Property Tracing and the Division of Community Assets

By | November 30, 2017

This article deals with family law and legal techniques that relate to the division of community property. One of the most complicated aspects of practicing family law, the question of how to equally divide a community estate, can often be contentious. This article was written to briefly discuss the legal technique known as property tracing and the concepts of community and separate property.

Because the division of property during divorce can be so contentious, complicated, and because there is often much to lose, a person seeking a divorce shouldn’t attempt to go through this process without the help of a good family lawyer. If after reading this article, you still have questions about community assets or property tracing, contact our office to schedule a consultation.

Property Tracing

Community Versus Separate Property, the Basics

You may have heard folks reference the fact that California is a community property state. But what does this mean? In simple terms, it means that assets accrued separately by spouses prior to getting married (real estate, inheritance, furniture, cars, earnings, etc.) remain separate during marriage as long as they’re not comingled in a joint account or through written agreements. Property and assets accrued during marriage by either party, are considered community property.

California Family Code §760 states:

“Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during marriage while domiciled in this state is community property.”

Under California Family Code § 2550, community property is to be divided equally among the divorcing spouses. The section states:

“The court shall, either in its judgment of dissolution of the marriage, in its judgment of legal separation of the parties, or at a later time if it expressly reserves jurisdiction to make such a property division, divide the community estate of the parties equally.”

Finally,

California Family Code §2581(a) states that the assumption that an asset is considered community property can be challenged, or rebutted by:

“A clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate and not community property.”

What These Laws Mean for Divorcing Couples

 So, what do all these previously mentioned sections of law mean for someone who’s getting divorced?

It means that when two spouses comingle their separate funds during a marriage, the court will typically assume that those funds are community property, and should be divided equally in a divorce.

However, there are certain cases in which a spouse may claim that a portion of comingled money is in fact separate. A spouse who successfully argues this claim, may be able to recover that portion of the community estate in a divorce proceeding.

This might apply in a situation where a home was purchased by one spouse prior to the marriage, or with money earned before the couple met, but ended up co-mingled in a joint account.

In order to make a claim to certain funds, a spouse and his or her lawyer might have to use a technique known as tracing.

Continue reading to learn more about the different varieties of this technique.

Direct Tracing

This method involves a spouse providing sufficient documentation in order to demonstrate that money spent on community property was in fact separate.

Consider the following example:

Prior to marrying, a woman inherits $65,000 from a deceased relative. She keeps this money in a separate account. After marrying her husband, she moves into a house purchased by the husband. She keeps her inheritance in a separate account until the couple decides to build a pool. The wife offers to pay for the $45,000 worth of construction using her separate funds, and makes a transfer from her separate account to a joint account she holds with her husband. The husband makes expenditures directly from funds in this account to pay various contractors and laborers during the pool’s design and construction.

Years later, the couple files for divorce. The woman’s attorney suggests, among other things, she seek reimbursement for the construction of the pool. Luckily, the woman kept meticulous records of financial transactions, including bank statements. She is able to present to the court documents showing the existence of the separate account, as well as records of the transfer to the joint account.

Through this method of direct tracing, the wife could potentially recover the $45,000 spent on the pool’s construction.

This of course is a simplified example of how direct tracing works. A more complicated scenario might involve a transfer from a separate account to a joint account, then from the joint account into escrow during the purchase of a house. In such a scenario, it might also be possible for a spouse to recover those once separate funds after a divorce. However, it’s important a person discuss their options with their family attorney.

Family Expense (Recapitulation) Tracing

This method is used in cases where the necessary records to conduct a direct tracing don’t exist, haven’t been maintained, or perhaps have been lost, making direct tracing impossible. In this type of case the court will consider the community’s family expenses.

Consider the following example:

A husband took inheritance money totaling $15,000 given to him prior to the marriage, and comingled it in a joint account held with his wife in the amount of $20,000. This would bring the new total of the joint account to $35,000. If it can be determined that the husband spent $20,000 toward community expenses (mortgage, food, utilities, childcare or education), he could potentially claim the remaining $15,000 as his separate property.

Complicated Property Questions Require Solid Legal Advice

Because of the complexity of the family code and community property rules, a person going through a divorce should always seek guidance from a quality family attorney. This article, which couldn’t possibly discuss all of the nuances of direct and family expense tracing, didn’t even broach the topics of forensic accountants, Moore Marsden calculations and the Brown Formula. All of these topics, complicated in and of themselves, might factor in some way to the division of a community estate.

If you have questions about any of the topics discussed on this page, contact our office to schedule a consultation.

One thought on “Property Tracing and the Division of Community Assets

  1. Beverly Settles

    All the information that I read today was very helpful

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