, a review of the

annotations under Section 4.003 does not

reveal any real authority to support the

argument that such an agreement can

eliminate or modify a spouse’s duty of

support of the other spouse during the

marriage, or a third party’s rights under the

necessaries doctrine. Section 4.003’s

laundry list of matters which can be

addressed in a premarital agreement

suggests that the parties can contract with

each other concerning their mutual rights

and obligations, and the contract is

enforceable among themselves and their

successors in interest as long as the

agreement does not violate public policy.

A matter which extends beyond the parties’

mutual rights and obligations and which

affects third parties should be subject to a

more stringent public policy examination

prior to being enforceable against a third

party, especially a third party creditor that

provided services deemed reasonably

necessary for either spouse’s support.

Note: It is important to note that Subchapter

B of Title 1, Chapter 4 of the Texas Family

Code, which relates to agreements between

spouses during the marriage, does not

contain similar language. This omission

suggests that, once married, spouses may

not be able to enter into a contract that

modifies or eliminates spousal support.

B. The Community-Free Marriage

Texas public policy does allow the

parties to the premarital agreement to create

a “community-free marriage” – a marriage

where all assets are either the separate

property of one spouse, or the other, or both

spouses. Art. XVI, § 15, Texas

Constitution. Even existing spouses can

create a community-free marriage. Tex.

Fam. Code § 4.102. Such a marital

agreement cannot prejudice the rights of pre-

existing creditors. Tex. Fam. Code § 4.106.

Subject to the provisions of Section 4.106,

creating a community-free marriage is a

valid means of affecting the rights of third

parties, including the spouses’ creditors,

since generally one spouse’s separate

property is not liable for the contract debts

or tort debts of the other spouse. Tex. Fam.

Code § 3.202(a).

Even if the parties have a

community-free marriage, each spouse is

still personally liable for a debt of the other

spouse if (i) the other spouse acted as the

spouse’s agent when incurring the debt or

(ii) the other spouse incurred a debt for

necessaries. Accordingly, that spouse’s

separate property is reachable by the creditor

of the other spouse that provided services

that are deemed to have been reasonably

necessary for the other spouse’s support.

Tex. Fam. Code § 3.201.

C. Effect of Support Waiver

If the terms of an otherwise valid,

enforceable premarital agreement purport to

eliminate or modify the spouses’ mutual

obligation of support, its effectiveness

should be limited to the relative rights and

obligations between the parties themselves

and their successors. Public policy

considerations suggest that the agreement

should not affect the rights of a third party

who provided uncompensated services

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deemed reasonably necessary for the other

spouse’s support. Those same public policy

considerations suggest that a spouse’s duty

of support during the marriage still exists

notwithstanding the agreement;

consequently, the agreement should be able

to only affect “reimbursement” claims

among the spouses upon termination of the

marriage. Tex. Fam. Code §§ 3.401-3.410.

D. Reimbursement Between Spouses

Absent such an agreement when the

marriage terminates, a spouse is not entitled

to reimbursement from the other spouse for

expending separate funds during the

marriage for the support of the other spouse

because of the spouses’ mutual duty of

support. Burney v. Burney, 225 S.W.3d 208

(Tex. App.—El Paso 2006, no pet.); In re

Marriage of Case, 28 S.W.3d 154 (Tex.

App.—Texarkana 2000, no pet.). However,

if a premarital agreement contains a “waiver

of support,” the spouse who is required to

pay a third party under the necessaries

doctrine should be able to seek

reimbursement from the other spouse upon

the termination of the marriage.

Notwithstanding the terms of the agreement,

the bottom line is each spouse still has a

duty to support the other spouse during the

marriage, even if they have agreed, in effect,

that each spouse is primarily liable for

his/her own necessities.

E. “Spousal Support”

Critics of this position will point out

that both the Uniform Premarital Agreement

Act and its Texas version specifically state

that a premarital agreement can modify or

eliminate spousal support; however, neither

expressly states that the agreement can

modify or eliminate the parties’ mutual duty

of support that attaches during their

marriage. The duty of support is not the

same concept as spousal support. The term

“spousal support,” as used in both the

Uniform Premarital Agreement Act and the

Texas version, was intended to refer to the

more politically correct equivalence of

“alimony” – spousal support. Spousal

support is the generally accepted term used

to describe payments required from one

spouse to another after divorce. It is

synonymous with the terms “alimony” and

“maintenance.”

F. But Texas Doesn’t Have Alimony!

Accordingly, it is likely that a Texas

court would interpret the term

“spousal support” within the context of

Section 4.003(a)(4) to be its generally

accepted meaning – a legal obligation on a

person to provide financial support to an ex-

spouse after divorce. Critics of this

interpretation will argue that Texas does not

recognize alimony; thus, the Legislature

must have retained that specific provision

from the uniform act for a reason. The

counter to that argument is that, while Texas

(then and now) maintains its policy

prohibiting court-ordered permanent

alimony, (i) the parties to the agreement may

marry and then move to a state that has more

traditional spousal support statutes or (ii) the

Legislature may in the future adopt a more

traditional spousal support statute.

Accordingly, it is likely that the Legislature

retained Section 4.003(a)(4) anticipating that

the parties intending to marry in Texas may

wish to address those situations in their

premarital agreements.

G. Texas Maintenance

In 1997, a limited form of post-

divorce spousal support was enacted. See

Chapter 8, Court-Ordered Maintenance,

Title 1, Subchapter C, of the Texas Family

Code. However, the Texas Family Code

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does not expressly address whether court-

ordered maintenance can be waived in a

premarital or marital agreement although

Sec. 4.003 does refer to the waiver of

spousal support in premarital agreements.

Since court-ordered maintenance was

created as part of a welfare reform package,

such a waiver may be against Texas public

policy, notwithstanding the language to the

contrary in the premarital agreement act.

H. UPAA Comments

The official comment of the uniform

act states:

Paragraph (4) of subsection (a)

specifically authorizes the parties

to deal with spousal support

obligations. There is a split in

authority among the states as to

whether a premarital agreement

may control the issue of spousal

support. Some few states do not

permit a premarital agreement to

control this issue (see, e.g., In re

Marriage of Winegard, 278

N.W.2d 505 (Iowa 1979); Fricke

v. Fricke, 42 N.W.2d 500 (Wis.

1950)). However, the better

view and growing trend is to

permit a premarital agreement to

govern this matter if the

agreement and the circumstances

of its execution satisfy certain

standards (see, e.g., Newman v.

Newman, 653 P.2d 728 (Colo.

Sup. Ct. 1982); Parniawski v.

Parniawski, 359 A.2d 719

(Conn. 1976); Volid v. Volid, 286

N.E.2d 42 (Ill. 1972); Osborne v.

Osborne, 428 N.E.2d 810 (Mass.

1981); Hudson v. Hudson, 350

P.2d 596 (Okla. 1960); Unander

v. Unander, 506 P.2d 719 (Ore.

1973)).

All of the cases mentioned in this official

comment involve post-divorce alimony,

maintenance or support. It seems obvious

that the relevant section of the uniform act

was not intended to address the spouses’

mutual duty of support or third party rights

under the necessaries doctrine.

I. Other States’ Laws

Surprisingly, there is very little

authority in other jurisdictions addressing

whether a “waiver of support” can eliminate

the necessaries doctrine. Most of the cases

that have discussed the waiver of spousal

support were references to it in the context

of post-divorce alimony and not in terms of

the spouses’ duty of support during

marriage. In Rathjen v. Rathjen, No. 05-93-

00846-CV, 1995 Tex. App. LEXIS 3759

(Tex. App.—Dallas May 30, 1995, no pet.),

the Texas court, applying the law of Hawaii,

refers to the Hawaiian Supreme Court

decision of Lewis v. Lewis/Reese v. Reese,

60 Haw. 497, 748 P.2d 1362 (1988) and

noted that other states have held that a

premarital agreement is unenforceable if its

application would result in public assistance.

This rationale is sound public policy that

should be followed absent clear statutory

authority to the contrary.

J. UPAA – Texas Version

When the Legislature adopted the

Uniform Premarital Agreement Act, deleted

from the uniform act’s “enforceability”

provisions language stating that, even if the

agreement eliminated or modified the

spousal support, and if such a provision

causes a spouse to be eligible for public

assistance, a court, upon divorce, could still

require the other spouse to provide support

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to the extent necessary to avoid that

eligibility. In a comment, the author

suggests that this change in the Texas statute

suggests that a Texas court cannot change

the terms of a premarital agreement just

because it results in a spouse’s eligibility for

public assistance. Amberlyn Curry, The

Uniform Premarital Agreement Act and Its

Variations Throughout the State, 23 J. Am.

Acad. Matrimonial Law, 335 (2010). The

more likely reason for the deletion was

Texas’ prohibition of post-divorce court-

ordered permanent alimony.

XVII. AGREEMENTS DURING

MARRIAGE

During marriage, spouses can

generally accomplish the same results that

could have been generated in a premarital

agreement. Such agreements are also

subject to the “mere agreement rule.” See

XIV, A, supra. They can partition or

exchange among themselves their existing

community property and any community

property to be acquired in the future. Tex.

Fam. Code § 4.102. Spouses may also agree

that income from a spouse’s separate

property will be separate property. Tex.

Fam. Code § 4.103. Accordingly, spouses,

like persons intending to marry, have the

legal ability to create a “community free

marriage.”

A. 2003 and 2005 Legislation

Section 4.102 was amended in 2003

to provide that, if community property is

partitioned, the income the partitioned

property thereafter generates is also

partitioned into separate property unless the

parties agree such income will be

community property. HB 885 (2003).

However, due to concerns that the 2003

amendment may have been unconstitutional,

HB 202 (2005) amended Sec. 4.102 again to

negate the presumption that future earnings

and income would be separate property so

that now Sec. 4.102 only authorizes such an

agreement.

Accordingly, the parties to a partition

and exchange agreement now have the

express statutory authority to partition and

exchange the future earnings and income

from the property they had agreed to

partition, a right already granted to them by

the 1980 amendment to Art XVI, Sec. 15 of

the Texas Constitution and Sec. 4.102 as

originally enacted.

1. Pre-2005 Partitions

Unfortunately, it can be anticipated

that someone will argue and perhaps even

convince a court that Texas spouses did not

have until the effective date of the 2005

amendment the right to partition the future

earnings of income of the community

property being partitioned, thereby casting

doubt on the effectiveness of any such

agreements entered into prior to that time.

Hopefully, the courts will rule that spouses

have had the constitutional right to enter into

these types of agreements since November

4, 1980, and that the legislature was not

even trying to take this right away in their

later legislation. Nevertheless, there also

remains the question of the effectiveness of

partition and exchange agreements entered

into between the effective dates of the 2003

and 2004 amendments that do not expressly

divide the future earnings and income of the

property being partitioned.

2. Partitions Without Consideration

HB 202 (2005) also amended Sec.

4.104 by adding a sentence that provides:

“Either agreement (referring to both Sec.

4.103 and Sec. 4.102 agreements) is

enforceable without consideration.” This

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sentence makes sense as applied to Sec.

4.103 agreements but may be

unconstitutional as to Sec. 4.102 partition

and exchange agreements. A partition and

exchange agreement contemplated by Art.

XVI, Sec. 15 requires some type of

consideration received by both parties to the

agreement, otherwise the agreement is, in

reality, a gift if one party receives 100% of

the property being partitioned.

The court in Byrnes v. Byrnes, 19 S.W.3d

556, 559 (Tex. App.–Ft. Worth 2000, no

pet.), stated the obvious:

The term “partition” as used in this

section contemplates a division of property

among the parties, not a complete forfeiture

or assignment. See McBride v. McBride, 797

S.W.2d 689, 692 (Tex. App.–Houston [14th

Dist.] 1990, writ denied). Absent a specific

reference to a partition or language

indicating that such a division was intended,

Texas courts have refused to uphold

transactions between spouses as partitions.

See Maple v. Nimitz, 615 S.W.2d 690 (Tex.

1981); Collins v. Collins, 752 S.W.2d 636,

637 (Tex. App.–Ft. Worth 1988, writ ref’d).

Of course, a gift by one spouse to the

other of presently existing community

property is permissible under Art. XVI, Sec.

15, but that section may not allow such a gift

of any and all community property to be

acquired in the future. Other than income

from separate property, other future

community acquisitions (e.g., future

personal earnings) can only be partitioned

under Art. XVI, Sec. 15. Of course, a gift of

presently existing community property by

one spouse to the other is presumed to

include any future income generated by the

gift. Tex. Fam. Code § 3.005, as authorized

by Art. XVI, Sec. 15.

3. Form Over Substance

This 2005 amendment implies that

spouses could “partition” an item of

community property so that it becomes one

spouse’s separate property. Accordingly,

without an express partition of the future

income, the future income the partitioned

property generates would be community

property. However, if one spouse gives to

the other spouse an item of community

property, the property is the donee spouse’s

separate property, and the future income it

generates will also be separate property,

unless the donor spouse expressly retains a

community income interest. Form over

substance should not prevail; if a “partition”

results in one spouse receiving 100% of the

property being “partitioned,” it’s not a

partition, but rather, it is a gift. Why create

confusion by enacting a statute that says a

partition does not need consideration?

B. Formalities

The formalities required and the

rules of enforcement for marital agreements

are essentially the same as for premarital

agreements. Tex. Fam. Code §§ 4.104 and

4.105. On the other hand, these agreements

would appear to be particularly susceptible

to charges of involuntariness and

unconscionability. Further, any such

agreement cannot prejudice the rights of

preexisting creditors. Tex. Fam. Code §

4.106.

Note: An agreement in order to settle

property rights incident to a divorce

requires the approval of the divorce court.

Tex. Fam. Code § 7.006. In other words, a

divorce settlement cannot be disguised as a

marital agreement to avoid court

involvement in property division at divorce.

C. Transmutation

Prior to January 1, 2000, it was

unconstitutional for a married couple to

convert by agreement separate property into

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community property. Many believed that

couples should have that flexibility since

they had the ability to convert community

into separate by agreement. They already

had the ability to allow their separate assets

to become commingled and therefore

community property. They could also

exchange a separate asset for a community

asset. So why not allow the conversion of

separate into community by agreement?

Perhaps a couple would like to take

advantage of the “step up in basis”

community property enjoys upon the death

of one spouse. Perhaps they wish to rescind

an earlier agreement to convert community

into separate so that property which was

community is community again. There are

any number of legitimate reasons why a

couple should have the ability to change the

character of their marital assets from

community to separate, or separate to

community.

1. Formalities

An agreement to convert separate

property into community property must be

in writing and: (a) be signed by the spouses;

(b) identify the property being converted;

and (c) specify that the property is being

converted into the spouses’ community

property. Tex. Fam. Code § 4.203.

2. Management

An agreement to convert a spouse’s

separate property into community does not

necessarily mean that the newly created

asset is subject to joint management.

Management still depends on record title or

possession. Tex. Fam. Code § 4.204.

3. Enforceability

The agreement is not enforceable if

the spouse against whom enforcement is

sought proves that the spouse did not: (a)

execute the agreement voluntarily; or (b)

receive a fair and reasonable disclosure of

the legal effect of converting the property

into community property. Tex. Fam. Code §

4.205.

4. Presumption of Fair Disclosure

An agreement that contains the following

statement, or substantially similar words,

prominently displayed in bold-faced type,

capital letters, or underlined, is rebuttably

presumed to provide a fair and reasonable

disclosure of the legal effect of converting

property to community property:

This instrument changes property to

community property. This may have adverse

consequences during marriage and on

termination of the marriage by death or

divorce. For example:

Exposure to creditors. If you sign

this agreement, all or part of the separate

property being converted to community

property may become subject to the

liabilities of your spouse. If you do not sign

this agreement, your separate property is

generally not subject to the liabilities of

your spouse unless you are personally liable

under another rule of law.

Loss of management rights. If you

sign this agreement, all or part of the

separate property being converted to

community property may become subject to

either the joint management, control and

disposition of you and your spouse or the

sole management, control and disposition of

your spouse alone. In that event, you will

lose your management rights over the

property. If you do not sign this agreement,

you will generally retain those rights.

Loss of property ownership. If you

sign this agreement and your marriage is

subsequently terminated by the death of

either spouse or by divorce, all or part of the

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separate property being converted to

community property may become the sole

property of your spouse or your spouse’s

heirs. If you do not sign this agreement, you

generally cannot be deprived of ownership

of your separate property upon termination

of your marriage, whether by death or

divorce. See Tex. Fam. Code § 4.205(b).

5. Preexisting Creditors

A conversion of separate property to

community property does not affect the

rights of a preexisting creditor of the spouse

whose separate property is being converted.

Tex. Fam. Code § 4.206. After all, a

transmutation agreement is a “transfer” of

property from one spouse to the other.

D. Survivorship Agreements

Prior to the 1987 amendment to Art.

XVI, Sec. 16 of the Texas Constitution,

spouses could not generally own community

property with rights of survivorship. See

Hilley v. Hilley, 342 S.W.2d (Tex. 1961) and

Free v. Bland, 82 S. Ct. 1089 (1962). Since

that amendment, they can. See Tex. Fam.

Code §§ 112.002, 112.051-112.252.

Concerning retroactive application of the

change in the law, the legislation that passed

after the 1987 amendment states that the

survivorship agreement is retroactive if in

writing and signed by the parties.

XVIII. FAMILY BUSINESS PLANNING

The use of modern business entities,

such as corporations, partnerships and

limited liability companies, has become an

integral part of family estate planning. One

popular technique is for family members to

contribute assets to a family limited

partnership in exchange for interests in the

partnership. A client intending to marry can

also take advantage of this planning

opportunity to preserve the assets

contributed to the family limited partnership

for the client and the children of a prior

marriage. The client’s partnership interest

should remain the client’s separate property

during the marriage. In other words, the

assets contributed to the partnership, as well

as assets acquired by the partnership, should

remain partnership assets and not become

marital assets of the owner and the owner’s

spouse during the subsequent marriage.

Note: In any separately-owned, closely-held

business enterprise where a spouse is

involved in the management, Jensen v.

Jensen must be factored into the planning.

See V, A, supra. The short answer is to pay

reasonable compensation for services

rendered by the owner during marriage and

maintain contemporaneous business records

of the reasonableness of the compensation

paid.

A. Entity Theory

The assets contributed to the

partnership become the assets of the

partnership, and the partners receive

partnership interests. The marital character

of a spouse’s interest in a partnership

created during marriage should depend on

the separate or community nature of the

assets contributed in exchange for the

interest itself. If an interest in the partnership

was acquired as a gift, the interest itself is,

of course, the separate property of the donee

spouse. The assets of the partnership,

including undistributed income and profits,

belong to the entity and do not take on a

separate or community character under

normal circumstances. See Sec. 152.056 of

the Texas Business Organizations Code and

see also Harris v. Harris, 765 S.W.2d 798

(Tex. App.–Houston [14th Dist.] 1989, writ

denied). Caution should be taken in the day-

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to-day management of the partnership to

avoid claims for reimbursement because of

the expenditures of uncompensated time,

talent or labor or contributions of

community property to the separate property

business. See V, A, supra.

B. Distributed Profits

When the partnership distributes its

profits to its partners, the profits distributed

to a married partner are community

property, whether the partner’s partnership

interest is separate or community property.

This result can work a conversion of what

would ordinarily be the separate property

into community property. For example, if a

spouse contributes separately owned oil and

gas royalty interests into a partnership, the

royalties collected by the partnership and

then distributed to the partners as

partnership profits are community property.

Had the spouse not contributed the royalty

interest to the partnership, the royalties

received would have been the owner’s

separate property. See Marshall v. Marshall,

735 S.W.3d 587 (Tex. App.—Dallas 1987,

writ ref’d n.r.e.). The Marshall case has

been cited for the proposition that all

partnership distributions during marriage are

community property. However, some

commentators argue that a distribution in

excess of current or retained earnings or

other distributions of capital should be

separate property. See Jack Marr, Business

and Divorce, 34

Annual Marriage

Dissolution Institute (2011).

C. Comparison to Corporations

Partnerships, limited partnerships

and limited liability companies are treated as

entities under Texas law. The owners do not

own the entity’s assets; they own interests in

the entity similar to shares of stock in a

corporation. A divorce court cannot award

specific partnership assets to the other

spouse. Gibson v. Gibson, 190 S.W. 3d 821

(Tex. App.—Ft. Worth 2006, no pet.). Non-

liquidating distributions by the entity to the

owners generally take on a community

character like ordinary cash dividends

distributed by a corporation to its

shareholders. But, do established corporate

law concepts, like the alter ego/reverse veil

piercing, Dillingham v. Dillingham, 434

S.W.2d 459 (Tex. Civ. App.—Ft. Worth

1968, writ dism’d w.o.j.) and reimbursement

for the expenditure of community time,

talent and labor like in Jensen apply to these

new entities as well?

Reverse veil piercing has been held

to be inapplicable to partnerships. See

Lifshutz v. Lifshutz, 61 S.W. 3d 511 (Tex.

App.—San Antonio, 2001, pet. denied) and

Pinebrook Properties, Ltd. v. Brookhaven

Lake Property Owners’ Association, 77

S.W. 3d 487 (Tex. App.—Texarkana, 2002,

pet. denied). Marr notes that the same rule

may apply to limited partnerships and

limited liability partnerships. See Marr,

supra. However, he notes that the concept

has been applied to limited liability

companies. See McCarthy v. Wani Venture,

A.S., 251 S.W. 3d 573 (Tex. App.—Houston

Dist.] 2007, pet. denied.

The concepts of fraud on the community and

reimbursement would appear to apply to any

entity situation.

D. Corporate Veil Piercing

Notwithstanding the “entity” rule,

the assets of a separately owned corporation

have been held by Texas courts to be part of

the community estate and subject to a just

and right division by the divorce court in

some situations. See Zisblatt v. Zisblatt, 693

S.W.2d 944 (Tex. App.—Ft. Worth 1985,

writ dism’d w.o.j.); Spruill v. Spruill, 624

S.W.2d 694 (Tex. App.—El Paso 1981, writ

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dism’d w.o.j.); Dillingham v. Dillingham,

434 S.W.2d 459 (Tex. Civ. App.—Ft. Worth

1968, writ dism’d w.o.j.).

While the cases are not numerous

and the theories used to justify the result are

not always consistent, reverse veil piercing

is a reality. In its landmark case, Castleberry

v. Branscum, 721 S.W.2d 270 (Tex. 1986),

the Texas Supreme Court explained the

basic theories that can be used to disregard a

corporate entity: alter ego, sham to

perpetrate a fraud, or actual fraud. The court

further explained that veil piercing is an

equitable doctrine that can be used to

prevent an unfair and unjust result.

In Lifshutz v. Lifshutz, 61 S.W.3d

511 (Tex. App.—San Antonio 2001, pet.

denied), the court purported to explain the

elements necessary to disregard the

corporate entity. First, there must be a

finding that the corporation is the alter ego

of the shareholder (i.e., there is a unity

between the corporation and the

shareholder). Second, the shareholder’s use

of the corporation damaged the community

estate beyond that which could be remedied

by a claim of reimbursement. While some

courts have required that the shareholder

must be the sole shareholder, other courts

have not. See Zisblatt, supra.

The Lifshutz court also suggested

that the use of the corporation must also

have had a negative impact on the

community estate. In other words, even if

the corporation is the shareholder’s alter

ego, the corporation may not be disregarded

unless community property was transferred

to the corporation.

E. Texas Pattern Jury Charge

The Texas Pattern Jury Charges

provide that the distinct corporate identity of

a corporation may be disregarded if there is

unity between the corporation and a

shareholder so that the separateness of the

corporation has ceased and the improper use

of the corporation has damaged the

community estate. The corporate identity

may be disregarded even though the

corporate formalities have been observed

and corporate assets have been kept

separated from individual property. See

Texas Pattern Jury Charges, 205.1, 205.2

(2016).

F. Convert Sole Proprietorships

Even if the client is not willing to

share a business enterprise with other

members of the family, a sole proprietorship

could be converted into an entity, like a

corporation, prior to the marriage. Proper

management and record keeping can

maintain the client’s stock in the corporation

as separate property and the assets of the

corporation as corporate assets, not marital

assets. Continuing to operate the “business”

as a sole proprietorship during the marriage

is likely to result in a commingling of

separate and community assets so that over

time the “business” becomes community

property because of the client’s inability to

trace which of the business assets were

owned prior to marriage or traceable to

assets owned prior to marriage. Caution

should be taken in the day-to-day

management of the corporation to avoid

claims for economic contribution and

reimbursement.

G. Partnership Formation

Some divorce lawyers take the

position that a general partnership interest

acquired during marriage is always

community property. See Marr, supra,

citing one case decided over twenty-five

years ago, York v. York, 678 S.W. 2d 110

(Tex. App.—El Paso 1984, writ ref’d n.r.e.).

Marr’s article does state that the regular

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rules of characterization do apply to shares

of corporate stock, limited partnership

interest, interests in limited liability

partnerships and interest in limited liability

companies. The better view is that the

separate or community character of the

partner’s interest (like shares of stock)

should depend on the character of the

consideration used to acquire the interest

(i.e., capitalize the entity), if any. If separate

consideration, the investment should be

separate.

For example, if a general partnership

is created at the time of the partners’

“handshake” rather than at the time the

partnership agreement is signed, the

individual partner’s interest in the

partnership becomes property at that time

and is likely to be community property

under the inception rule. It was not acquired

by gift, devise or descent; and if the “idea”

or “concept” was an intangible that did not

have a separate or community charter, the

partnership interest would appear not to be

traceable back to any separate property of

the partner.

On the other hand, if the general

partnership is not created until the

partnership agreement is signed, the

partner’s interest is more like a

shareholder’s stock in a corporation, and it

should be the partner’s separate property, if

separate property was contributed by the

partner to the partnership in exchange for

the partner’s interest.

XIX. MARITAL PROPERTY RIGHTS

IN IRREVOCABLE TRUSTS

The private express trust is a unique

concept and one that is frequently

misunderstood by members of the public

and practitioners alike. The common law

established that the trust is not an entity; it

cannot own property; it cannot incur debt.

Although it may be treated as if it were an

entity for some purposes, it remains today a

form of property ownership. See Tex. Trust

Code § 111.004(4). Certain other common

law principles remain relevant today. For

example, a person serving as trustee is not a

legal personality separate from such person

in his or her individual capacity. A person

serving as trustee is not the agent of either

the trust, the trust estate or the beneficiaries

of the trust. Finally, the trust assets are not

considered to be the property of the person

serving as trustee; such assets belong in

equity to the beneficiary. These principles

can affect the marital property rights of the

parties.

A. The Private Express Trust

One noted authority describes the

private express trust as ". . . a device for

making dispositions of property. And no

other system of law has for this purpose so

flexible a tool. It is this that makes the trust

unique. . . . The purposes for which trusts

can be created are as unlimited as the

imagination of lawyers." III, IV, Scott on

Trusts (3d. ed. 1967).

1. Definition

A trust, when not qualified by the

word "charitable," "resulting" or

"constructive," is a fiduciary relationship

with respect to property, subjecting the

person by whom the title to the property is

held to equitable duties to deal with the

property for the benefit of another person,

which arises as a result of a manifestation of

the intention to create the relationship.

Restatement (Third) of Trust § 2. (2003)

2. Creation

According to Section 112.002 of the

Texas Trust Code, a trust may be created by:

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(i) a property owner's declaration that the

owner holds the property as trustee for

another person; (ii) a property owner's inter

vivos transfer of the property to another

person as trustee for the transferor or a third

person; (iii) a property owner's testamentary

transfer to another person as trustee for a

third person; (iv) an appointment under a

power of appointment to another person as

trustee for the donee of the power or for a

third person; or (v) a promise to another

person whose rights under the promise are to

be held in trust for a third person.

3. Revocable or Irrevocable

Inter vivos trusts are further divided

into two categories: revocable and

irrevocable. A revocable trust is one that

can be amended or terminated by the settlor.

An irrevocable trust, in contrast, is one that

cannot be amended or terminated by the

settlor for at least some period of time. The

presumption regarding the revocability of

inter vivos trusts varies by jurisdiction. For

example, in Texas all inter vivos trusts

created since April 19, 1943, are revocable

unless the trust document expressly states

otherwise; while in some other states, trusts

(including Texas trusts created prior to April

19, 1943) are deemed irrevocable unless the

trust document states otherwise. Tex. Prop.

Code Ann. § 112.051. See Restatement

(Second) of Trusts, § 330; Bogert, Law of

Trusts and Trustees, § 998 (1983).

Note: If the trust is revocable, it is deemed

“illusory” and is effectively ignored for

marital property purposes (i.e., the “trust

veil” is pierced). See Land v. Marshall, 426

SW.2d 841 (Tex. 1968). See XXII, B, infra.

B. Beneficial Ownership

While record legal title to the assets

of the trust is held by the trustee, equitable

title — true ownership — belongs to the

beneficiaries. For example, trust law

generally exempts the assets of the trust

from any personal debt of the trustee not

related to the administration of the trust.

This exemption even applies if the trust

property is held by the trustee without

identifying the trust or the beneficiaries.

The rationale behind this exemption is the

concept that the assets of the trust really

belong to the beneficiaries. See Tex. Prop.

Code § 101.002 and Tex. Trust Code §

114.0821. These principles confirm that

trust assets belong to the beneficiaries and

not the trustees. Accordingly, a trustee’s

spouse generally does not acquire any

marital property interest in trust property,

but spouses of the beneficiaries may,

depending on the circumstances.

C. Interests of the Settlor’s Spouse

The creation and funding of an inter

vivos trust by a settlor may or may not

remove the trust assets from the reach of the

settlor's spouse. If (i) the trust is irrevocable

and (ii) the settlor has not retained an

equitable interest in the trust estate, the

assets of the trust really belong to the

beneficiaries and no longer have either a

separate or community character insofar as

the settlor’s spouse is concerned. If the

transfer of community assets in order to

fund the trust is found to have been in fraud

of the interests of the settlor’s spouse, the

spouse may be able to reach the assets of the

trust like any other assets transferred to a

third party, free of trust, but in fraud of the

community interests of the wronged spouse.

See VIII, supra.

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D. Settlor’s Retained Interest

If the settlor creates an irrevocable

trust and retains a beneficial interest in the

trust assets, the rights and remedies of the

settlor’s spouse would appear to be similar

to the rights of the settlor’s creditors.

Creditors can generally reach the maximum

amount that the trustee can pay or distribute

to the settlor under the terms of the trust

agreement, even if the initial transfer into

the trust was not in fraud of creditors. For

example, if the settlor retains an income

interest in the trust assets for the rest of the

settlor's life, creditors can reach the retained

income interest, and if the settlor retains a

general power of appointment over the

entire trust estate, creditors can reach the

entire trust estate. See Bank of Dallas v.

Republic Nat. Bank of Dallas, 540 S.W.2d

499 (Tex. Civ. App.—Waco 1976, writ ref’d

n.r.e.). If the settlor retains an income

interest for the remainder of the settlor's

lifetime, the creditors can reach the income

interest, but not the fixed remainder interest

already given to the remaindermen. If the

trustee has the discretion to invade the

principal for the settlor, the extent of the

settlor's retained interest will probably be

the entire trust estate. See Cullum v. Texas

Commerce Bank Dallas, Nat. Ass’n., 05-91-

01211-CV, 1992 WL 297338 (Tex. App.—

Dallas Oct. 14, 1992) (not designated for

publication). The inclusion of a spendthrift

provision will not insulate the settlor's

retained interest from the settlor's creditors.

See Tex. Trust Code § 112.035 and Glass v.

Carpenter, 330 S.W.2d 530 (Tex. Civ.

App.—San Antonio 1959, writ ref’d n.r.e.).

1. Marital Property Issues

The application of these principles in

the marital property context would suggest

that any income generated by the trust estate

would still be deemed community property

if the settlor retained an income interest in

the trust which, for example, was funded

with the settlor's separate property.

However, in a recent case where the trust

was funded with the settlor's separate

property prior to marriage and the trustee

was a third party who had discretion to make

income distributions to the settlor, the

trustee's discretion prevented the trust's

income from taking on a community

character until the trustee exercised its

discretion and distributed income to the

settlor. The wife in a divorce action had

claimed that all of the trust assets were

community property since the income

generated during the marriage had been

commingled with the trust corpus. See

Lemke v. Lemke, 929 S.W.2d 662 (Tex.

App.—Fort Worth 1996, writ denied) and

Matter of Marriage of Burns, 573 S.W.2d

555 (Tex. Civ. App.—Texarkana 1978, writ

dism'd w.o.j.). Some older cases support

that same result. See Shepflin v. Small, 4

Tex. Civ. App. 493, 23 S.W.432 (1893, no

writ) and Monday v. Vance, 32 S.W. 559

Tex. Civ. App. 1895 no writ).

2. Other Factors

Had the trust been funded with

community property without the consent of

the other spouse, the other spouse could

challenge the funding of the trust as being in

fraud of the community. Had the assets

been subject to the spouses' joint control, the

other spouse could argue that the transfer

was void since the other spouse did not join

in the transfer. Had the settlor retained a

general power of appointment, the other

spouse could argue that the transfer of

community property into the trust was

"illusory" as to her community interests

therein. See VIII, I, supra. Accordingly, the

only safe conclusion to reach is that the

proper application of marital property

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principles should depend on the nature and

extent of the retained interest and perhaps

the timing of the creation of the trust.

E. Interests of the Non-Settlor

Beneficiary

Because a beneficiary of a trust owns

a property interest in the trust estate created

by a settlor who is not the beneficiary, the

ability of the spouse of the beneficiary to

establish a community interest in certain

assets of the trust should depend on the

nature of the beneficiary's interest.

Equitable interests in property, like legal

interests, are generally "assignable" and

"attachable," but voluntary and involuntary

assignees cannot succeed to an interest more

valuable than the one taken from the

beneficiary.

1. Comparison to Creditors’ Rights

Again, a review of the rights of

creditors of the beneficiary appears relevant.

For example, if the beneficiary owns a

remainder interest, a creditor’s attachment of

the beneficiary’s remainder interest cannot

adversely affect the innocent life tenant's

income interest. On the other hand, if the

beneficiary is only entitled to distributions

of income at the discretion of the trustee for

the beneficiary’s lifetime, a creditor of the

beneficiary cannot attach the interest and

require the trustee to distribute all the

income. In fact, a creditor may not be able

to force the trustee to distribute any income

to the creditor since it would infringe on the

ownership interests of the remaindermen.

2. Principal

The original trust estate (and its

mutations and income generated prior to

marriage) clearly is the beneficiary's

separate property as property acquired by

gift, devise or descent, or property acquired

prior to marriage. Distributions of principal

are likewise the beneficiary’s separate

property. See Hardin v. Hardin, 681 S.W.2d

241 (Tex. App.—San Antonio 1984, no

writ).

3. Distributed Income

If the discretionary income

beneficiary is married, it would logically

follow that distributed income should be

considered separate. The exercise of

discretion by the trustee, in effect, completes

the gift. The result may be different if the

beneficiary is the trustee or can otherwise

control the distributions. On the other hand,

if the trustee is required to distribute the

trust's income to the married beneficiary, the

income could be considered community

once it is distributed since it arguably could

be considered income from the beneficiary's

equitable separate property. See Ridgell v.

Ridgell, 960 S.W.2d 144 (Tex. App.—

Corpus Christi 1997, no pet.). However,

there is recent case authority that holds that

trust income required by the trust document

to be distributed to the beneficiary is the

beneficiary's separate property, at least

where the trust was created prior to the

marriage. Cleaver v. Cleaver, 935 S.W.2d

491 (Tex. App.—Tyler 1996, no writ). See

also Matter of Marriage of Long, 542

S.W.2d 712 (Tex. Civ. App.—Texarkana

1976, no writ), and Wilmington Trust Co. v.

United States, 753 F.2d 1055 (5th Cir.

1985).

4. Undistributed Income

Undistributed income is normally

neither separate nor community property.

See Matter of Marriage of Burns, supra;

Buckler v. Buckler, 424 S.W.2d 514 (Tex.

Civ. App.—Fort Worth 1967, writ dism'd

w.o.j.), and McClelland v. McClelland, 37

S.W. 350 (Tex. Civ. App. 1896, writ ref'd).

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However, if the beneficiary has the right to

receive a distribution of income but does not

take possession of the distribution, such

retained income may create marital property

rights in the beneficiary's spouse. See

Cleaver, supra. Depending on the intent of

the beneficiary in allowing the distribution

to remain in the trust, such income (and

income generated by the retained income)

may be considered to have taken on a

community character or may be considered

to have been a transfer to the other

beneficiaries of the trust and subject to

possible fraudulent transfer on the

community scrutiny.

F. Spendthrift Trust

Texas law permits the settlor of a

trust to prohibit both the voluntary and

involuntary transfer of an interest in trust by

the beneficiary prior to its actual receipt by

the beneficiary. In fact, the settlor may

impose this disabling restraint on the

beneficiary's interest by simply declaring

that the trust is a "spendthrift trust." Such a

restraint is not effective if the beneficiary

has a mandatory right to a distribution, but

simply has not yet accepted the interest.

Further, such a restraint is not effective to

insulate a settlor's retained interest from the

settlor's creditors. See Tex. Trust Code §

112.035. This rationale suggests that the

settlor's intent as to the nature of the

beneficiary's interest may be relevant in

determining whether the beneficiary's

spouse acquires a community interest in the

trust estate, the undistributed income or any

distributed income.

G. Powers of Appointment

If the beneficiary has the absolute

authority under the trust agreement to

withdraw trust assets or to appoint trust

assets to the beneficiary or the beneficiary's

creditors, the beneficiary is deemed to have

the equivalence of ownership of the assets

for certain purposes. For example, such

beneficiary would appear to have such an

interest that cannot be insulated from the

beneficiary's creditors by either the non-

exercise of the power or a spendthrift

provision. An appointment in favor of a

third party could be found to have been in

fraud of creditors. See Bank of Dallas,

supra. While inconsistent with the common

law, which treated the assets over which a

donee had a general power as belonging to

others until the power was exercised,

application of this modern view may treat

the assets over which a married donee has a

general power as the separate property of the

donee, but any income generated by those

assets may be community property.

1. Special Powers

Many beneficiaries are given limited

general powers (i.e., "Crummey" and the so-

called "Five or Five" power, both of which

permit the beneficiary to withdraw a certain

amount from the trust estate at certain

periods of time).

2. Lapse of Powers

If the beneficiary allows the

withdrawal power to lapse, can the creditors

still go after that portion of the estate that

could have been withdrawn or can the

beneficiary’s spouse claim either a possible

community interest in the assets allowed to

continue in trust, or the income thereafter

generated? In other words, does the lapse of

the power make the beneficiary "a settlor" of

the trust? The Legislature has answered

some of these questions. Section 112.035 of

the Texas Trust Code was amended by the

Legislature in 1997 to confirm that a

beneficiary of a trust is not to be considered

a settlor of a trust because of a lapse, waiver

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or release of the beneficiary's right to

exercise a "Crummey right of withdrawal"

or "Five or Five" power.

3. Ascertainable Standard

If the beneficiary's power of

withdrawal is limited to an ascertainable

standard (i.e., health, support, etc.), creditors

who provided goods or services for such a

purpose should be able to reach the trust

estate, but not other creditors. Further, it

follows that any income distributed for such

purposes, but not so expended, may be

community since such expenses are

normally paid out of community funds. See

VII, E, supra.

4. Non-General Powers

A beneficiary's power to appoint

only to persons other than the beneficiary,

the beneficiary's creditors and the

beneficiary's estate are generally deemed

personal to the beneficiary and not

attachable by the beneficiary's creditors. It

would also follow that such a power would

not give the spouse any interest in the trust

estate. However, if the power is exercised to

divert community income from the

beneficiary, could it be subject to possible

fraud on the community scrutiny?

Note: See Sharma v. Routh, 302 S.W.3d 355

(Tex. App.—Houston [14th Dist] 2009, no

pet.), for an example of a divorce case

where the court examines the nature of the

spouse’s interests in irrevocable trusts to

determine their marital character.

XX. PLANNING FOR DESCENDANTS

In the client’s estate plan, the client

should consider possible marital property

planning for the client’s descendants,

especially if they reside in a community

property state. For example, whether or not

the client trusts the son-in-law, steps can be

taken to hopefully enable the daughter to

maintain the separate character of any inter

vivos or testamentary gifts.

A. Segregated Accounts

At a minimum, the daughter should

be advised to “keep her separate, separate”

by opening bank and brokerage accounts in

her individual name (perhaps with a

designation “separate account”) and only

depositing into the account her separate

property. Contemporaneous business records

showing the source of any and all separate

deposits should be retained in the event

proof of separate character of the account is

later needed.

B. Avoid Inadvertent Commingling

In a state like Texas, where income

from separate property is community

property, any interest (or other income

generated by the account) should be paid

into a different account in her name (perhaps

with a designation of “special community

account”) in order to avoid a “commingling”

of community and separate funds in the

separate account. If an account is

“commingled,” it becomes community

property.

C. Separate Investments

Any investment given to her,

purchased with funds in her “separate

account” or certificates issued out of her

separate account, should be held in her name

only. Further, real estate conveyed to her

should be conveyed to her “as her separate

property.” Again, contemporaneous business

records can serve as evidence of the nature

of the transaction and the separate character

of the asset and should be retained.

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D. Family Entities

If the daughter is to be a partner in a

family partnership, a member in a family-

oriented limited liability company or a

shareholder in a closely-held corporation,

her interest should be given to her as a gift

(or purchased with traceable separate

property). Again contemporaneous business

records of the nature of the transaction

should be retained. If she expends any

“time, talent or labor” in the management of

the entity, paying her a reasonable

compensation for those personal services

should be considered to hopefully avoid a

later reimbursement claim by her husband.

E. Asset Protection Trusts

Any and all of the inter vivos or

testamentary gifts could be placed in an

asset protection trust for the daughter’s

benefit during her lifetime. The spendthrift

provisions will help not only insulate the

daughter’s interest from the claims of her

creditors, but also any community property

claims of the son-in-law. Including a

statement in the trust agreement that it is the

settlor’s intent that any and all interests of

the daughter, as well as any and all

distributions to her out of the trust, are her

separate property may not be conclusive, but

may prove to be persuasive in future

litigation.

Limiting distributions of income

and/or principal to an ascertainable standard

(health, education, maintenance, or support)

is especially important if the daughter is

going to be the trustee or is going to be

given general power of appointment. If a

third party is going to serve as trustee,

income distributions to her could be at the

discretion of the trustee or pursuant to an

ascertainable standard. Caution should be

exercised in granting any other powers to

the daughter over the trustee or the trust

estate. Carefully planning and drafting the

terms of the trust could prove to be

persuasive in maintaining the trust as her

separate property.

F. Daughter’s Counsel

Counsel can be retained to advise the

daughter on what other planning tools are

available to her in order to insulate “her

estate” from any possible community

property claims of her husband (or his

successors or creditors) and/or to review the

daughter’s planning to ensure that what can

be done has been done to insulate the

daughter’s inheritance from any possible

claims of the son-in-law (or his successors

or creditors).

Finally, the fees of the daughter’s

counsel should be paid by the daughter with

her separate property or by the client to

avoid any claim by the son-in-law that the

daughter misused their community property

to his detriment.

XXI. NON-PRO RATA

DISTRIBUTION OF THE

COMMUNITY

Upon the death of the first spouse

and while record legal title to the probate

assets still reflects that some community

assets are held in the decedent's name, some

are held in the surviving spouse’s name and

others are held in both names, the surviving

spouse and the heirs and/or devisees of the

deceased spouse are, in effect, tenants in

common as to each and every community

probate asset, unless the surviving spouse is

the sole distributee of some or all of the

deceased spouse's one-half interest in such

assets.

Assuming that the decedent's one-

half community interest has been left to

someone other than the surviving spouse,

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the respective ownership interests of the

surviving spouse and the decedent's

distributees are subject to the possessory

rights of either a court appointed personal

representative or the surviving spouse for

administration purposes. When probate

administration is completed, the surviving

spouse and the distributees are entitled to

their respective undivided one-half interests

in each and every remaining community

probate asset. Tex. Est. Code § 101.001.

Note: Why? Under our Texas community

property system, the surviving spouse owned

an undivided one-half interest in each item

of community property prior to the

decedent’s death and retains that one-half

interest upon the decedent’s death.

A. Non-Pro Rata Division

Under these circumstances, can the

surviving spouse and the personal

representative (or the decedent's

distributees) agree to make a non-pro rata

division of the community estate so that the

surviving spouse receives 100% of some of

the assets and the distributees receive 100%

of other community assets? The answer is an

obvious yes, although the authority of a

personal representative to enter into such a

transaction should depend, in part, on if

there is a probated will, the terms of the will

and the powers granted to the executor in the

will.

Of course, even if the will purports to

enable the executor to make a non-pro rata

division of the community, the surviving

spouse's agreement is still required.

B. Effect on Nonprobate Assets

The surviving spouse is likely to be

the beneficiary of nonprobate dispositions

like retirement plans, life insurance and

multiple-party accounts. Can the will of the

deceased spouse or the executor of the

deceased spouse’s estate (or the devisees of

the deceased spouse) require the surviving

spouse to accept the nonprobate disposition

in lieu of the surviving spouse’s one-half of

all or part of the community probate estate?

The answer is an obvious “no” without the

surviving spouse’s agreement.

Note: Regarding XXI, A and B, supra, the

surviving spouse may have already agreed

to the non-pro rata division by accepting

some benefit in exchange for giving up other

benefits, powers or rights through either an

express or equitable election.

C. Tax Consequences

Accordingly, the real issue may be

whether any such resulting non-pro rata

division of the community will be

considered a taxable event, subjecting the

parties to, for example, capital gain exposure

to the extent the assets have appreciated in

value since the decedent's date of death, or

whether one party gives up more in value

than received, creating a taxable gift

situation. The gift tax issue is obvious. As

to the risk of the division being a taxable

event for income tax purposes, the answer is

a probable “yes.”

D. IRS Income Tax Positions

To deal with the risk of a taxable

event in the event of a non-pro rata division

of the community following the first

spouse’s death, for years Texas lawyers

have looked to old three private letter

rulings.

1. In PLR 8016050, 1980 WL

132102, where a husband and the executor

of his wife's estate proposed an equal, but

non-pro rata division in California, the

Service ruled the exchange was not a taxable

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event. In California, the ruling noted, the

right of partition is to the entire community

estate and not merely to some specific part,

relying in part on the legal principle that the

marital property interest of each spouse is an

interest in the community, as if the

community were an “entity” like a

partnership. However, in Texas, community

property principles do not create a

“community entity.” Community property

is a form of co-ownership of each and every

community asset that ceases to exist when

the marriage terminates. This substantive

difference in Texas law may make this

ruling inapplicable to Texas estates. Thus,

the risk still exists.

2. In PLR 8037124, 1980 WL

134564, a couple proposed to divide

community property into two equal but non-

pro rata shares in order to create liquidity for

the deceased spouse’s estate to pay estate

taxes upon an anticipated death. The ruling

concluded that such a partition would not

result in a taxable event. The ruling was

issued prior to the enactment of 26 USCA

Sec. 1091, which provides that no gain or

loss on such a division in the event of

divorce.

3. In PLR 9422052, 1994 WL

237304 community assets had been placed

in a revocable trust arrangement prior to the

first spouse's death, and the trust agreement

authorized the trustee to make non-pro rata

distributions following the first spouse's

death among the survivor's trust and the

deceased spouse's marital deduction and

bypass trusts, negating the taxable exchange

consequences.

E. Marital Agreement Approach

Even if the will of the deceased

spouse authorized the executor to make non-

pro rata distributions, it is doubtful such

mandate is binding on the surviving spouse

unless the couple had agreed to a non-pro

rata division in a valid marital agreement.

The second 1980 ruling suggests that such a

martial agreement may not result in a

taxable event following the first spouse’s

death. Accordingly, the real question is

whether such an agreement is valid under

the Texas “mere agreement rule.” See XIV

and XVII, supra. The author is not aware of

any cases specifically addressing this issue,

but is of the opinion such an agreement

should be valid under Texas law (i.e., not

violate the mere agreement rule).

F. The Revocable Trust Approach

The 1994 ruling offers another

approach – a planning advantage a revocable

trust may have over a traditional

testamentary plan when the settlor spouses

have agreed in the revocable trust agreement

to a non-pro rata distribution of the trust

estate upon the first spouse’s death. Most

commentators, including this author, seem

to agree that such an agreement among the

settlor spouses in the trust agreement should

be valid under Texas law (i.e., it does not

violate the mere agreement rule). See Note

following XXII, K, infra.

G. Safe Harbor Approach

Until there is express authority under

Texas law for the spouses to enter into such

a non-pro rata division agreement in a

marital agreement or through a joint

revocable trust in, in order to minimize the

tax risks the safe harbor approach may be

for an independent executor with

appropriate authority granted in the will to

enter into a partition of the community

assets with the surviving spouse shortly after

the first spouse's death and prior to any

significant appreciation in value to the

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community assets. Care should then be

taken to track the income from the

partitioned assets so that the income is

properly reported on the income tax returns

of the survivor and the estate (or its

successors).

Note: Without specific authority granted in

the will, even an independent executor does

not have the authority to partition undivided

interests in the deceased spouse’s estate

(the decedent’s interest in the community

property and the decedent’s separate

property) among the devisees (or to sell an

interest which is incapable of fair partition).

Tex. Est. Code § 405.008. An independent

executor can make partial distributions

before the estate closes. Tex. Est. Code §§

360.002, 402.052. But only the surviving

spouse can seek a “partition” of the

community property during administration

by applying to the court for the partition

even in an independent administration. Tex.

Est. Code § 360.253. See In Re Estate of

Furr, 553 S.W.2d 671 (Tex. Civ. App.—

Amarillo 1977, writ ref’d, n.r.e). Such

authority is not granted to the decedent’s

personal representatives or distributees.

Accordingly, it seems reasonable to

assume following the death of the first

spouse, the surviving spouse is in a position

to initiate the partition of community assets

and an independent executor with the

appropriate authority granted in the will

should be able to partition and exchange

community assets with the surviving spouse

without a court proceeding. Absent

authority in the will, the consent of the

distributees of the deceased spouse’s estate

is needed. But the tax risk remains.

XXII COMMUNITY PROPERTY IN

THE REVOCABLE TRUST

If a married individual or couple

places community property in a revocable

trust, the relative marital property rights of

the spouses could be adversely affected. For

example, separate and community could be

commingled; community property subject to

a spouse's sole management and control

could become subject to the couple's joint

control. Community property may be

deemed partitioned.

A. Professional Responsibility

It is obvious, therefore, that the

practitioner advising both spouses should be

alert for possible conflicts of interests and

make sure the couple understands the effect

revocable trust planning could have on their

marital property rights during the remainder

of the marriage and on its dissolution either

by death or divorce.

B. Creation and Funding

Generally, when marital property is to

be placed into a revocable trust, steps should

be taken to insure that the planning is

marital property neutral. That the planning:

1. Is not deemed fraudulent or even

"illusory" under Land v. Marshall,

426 S.W.2d 841 (Tex. 1968).

(husband placed his sole

management community property

into a revocable trust; upon his

death, the wife disrupted the plan by

pulling her one-half interest out of

the trust under the "illusory" transfer

doctrine);

2. Is not deemed void because one

spouse unilaterally attempted to

transfer community property subject

to joint control into the trust under

Tex. Fam. Code § 3.102;

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3. Does not amount to a partition of

community property under Section

4.102 of the Texas Family Code

unless that is desired by the parties;

4. Does not work a commingling of

community and separate funds as to

risk losing the separate character of

the separate property, unless that is

desired by the parties;

5. Does not convert one spouse's

retained equitable interest in his or

her sole management community

property into joint community

property and thereby expose it to

liability for the contractual debts of

the other spouse; and

6. Defines which assets the trustee

should use to provide for, and pay

the debts of, the spouses while both

are alive, and to satisfy claims of

creditors upon the first spouse's

death.

Note: Texas community property law may

create a unique planning opportunity when

one spouse is incapacitated. Following a

judicial declarations of incapacity, the other

spouse, in the capacity of the community

administrator, is granted the sole power of

management, control and disposition of the

entire community estate. Does this

authority give the managing spouse the

power to create and fund a revocable trust

as a planning technique to avoid a

guardianship in the future? In Land v.

Marshall, the Texas Supreme Court held

that the husband’s creation of a revocable

trust with community subject to his

management and control, even without his

wife’s joinder was not void as to the wife’s

one-half interest, but voidable at her

election under the “illusory transfer”

doctrine.

C. Distributions

Careful consideration should be given

to the trustee's duty to support the couple

while both are still surviving. Generally, the

terms of the trust should specify whether

trust income is to be distributed or retained

and if distributed, whether distributions to a

spouse, or both, are appropriate. It may be

advisable to distribute what would otherwise

be a spouse's sole management community

income (income from separate property or

existing sole management community

property) to that particular spouse. If such

income is retained, it may be advisable to

hold and invest it, in trust, as "sole

management community." When the trustee

is authorized to distribute income or

principal for the spouses pursuant to an

ascertainable standard, the terms of the trust

need to specify what sources are to be

exhausted first (i.e., use separate before

community, or use community before

separate and which type of community is

expended first—sole management or joint).

A different set of distribution criteria may be

appropriate during those periods the spouses

are incapacitated.

D. Power of Revocation

When spouses fund a revocable trust

with community property, should the power

of revocation be retained “jointly” or

“severally”? If the document directs that

either spouse can revoke the trust

unilaterally, should the power extend to the

whole community asset being withdrawn

from the trust or only to the revoking

spouse's undivided one-half interest therein?

1. Joint Revocation

If the power to revoke is retained

jointly by the couple, the couple's equitable

interest in the trust would appear to be their

joint community property even though some

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of the community assets in the trust were a

spouse's sole management community

property prior to funding. Converting sole

management community property into joint

community property affects the relative

marital property rights of the spouses. For

example, an asset which would have been

exempt from certain debts of a particular

spouse would become liable. See Brooks v.

Sherry Lane National Bank, 788 S.W.2d 874

(Tex. App—Dallas 1990).

2. Unilateral Revocation

To avoid converting sole management

community property into joint community

property, the document could be drafted to

permit either spouse to withdraw from the

trust that spouse's community one-half

interest in any community asset placed in

the trust. However, this approach has

several problems. Such a power would, in

effect, permit either spouse to unilaterally

partition the couple's community property

interests, a result which does not appear to

be authorized by Art. XVI, Sec. 15 of the

Texas Constitution. Only jointly can spouses

partition community property into their

respective separate estates. Even an

agreement by the spouses to authorize such

a unilateral partition might appear to violate

the "mere agreement" rule of marital

property. See Kellet v. Trice, 95 Tex. 160,

66 S.W. 51 (1902); King v. Bruce, 145 Tex.

647, 201 S.W.2d 803 (1947); Hilley v.

Hilley, 161 Tex. 569, 342 S.W.2d 565

(1961).

Accordingly, if unilateral revocation

is desired, the more considered solution is to

allow one spouse, with notice to the other, to

withdraw their sole management community

and any joint community property with the

joint community property being distributed

in both names.

3. “Joint and Several” Revocation

Accordingly, the safe harbor approach

would be for the couple to retain power of

revocation (i) jointly for some assets of the

trust (the joint community property assets)

and (ii) unilaterally as to other assets in the

trust (sole management community property

and separate property) after giving notice to

the other spouse. If a power of revocation is

exercised as to a sole management

community asset, the withdrawn asset

should remain the couple's community

property, but still subject to the withdrawing

spouse's sole management and control.

Note: If the couple so agrees, allowing

either spouse to revoke as to a joint

community asset would not appear to have

any adverse consequences from a

constitutional, liability or tax perspective so

long as the asset in its entirety is revested as

community property.

E. Subsequent Incapacity of a Settlor

As with any revocable trust, the trust

document should address the effect the

possible incapacity of a settlor will have on

the power of revocation. Can an agent under

a durable power of attorney revoke on

behalf of the settlor/principal? Can a

guardian revoke the ward's revocable trust?

Is the power of revocation a non-delegable

power? See Weatherly v. Byrd, 566 S.W.2d

292 (Tex. 1972). The questions evolve even

further if the settlor is married and the trust

is funded with the incapacitated spouse's

sole management community property or

joint community property. Do Sec.

1353.002 of the Texas Est. Code and Sec.

3.301 of the Texas Family Code permit the

other spouse to revoke the trust on behalf of

the incapacitated spouse? Texas law

provides no clear answers to these questions,

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thus, the document should address all of

them.

F. Effect of Subsequent Divorce

Community assets and quasi-

community property held in trust where one

or both of the spouses hold a power of

revocation are likely part of the "estate of

the parties" subject to division by the

divorce court in a just and right manner

pursuant to Sec. 7.001 of the Texas Family

Code.

1. Powers of Appointment

A power of revocation is defined in

the Texas Property Code as a general power

of appointment, giving the holder thereof the

equivalents of ownership over the assets

subject to the power. See Tex. Prop. Code,

§ 181.001.

2. Void and Voidable Transfers

If only one spouse is the settlor of a

trust funded with the settlor spouse's special

community property, the transfer of such

community assets into the trust is deemed

"illusory" as to the other spouse. See Land v.

Marshall, XXII, B, supra. If the sole settlor

spouse attempted to transfer into the trust

joint community assets without the joinder

of the other spouse, the transfer should be

found to be void as to the other spouse.

3. Separate Trust Estate

If the settlor spouse transferred

separate property into a revocable trust

arrangement, (a) the original trust estate and

its traceable mutations should retain the

separate character of the separate property

contributed to the trust, (b) trust income

distributed to the settlor is still community

property and (c) any undistributed income

and its mutations should be deemed to be

community due to the settlor's power of

revocation.

4. Transfer to Third Parties

Any trust income or any other

community assets held in the trust and

distributed by the trustee to a third party,

such as a child of a settlor from the settlor's

prior marriage, is likely to be treated as a

completed gift by the settlors to the third

party for tax purposes. If the gift is made

unilaterally by one spouse, the gift is subject

to attack by the other spouse as being a

transfer in fraud of the other spouse's

community property rights.

5. Revocable Trusts Becoming

Irrevocable

If, during the marriage, a revocable

trust becomes irrevocable due to a

modification by the settlor, or due to the

trust terms (e.g., the trust provides that it

becomes irrevocable upon the settlor's

incapacity or death), (a) the interests of the

non-settlor beneficiaries may become fixed,

vested and/or ascertainable, (b) the settlor

may be deemed to have made a completed

gift for tax purposes and (c) the now

completed transfers to the non-settlor

beneficiaries are subject to scrutiny as being

transfers in fraud of the other spouse's

community property rights.

6. Income Taxes

Capital gains taxes generated by the

sale of revocable trust assets traceable to a

settlor’s separate property is taxable to the

settlor and is reported on the settlor's income

tax return (typically a joint return with the

settlor's spouse). The payment of the

consequential tax liability with community

funds could adversely affect the rights of the

other spouse, possibly creating a

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reimbursement claim when the marriage

terminates.

7. Planning for Divorce

While Section 123.052 of the Texas

Estates Code voids provisions in favor of the

former spouse and the former spouse’s

relatives, in the event of a subsequent

divorce, other problems exist if the trust is a

joint revocable trust that provides for “joint

revocation” and does not address what

happens to the power of revocation in the

event of a divorce. Further, it is not difficult

to imagine the problems trying to interpret

and construe the remaining terms of the

trust.

In that situation, it would likely serve

both settlors to address these issues in the

divorce settlement. Awkward as it might be,

it would be even better to address the

possibility of a subsequent divorce in the

trust agreement and how it would impact the

power of revocation and the other terms of

the trust. Hopefully, the trust agreement

would not be subject to scrutiny by the

divorce court; but Section 7.006 of the

Texas Family Code should be considered.

G. Death of First Spouse

Upon the death of the first spouse to

die, the decedent's separate property and

one-half interest in the community assets

pass pursuant to the terms of the trust

agreement (e.g., perhaps some specific or

general gifts outright to certain

beneficiaries), with most of these assets

continuing in one or more trusts (e.g.,

bypass and/or Q-Tip trusts) for the benefit of

the surviving spouse and the remainder

beneficiaries.

H. Survivor's Interests

Upon the death of the first spouse, the

surviving spouse's separate property and

one-half interest in the community property

typically should be delivered to the

surviving spouse or segregated into a

"survivor's trust" that continues to be

revocable by the surviving spouse unless a

different result is desired after considering

the consequences of it becoming

irrevocable. In addition to the substantive

advantages for the surviving spouse,

continuing revocability prevents an

unintended taxable gift on the part of the

surviving spouse. If the surviving spouse is

not a settlor of the trust (or did not otherwise

agree to the terms of the trust) and does not

receive the survivor's one-half interest in the

community property, the settlor spouse can

use the "illusory trust" argument to reclaim

the survivor's one-half interests in the

community trust assets. See Land v.

Marshall at XXII, B, supra.

I. Planning Considerations

When drafting the trust document,

separate trusts may be desirable for each

spouse’s separate property and their

community property. In fact, it may be

advisable to segregate the community

property further into three separate sub-

trusts, one for each spouse’s sole

management community property and one

for their joint community property in order

to maintain their relative marital property

rights, to facilitate the management rules of

Sections 3.101 and 3.102 of the Texas

Family Code and to continue the liability

exemption rules of Section 3.202 of the

Family Code, otherwise the couple's relative

rights are affected and the attorney is placed

in a conflict of interest by trying to

represent both spouses in the planning.

Finally, the trustee should be instructed to

pay debts and other expenses in a manner

consistent with the liability rules of the

Texas Family Code.

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J. Community Property Basis

Because a decedent's interest in the

revocable trust assets is included in the

gross estate, such assets will receive a new

income tax basis. However, if community

property is placed in a revocable in the trust,

care should generally be taken in the

drafting of the trust agreement and the other

transfer documents to make sure that the

funding of the trust with community

property does not amount to a partition of

the community property that would

jeopardize the new income tax basis both

halves of the community can receive upon

the death of the first spouse. See Rev. Rul.

66-283, 1966-2 C.B. 297.

K. Non-Pro Rata Division

Notwithstanding the typical distribution

of what was community property trust

assets upon the death of the first spouse that

was described in XXII, G, H, supra, the

couple, as joint settlors, in the trust

agreement could agree to have the trustee

make a non-pro-rata division of any

community property assets held in the trust

or added to the trust by reason of the first

spouse’s death. Assuming it does not

violate the mere agreement rule, such an

agreement might generate significant tax

savings when compared to a non-pro-rata

distribution of the community probate

estate. See XXI, D, F, supra

XXIII. PLACING THE HOMESTEAD

AND OTHER EXEMPT

PROPERTY IN A REVOCABLE

TRUST

A homestead exemption from the

owner's general creditors can only exist in a

possessory interest in land. See Capitol

Aggregates v. Walker, 448 S.W.2d 830

(Tex. Civ. App.-Austin 1969, writ refd

n.r.e.); Texas Commerce Bank v. McCreary,

677 S.W.2d 643 (Tex. App. – Dallas 1984,

no writ). In revocable trust planning, where

legal title in the home is transferred to the

trustee, the settlor usually retains the

equitable title at least for the remainder of

the settlor's lifetime. In addition, there is

case law authority for the proposition that an

"equitable interest" will support a homestead

claim. See Rose v. Carney's Lumber Co.,

565 S.W.2d 571 (Tex. Civ. App.—Tyler

1978, no writ); White v. Edwards, 399

S.W.2d935 (Tex. Civ. App.—Texarkana

1966, writ refd n.r.e.). In fact, one early case

held that the property retained its homestead

character during the settlor's lifetime

notwithstanding the fact it had been

conveyed to a trustee where the settlor had

continued to occupy the property and the

purpose of that trust was to prevent the

premises from being taken by creditors. See

Archenhold v. B.C. Evans Co., 32 S.W. 795

(Tex. Civ. App. 1895, no writ).

A. Exemption from Creditors

Thus, it appears as if the homestead

continues to be exempt from most creditors

so long as the settlor of a revocable trust is

alive. Tex. Prop. Code § 41.001. The same

would hopefully be true for exempt personal

property. Tex. Prop. Code § 42.001. In

2009 the Texas Legislature added Property

Code Section 41.0021, confirming that the

transfer of a homestead to a qualifying trust

does not affect the homestead protections of

the Texas Constitution Section 50, Article

XVI and Texas Property Code Section

41.001.

Note: Amendments to the property tax code

also provide that the homestead ad valorem

tax exemption can remain even if the

residence is placed in a “qualifying” trust.

See Tex. Property Tax Code § 11.13.

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B. Survival of the Separate Property

Homestead

The transfer of assets to the

revocable trust may result in the loss of

certain probate provisions which protect the

surviving members of the family from the

decedent’s creditors (i.e., the probate

homestead, exempt personal property,

family allowance and the claims procedures

followed in probate administration)

following a decedent’s death. Section

41.0021(e), says, “This section does not

affect the rights of a surviving spouse or

surviving children under Section 52, Article

XVI, Texas Constitution, or Part 3, Chapter

VIII, Texas Probate Code” (Homestead,

Family Allowance and Other Exempt

Property).

1. Probate Homestead

The Texas Constitution provides

that, on the death of a homestead owner, the

separate property homestead is to descend

and vest in like manner as other real

property of the deceased but that it shall not

be partitioned among the heirs of the

deceased during the lifetime of the

surviving spouse for so long as the survivor

elects to use or occupy the same as a

homestead, or so long as the guardian of the

minor children of the deceased may be

permitted, under the order of the proper

court having the jurisdiction, to use and

occupy the same. Tex. Const. Art. XVI. §

52 (1987). The effect of this constitutional

mandate is to vest a “life estate” in the

surviving spouse until abandonment, or a

right to receive an estate until majority for

minor children. Thompson v. Thompson,

236 S.W.2d 779 (Tex. 1951). In addition,

the Texas Estates Code provides that

following the owner's death, the homestead

will not be liable for any debts, except for

the purchase money thereof, the taxes due

thereon, or work and material used in

constructing improvements thereon. Tex.

Est. Code § 102.004. Further, the Texas

Estates Code directs the probate court to set

apart for the use and benefit of certain

family members, all such property of the

estate as is exempt from execution or forced

sale by the constitution and laws of the

state. Tex. Est. Code § 353.051.

2. Right of Occupancy

Will the surviving spouse have a

right to occupy the home following the

death of the owner if it was placed in a

revocable trust prior to its owner's death?

While there are no definitive cases on point,

it appears that the surviving spouse may not

have such a right unless the trust document

so provides. If the home was placed in the

revocable trust during marriage, both

spouses would have had to join in the

transaction or the conveyance would have

been ineffective. Tex. Fam. Code § 5.001.