San Antonio Express-News
January 24, 2006

CPSA OK for Converted Assets

copyright 2006, Paul Premack

Under Texas law, separate property includes anything 1) owned before your marriage, 2) received by gift or inheritance during your marriage, or 3) you and your spouse agree (in writing) is separate property. Everything else is community property. While Texas law has allowed spouses to "partition" their community assets into separate property, only in the last few years has it become legal to convert a separate item into community property.

The community property survivorship agreement (CPSA) that you ask about is also a concept that was once forbidden by Texas law, but a public vote 15 years ago reformed the law. Using a CPSA, a married couple can transfer ownership of their community property to the survivor between them when one of them dies. It happens in a non-testamentary fashion, without probate.

Combining the two legal changes, you are empowered to convert the inherited rent house from being your separate property into a community asset. Then the rent house can be included in a CPSA so that title will pass to your spouse upon your death.

Before you act, think about the reasons you may NOT want to make the change. The rent house, while separate property, is under your sole management and control. You control the leasing, you receive the rentals, you decide whether and when to sell the property. Any creditors of your spouse cannot reach the rent house. If you divorce, your spouse should have no claim to your separate property. On your death, you can pass 100% ownership in the rent house to anyone of your choosing, although probate may be needed to do so.

Conversely, you may have good reasons to go forward with the conversion. Treating the rent house as community property will allow a step-up in basis for its entire value when either spouse dies. If your remain sole owner and your spouse dies, you get no step-up in basis at all.

The law that allows you to convert requires certain formalities. Texas Family Code section 4.202 requires the conversion be voluntary and requires that both spouses have "fair and reasonable disclosure" of the legal effect of the conversion. It must, of course, be done in writing, must include the formal legal description of the real estate being converted, must be signed by both spouses, notarized and must be recorded with the county clerk.

To allow ownership of the new community property to pass to the surviving spouse using a CPSA, the Texas Probate Code requires additional formalities. The agreement must, for instance, recite that the rent house "will become the property of the survivor between us on the death of either of us" or use similar language. The CPSA must also be signed, notarized and recorded.

Thus it is entirely possible for you to accomplish your goal of passing ownership without probate, but you should consult with your attorney about how the conversion might affect you and to have the documents written to comply with Texas law.