Congratulations! You are the proud parents (or grandparents) of the bride. We’ll call her Susan. Susan married Joe. As a wedding gift, you wrote a $20,000 check to “Susan and Joe” to help the happy couple purchase their first home. You thought about writing the check only to Susan but opted not to risk offending the couple on their wedding day. The couple in fact used the $20,000 for the down payment on a $200,000 home. They both signed a mortgage note for the $180,000 balance. The deed was taken in both Susan and Joe’s names.
It’s now fifteen years later. Sadly, Susan and Joe are divorcing. The court decrees that the home be sold with the net proceeds divided 60% to Susan and 40% to Joe. It seems everyone has a different opinion on what should happen to your $20,000 wedding gift. Some say Susan should get the first $20,000 from the net proceeds. Some say it’s caught up in the court’s 60-40 split. Let’s answer the question.
Effect of the Wedding Gift
The $20,000 proved to be a gift of $10,000 each to Susan and Joe since both names were on the check. It isn’t possible to make a “community property” gift to the couple. Susan and Joe each own a $10,000 share as their separate property.
Effect of the Down Payment
The gift’s use for the down payment gave Susan and Joe each a $10,000 or 5% separate property interest in the home. In effect, each contributed $10,000 of the $200,000 purchase price, which equaled 5%. That means the home is 90% community property based on the $180,000 mortgage note signed by both spouses.
Effect of the Court’s Order and Sale
The net proceeds of the sale should be divided as follows: (a) $10,000 or 5% to Susan, which reflects her separate property interest; (b) $10,000 or 5% to Joe, which reflects his separate property interest; (c) the remainder divided with 60% to Susan and 40% to Joe, which reflects the court-ordered division of the community interest. How does this come about?
Courts have no authority to give a person’s separate property to the other spouse in divorce. Doing so violates the Texas constitution. Courts only have authority to divide the community estate (or community interest) of the spouses. Courts divide the community interest in a “just and right manner” which does not require a 50-50 split.
How It All Shakes Out
For sake of our example, let’s say the home eventually sells for $300,000 with $20,000 in closing costs. Let’s say the mortgage balance at sale is $110,000. That means the net proceeds would be $170,000. Susan and Joe each should expect their $10,000 separate property interest to be restored first. That would leave a $150,000 community interest to be divided per the court’s order. From that $150,000 community interest, $90,000 would go to Susan (60%) and $60,000 would go to Joe (40%) as their respective court-awarded shares. In the end, Susan should walk away with $100,000 and Joe with $70,000, which is the sum of their respective separate and community interests..
Why $10,000 Instead of the 5% Interest?
Susan and Joe each should have their $10,000 separate property interest returned because that amount is larger than 5% of the net proceeds (noting that 5% of $170,000 is only $8,500). The law says a person’s separate property interest is pro tanto—meaning “to the extent of the contribution.” Restoring only 5% or $8,500 to each would permit the court’s order to divest Susan and Joe of a portion of their separate property. How so? If only 5% was restored, then $1,500 of the original $10,000 each of them contributed would be included in the court’s division of the community interest. The Texas constitution doesn’t allow that.
Change the Facts, Change the Answer
If we change the facts a bit, then we’ll get a different answer. How about if the net proceeds were much higher, say $220,000 (an increase of $50,000 from the previous example). Then, 5% of the net proceeds would total $11,000. In other words, the 5% separate interests of Susan and Joe appreciated from $10,000 to $11,000. Why is that increase not community property? Because the law also says that when separate property increases in value, the appreciated amount remains separate property. It doesn’t somehow morph into community property. Here’s how this one would shake out. After subtracting the two $11,000 separate property interests, the remaining $198,000 would be divided 60-40 per the court’s order.
The Ex-Spouses’ Reaction
You already know Susan love you. Joe remembers you fondly for your generous gift to him.
Author Jim Cramp is the founder and principal attorney at the Cramp Law Firm. The Cramp Law Firm provides a spectrum of family-related legal services in the greater San Antonio Region.
For attorneys, this blog post draws upon the following cases: In re Royal, 107 S.W.3d 846 (Tex. App.—Amarillo 2003, no pet.); In re Marriage of Thurmond, 888 S.W.2d 269 (Tex. App.—Amarillo 1994, writ denied).