By Larry Martin
In Texas, only community property is subject to division by the courts. Trial courts have no authority to award a spouse’s separate property to the other spouse in a divorce proceeding.
Agreements to convert one spouse’s separate property into community property are becoming increasingly popular. Such an agreement can be a loving gesture from one spouse to provide for the other. These agreements can also be a way to affect an inheritance. These conversion agreements can have favorable tax implications. In some situations, an agreement of this nature may be a way for a misbehaving spouse to compensate for something he or she did wrong in the marriage.
What are the requirements of an agreement to convert property?
- The parties must be married. Therefore, persons about to marry may not enter into an agreement to convert separate property into community property.
- The agreement must be in writing and signed by the spouses.
- The agreement must specifically identify the property being converted and state that such property is being converted to community property.
- Only property currently in existence can be converted from separate property into community property. Unlike a premarital agreement or partition or exchange agreement, parties cannot agree to convert separate property to be acquired in the future into community property.
Additionally, the parties must follow the statutory requirements set out in the Texas Family Code. The mere transfer of a spouse’s separate property into the name of the other spouse, without following the statutory requirements, is not sufficient to convert separate property into community property.
Why convert separate property into community property?
One reason to convert property is to create a community property interest in the property being converted, in favor of the other spouse. Here, at least one spouse is benefitting because he or she now has an interest in property that he or she may not otherwise have had.
An additional potential advantage is for tax and estate planning purposes. Community property may receive special “stepped up basis” treatment in the event of the death of a spouse. The parties may want to convert a specific piece of separate property into community property and thereafter enter into a community property with right of survivorship agreement.
Finally, the parties could effectively “undo” a previously executed premarital agreement or partition or exchange agreement, the purpose of which was to create separate property or partition community property into separate property.
Are there disadvantages associated with this type of agreement?
Yes. A spouse who converts his or her separate property into community property is relinquishing a property right that a court would not have the authority to take away under normal circumstances.
Disadvantages also exist from an estate planning perspective. Generally, upon the death of a spouse, the deceased spouse has the right to dispose of one-half of all community property, pursuant to his or her will. If the property had remained the separate property of the surviving spouse, the entirety of the property would not be subject to disposition by the deceased spouse.
Other potential disadvantages include: (i) the loss of management rights over the property being converted; and (ii) subjecting the property being converted to the debts of the other spouse. Generally, the separate property of one spouse is not liable for the contractual obligations of the other spouse. However, if property is converted from separate property to community property, it may be subject to the claims of the other spouse’s creditors.
If you are contemplating an agreement to convert property, seek the advice of competent counsel in order to have a complete understanding of the ramifications of such an agreement.