HBA-SEB H.B. 734 76(R)BILL ANALYSIS Office of House Bill AnalysisH.B. 734 By: Goodman Juvenile Justice and Family Issues 6/28/1999 Enrolled BACKGROUND AND PURPOSE Prior to the 76th Legislature, a person who was married or about to marry was authorized to enter into a marital agreement converting community property to separate property, but spouses could not have converted separate property to community property. Upon death, separate property is taxed more heavily by the federal government than community property. H.B. 734 authorizes spouses to agree to convert separate property to community property. This bill also establishes that the enhancement in value during a marriage of separate property owned by a spouse due to a financial contribution made with community property creates an equitable interest of the community estate in the separate property. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subchapter A, Chapter 3, Family Code, by adding Section 3.006, as follows: Sec. 3.006. PROPORTIONAL OWNERSHIP OF PROPERTY BY MARITAL ESTATES. Provides that if the community estate of the spouses and the separate estate of a spouse have an ownership interest in property, the respective ownership interests of the marital estates are determined by the rule of inception of title. Establishes that an equitable interest created by Subchapter E does not create an ownership interest in a spouse's separate property and does create a claim against the spouse who owns the property that matures on termination of the marriage. SECTION 2. Amends Chapter 3, Family Code, by adding Subchapter E, as follows: SUBCHAPTER E. EQUITABLE INTEREST OF COMMUNITY ESTATE IN ENHANCED VALUE OF SEPARATE PROPERTY Sec. 3.401. ENHANCEMENT IN VALUE DUE TO FINANCIAL CONTRIBUTION OF COMMUNITY PROPERTY. Establishes that the enhancement in value during a marriage of separate property owned by a spouse due to a financial contribution made with community property creates an equitable interest of the community estate in the separate property. Provides that the equitable interest is measured by the net amount of the enhancement in value of the separate property during the marriage due to the financial contribution made with community property. Sec. 3.402. USE OF COMMUNITY PROPERTY TO DISCHARGE DEBT ON SEPARATE PROPERTY. Provides that the use of community property to discharge all or part of a debt on separate property owned by a spouse during a marriage creates an equitable interest of the community estate in the separate property. Sets forth the computation for the equitable interest. Establishes that for purposes of this section, the cost of any improvements made to the separate property paid for by either the separate or community estate is included as part of the principal of the debt. Sec. 3.403. APPLICATION OF INCEPTION OF TITLE RULE. Provides that this subchapter does not affect the rule of inception of title under which the character of property is determined at the time the right to the property is acquired. Establishes that the equitable interest created under this subchapter does not create an ownership interest in property. Sec. 3.404. EQUITABLE INTEREST OF SEPARATE PROPERTY ESTATE. Establishes that the separate estate of a spouse has an equitable interest in the enhanced value of the separate estate of the other spouse or in the enhanced value of the community estate for a financial contribution made to the other separate estate or to the community estate and the discharge of all or part of a debt of the other separate estate or of the community estate. Sets for the manner of measurement for the equitable interest. Sec. 3.405. USE AND ENJOYMENT OF PROPERTY. Provides that the use and enjoyment of property during a marriage does not create a claim of offsetting benefits to the equitable interest created by this subchapter. Sec. 3.406. EQUITABLE LIEN. Requires a court, on termination of a marriage, to impose an equitable lien on community or separate property to secure a claim arising by reason of an equitable interest as provided by this subchapter. SECTION 3. Amends Chapter 4, Family Code, by adding Subchapter C, as follows: SUBCHAPTER C. AGREEMENT TO CONVERT SEPARATE PROPERTY TO COMMUNITY PROPERTY Sec. 4.201. DEFINITION. Provides that "property" has the meaning assigned by Section 4.001 (Definitions): an interest, present or future, legal or equitable, vested or contingent, in real or personal property, including income and earnings. Sec. 4.202. AGREEMENT TO CONVERT TO COMMUNITY PROPERTY. Authorizes spouses to agree at any time that all or part of the separate property owned by either or both spouses is converted to community property. Sec. 4.203. FORMALITIES OF AGREEMENT. Establishes that an agreement to convert separate property to community property is enforceable without consideration and must identify the converted property, specify that the property is being converted to community property, and be in writing and signed by both spouses. Provides that the mere transfer of a spouse's separate property to the name of another spouse or to the name of both spouses is not sufficient to convert the property to community property. Sec. 4.204. MANAGEMENT OF CONVERTED PROPERTY. Provides that property converted to community property under this subchapter is subject to the sole management, control, and disposition of the spouse in whose name the property is held or the spouse who transferred the property if the property is not subject to evidence of ownership, or the joint management, control, and disposition of the spouses if the property is held in the name of both spouses or is not subject to evidence of ownership and was owned by both spouses before the property was converted to community property. Provides exceptions to this section if the agreement to convert the property specifies otherwise and as provided by Subchapter B, Chapter 3 (Management, Control, and Disposition of Marital Property), and other law. Sec. 4.205. ENFORCEMENT. Establishes that an agreement to convert property to community property is not enforceable if the spouse against whom enforcement is sought proves that the spouse did not execute the agreement voluntarily or did not receive a fair and reasonable disclosure of the legal effect of converting the property to community property. Provides that when a specific statement or a substantially similar statement is used in an agreement, the statement is rebuttably presumed to give a fair and reasonable disclosure of the legal effect of the conversion the conversion of property to community property if the wording is prominently placed in bold-faced type, capital letters, or underlined. Provides the wording for such a statement regarding exposure to creditors, loss of management rights, and loss of property ownership. Sec. 4.206. RIGHTS OF CREDITORS; RECORDING. Establishes that a conversion of separate property to community property does not affect the rights of a preexisting creditor of the spouse whose separate property is being converted. Authorizes a property conversion to be recorded in the deed records of the county in which a spouse resides and of the county in which any real property is located. Provides that a conversion of separate property to community property is constructive notice to a good faith purchaser for value or a creditor without actual notice only if the agreement to convert the property is acknowledged and recorded in the deed records of the county in which the real property is located. SECTION 4. Amends Section 7.002, Family Code, to require a court, in a decree of divorce or annulment, to order a division of the equitable interest of the community estate in the separate estate of a spouse, separate property of a spouse in the separate property of the other spouse, and separate estate of a spouse in the community estate. Makes a conforming change. SECTION 5. (a) Effective date: September 1, 1999, except as provided by this section. (b) Provides that the change in law made by this Act by the addition of Subchapter C, Chapter 4, Family Code, takes effect January 1, 2000, but only if the constitutional amendment proposed by the 76th Legislature, Regular Session, 1999, relating to the conversion of separate property to community property, is approved by the voters. (c) Makes application of this Act prospective, except as provided by Subsection (b). SECTION 6. Emergency clause.