Tuesday, January 02, 2007

Texas Property IV: Tracing Rules

In Texas Family Law, one of the most challenging things to do is attempting to establish the existence of funds that are the separate property of one of the spouses.

Luckily, there are some tracing rules that have been developed over time to assist us in identifying separate property.

The first, and possibly most popular, is the Community First Out Rule. As the name implies it is a generally accepted rule that when separate property funds are commingled into an account which also contains community funds, it is presumed that the withdrawals are first made with the community funds. Welder v. Welder, 794 S. W. 2d 420 (Tex.App.--Corpus Christi 1990, no writ).

Suppose you are married and your late aunt Henrieta wills you $500,000 and place it into your joint checking account which has $30,000 in it. You then buy a home for $200,000 and pay cash for it. How much of the home is community property?

Its kind of a trick question.

First, we know that the $500,000 is your separate property because under 3.001 of the Texas Family Code, anything bequeathed to you is separate property. Next the Community First Out Rule, says that the first $30,000 you paid on the home is presumed to have been from the community portion. However, it is not correct to ask 'how much of the home is community property'. The inception of title rule says that the entire house is characterized as community property. The court would still have the power to rule on what happens to the home. (In most cases it is ordered sold). Title however is different from equity.

Pretending for the moment that there is no appreciation in the value of the home, the separate estate would be entitled to reimbursement from the community estate in the amount of $170,000 (that is, once the house is sold, the spouse who had the inheritance would get the first $170,000 from the sale automatically). The remaining equity in the home ($30,000) would be considered community property and would be apportioned between the spouses in the way the judge feels is best . Finally, the remaining money in the joint account ($200,000) would be confirmed as the property of the separate estate because it is presumed that the $30,000 was spent on the home.