Sorting Out Separate and Community Property in a Galveston Divorce Case

By October 15, 2018Divorce

For most Galveston couples seeking a divorce, the main contested issue is division of property. Texas law presumes that any property acquired by either spouse during the marriage (except as a gift) is “community property.” Conversely, any property acquired by either spouse individually prior to marriage is classified as that spouse’s “separate property.”

But what about property that a spouse holds through a separate business entity, such as a corporation or limited liability company. In those situations, the property itself belongs to the entity, and is not considered either community or separate property. However, any subsequent distributions of property or income from the entity to the spouse may still be considered community property.

Wife’s Attempt to Transfer Property from LLC to Herself Backfires

Here is an illustration taken from a recent Texas divorce case. The couple in this case sought a divorce following a brief marriage. Before the marriage, the wife acquired approximately 2 acres of real property, which she used to build and operate (ironically enough) a wedding and planning center. The husband contributed a good deal of his own money to help the wife build-out the property.

In July 2014, about two months before the couple’s marriage, the wife conveyed the land and its improvements to a limited liability company (the LLC). The husband filed for divorce in 2016. After the divorce filing–and after she separately filed for bankruptcy–the wife transferred the property from the LLC to her. She then attempted to claim the property was part of her “homestead” and thus exempt from the bankruptcy proceeding.

Earlier this year, the Texas court overseeing the divorce held the 2-acre property was properly classified as “community property.” The Court of Appeals agreed with the trial judge. As the appeals court explained, in addition to the husband’s “significant loans and contributions toward capital and noncapital improvements” on the property, the wife’s attempt to shift the property in-and-out of the LLC worked to her detriment. Although the land was unquestionably her separate property at the outset–as she purchased it before marriage–once she placed it in the LLC, it ceased to be either separate or community property.

But by transferring the property back from the LLC to herself, that constituted a “distribution” from the limited liability company. And when, as here, such distributions are made during the marriage, it must be considered community property under Texas law. So the trial court was correct to treat the property as part of the couple’s community estate.

Speak with a Galveston Divorce Lawyer Today

There are many cases where spouses think they can cleverly work around Texas community property laws by moving assets around. But the law frequently anticipates such moves. This is why you need to work with an experienced Galveston divorce lawyer who can assist you in doing things the right way. Contact the Law Offices of Tad Nelson & Associates if you are thinking about divorce–or have already been served with papers–and would like to speak with a member of our team about what steps to take next. Call us today at (281) 843-9776.