We get asked this question a lot by parties contemplating divorce where one or both parties also have an ownership interest in a family business or started a business before marriage. To address this question, I believe it is helpful to start by explaining some of the underlying concepts.
- Property Characterization
Under Texas law, property is characterized as either Community Property or Separate Property. There are also instances where a specific property might be “mixed” in character—meaning, the property has both Community Property and Separate Property components.
- Community Property: All property acquired by either spouse during marriage is Community Property except if that property is the Separate Property of either spouse. Income earned by either spouse during marriage is community property—even if income is from separate property.
- Separate Property: All property a spouse owned or claimed before marriage, or that was acquired afterwards by gift, devise or descent, is the separate property of that spouse. Additionally, recovery for personal injury sustained by a spouse during marriage (except recovery for loss of income), is separate property of that spouse.
2. Presumption of Community Property
Texas law presumes that all property owned by either spouse during or upon dissolution of their marriage is community property. However, this presumption can be rebutted or overcome by clear and convincing evidence.
- Inception of title rule
- A property’s character (community or separate) is based on the time and manner in which a person first acquires an interest in the property.
- Separate property is not altered by sale, exchange or substitution of property.
Business Owner Divorce
If you have a family business that has been in your family for generations—or a business that you acquired before marriage, then generally speaking, applying the inception of title rule, that business is separate property because you acquired your interest in that business before marriage.
It is however important to remember that income is community property—so the income earned from the family business is Community Property even though the family business is characterized as Separate Property.
Another wrinkle that we often see is when Community Property is used to benefit Separate Property. For instance, the spouse who has an ownership interest in family business may also be working at that business for a reduced salary or no salary. Under these set of facts, the spouse that has no ownership interest in the family business may be entitled to a reimbursement claim on the grounds that income from one spouse (which is Community Property), is being used to benefit the Separate Property of the that spouse.
Another permutation is when the family business keeps a lot of “retained earnings” that could arguably have been paid out as earnings to the owners. Under this situation, the spouse that has no ownership interest in the family business could argue that the retained earnings should be classified as income and should not be classified as Separate Property.
In large estates, proving the character of property can be very technical. Even in situations where the character of the business is not in dispute, income from the business may be in dispute.
If you are involved in or contemplating a divorce in Houston, Sugar Land, The Woodlands, or surrounding areas, that involves family business, complex assets and property, we would love to hear about your case and assist you through this difficult time.