During a divorce you and your former spouse are dividing property and assets, but what if you also have a court case? Do you have to divide any of your case proceeds or settlement? Determining if a divorce will impact your case or settlement proceeds begins with determining whether you live in a community property state or non-community property state. Whether your state is a community property or a non-community property state determines how a court will characterize property in the event of divorce.
What is a Non-Community Property State?
Most states are non-community property states. A non-community property state is a state that characterizes “property earned by a wife or husband as her or his individual separate property.”[1] In non-community property states, the division of property at divorce is up to the court’s discretion[2] For some states, they utilize the equitable distribution method to determine how to fairly divide property between divorcing spouses.[3] The division of the property is facilitated by the judge involved in the divorce proceeding who takes into account certain factors, which can include:
- A spouse’s financial status
- A spouse’s ability to earn an income
- The value of each spouse’s separate property, which can include:
- Businesses
- Retirement Funds
- Investments
- A spouse’s contribution to the marital estate
- Contributions, if any, to a spouse’s education or training
- The financial needs of the spouses
- Age and health of the spouses
- The liquidity of marital property
- Premarital agreements, if any
- Spousal maintenance or alimony obligations.[4]
A Non-Community Property State’s Impact on Settlement Proceeds
In a state that is not a community property state, any settlement proceeds received by a spouse will generally remain the property of the spouse who is a party to the suit.[5] (Add a sentence that gives a laymans term of what this means). However, the distribution of the settlement proceeds between the spouses is ultimately up to the court’s discretion.[6]
What is a Community Property State?
Community property is a term that describes property acquired by either spouse during the marriage.[7] Community property includes any property that is not acquired by inheritance or gift. When property is acquired during the marriage that is not from inheritance or gift, each spouse will be presumed to have a fifty percent interest in the property acquired.
Out of the all the states and territories in the United States, only ten are classified as community property states. These states are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Puerto Rico[8]
During the divorce process, each divorcing spouse has a fifty percent interest in any property considered community property, and if a couple is divorcing in a community property state, the property acquired during the marriage is presumed to be community property. The community property presumption is rebuttable, and property can be characterized as separate property if the spouse meets the requirements to prove property separate.
In Texas, two ways to rebut the community property presumption are tracing and reimbursement.[9] A spouse that has used their separate property to benefit the other spouse during the marriage can request that they be reimbursed for their contributions. “[T]he common thread running through all of the reimbursement claims is that either funds, assets, time, toil or effort of one estate has been used to enhance another estate.”[10] The other common way is by tracing property.[11] Tracing usually involves using financial documents such as bank statements to prove that property is the separate property of one spouse.[12]
What is Defined as Community Property in a Settlement?
If a divorcing couple lives in a community property state, a divorce will have a different impact on the distribution of settlement proceeds. Suppose a spouse receives case/settlement proceeds during the marriage, and a portion of the proceeds would be characterized as community property in the event of a divorce. In that case, it is the burden of the spouse receiving the settlement to prove which portion of the proceeds are separate property.[13] If the spouse cannot prove which portion of the settlement is separate property, the entire settlement will be characterized as community property.[14] Your attorney can help provide guidance on which portions of a settlement is separate property, but here is a broad overview of what is considered community property and what is not during a settlement.
Community Property:
- Expenses for which the community was liable, including medical expenses incurred during the marriage
- Loss of income or earnings and impairment of earning capacity during the marriage[15]
- Future Medical Expenses[16]
Separate Property of the Injured Spouse:
- Pain and suffering, physical as well as mental
- Disfigurement[17]
- Physical Impairment
Texas: A Community Property State
The state of Texas is a community property state, so property division, including case and settlement proceeds is significantly affected in the event of divorce. “When a spouse receives a personal injury (settlement), the presumption of community property applies.”[18] Texas Family Code § 3.001(3) governs how case/settlement proceeds for personal injury are characterized in Texas. “A spouse’s separate property consists of the recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.”[19] Recoveries for disfigurement, physical impairment, physical pain, suffering in the past and the future, and mental pain and anguish are considered separate property.[20] If the settlement includes payment for lost wages or earning capacity or future medical expenses, the amount of the award for those categories will be characterized as community property.[21]
Determining whether you live in a community property state is of utmost importance during a dissolvement of a marriage. It has a significant impact on the division of case/settlement proceeds in the event of divorce. It is also important to remember that certain states may have specific laws regarding the division of case/settlement proceeds, so consulting an attorney familiar with the laws of the state subject to the divorce may be necessary.
Written by:
Bailey VanNatta
Law Clerk
WATTS GUERRA LLP
Four Dominion Drive, Bldg. Three, Suite 100
San Antonio, Texas 78257
Phone: (210) 447-0500
Frank Guerra
Board Certified – Personal Injury Law
Texas Board of Legal Specialization
WATTS GUERRA LLP
Four Dominion Drive, Bldg. Three, Suite 100
San Antonio, Texas 78257
Phone: (210) 447-0500
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