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Tracing Property to its Community or Separate Property Source

Property Division Principles in California

In general, the community estate of a divorcing couple is subject to equal division upon divorce. Under California law, the “community estate” includes community property and quasi-community property. All property acquired by a married couple, or by a party to the marriage,during the marriage is presumed to be community property. Conversely, any property that a spouse obtains in his or her name before marriage or after divorce, or by way of inheritance or gift during marriage, is deemed to be separate property. A spouse’s separate property is not subject to equal division upon divorce.

Why Is Tracing Necessary?

Sometimes property or assets that would initially qualify as either community or separate property can be shown to have a different character after tracing them to their source. For example, if a couple acquired a Boston Whaler watercraft during marriage, it is presumed to be community property. However, if the boat was acquired in a series of transactions that began with the exchange of one of the spouse’s separate property, that spouse would be entitled to at least some separate ownership interest in the boat, if not the entire interest.

Another situation that requires the tracing of assets involves the intermixing of community and separate property funds—also known as “commingled” funds. Because money is fungible—being virtually indistinguishable from other money—commingled community and separate property money presents a challenging problem for property division purposes.

For example, $5,000 in wages earned during marriage is not easily separated from $5,000 in inheritance or pre-marriage savings if all are deposited into a single bank account. As a result, California courts have recognized special tracing rules and methods to help resolve issues arising from such situations.

Methods of Tracing Assets

Courts in California have recognized several tracing methods, including “direct tracing,” “family expense tracing,” and “equitable apportionment tracing” to name a few. Although these tracing methods all accomplish the same goal of finding the source of an acquisition, the insight they provide depends on the extent to which community and separate property have been commingled.

Under the direct tracing method, the origin of an acquired asset can be traced directly from transaction to transaction. For example, a sports car that was acquired during marriage from proceeds a person received after selling jewelry they inherited can be traced to a separate property source, the inheritance, by the provision of receipts and bank statements showing the source of the funds.

The family expense tracing method is useful when distinguishing commingled funds in a bank account. Under this method, there is a presumption that community income pays for community expenses first and foremost.

To illustrate this concept, imagine having a bank account containing $5,000 in community funds and $7,000 in separate property money. Under the family expense tracing method, the $5,000 in community income is first used to pay for expenses such as family groceries, health insurance, car insurance, utilities, and rent or mortgage payments. If family expenses totaled $6,000, the $5,000 community funds are presumed to have been exhausted, and $1,000 of separate property funds can be traced to family expenses. Therefore, if a party acquired a $6,000 motorcycle after paying all family expenses, he or she is able to show that it was paid purely with separate property income.

Finally, the equitable apportionment tracing method operates similar to the family expense method. However, the equitable apportionment method holds that where all community expenses exceeded the total amount of community funds over the course of the entire marriage, other assets cannot be traced to community funds as they would have been exhausted by community expenses first.

Hire a Skilled Lawyer from Bremer, Whyte, Brown & O’Meara

If you need legal counsel regarding property division issues involving high-value assets, it is in your best interest to find an effective legal advisor and advocate to represent you. At Bremer, Whyte, Brown & O’Meara, our legal team has years of valuable legal experience dealing with sophisticated financial issues in divorces, such as the tracing of assets and property to their community or separate property sources.

Get started by calling our office at (949) 229-8546 or contacting us online today.