Direct Tracing Community Property vs. Separate Property in a California Divorce

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Perhaps the best part of traveling with others is the great meals and shared experiences with a special friend. And perhaps the worst is sorting out who paid for what, who consumed what, and who owes what to whom at the end of the trip. This sorting and separating is challenging enough with friends whose company you enjoy and for whom you do not mind buying dinner. But when you need to sort and separate assets and debts accrued over the course of a marriage with your soon-to-be-ex, the challenge is that much greater. 

Property like real estate, furniture, jewelry, vehicles, checking and savings accounts, retirement accounts, investments, and business interests—as well as any associated debts—can fall into three potential buckets during a marriage in California: Yours, mine, and ours. 

If you are thinking about a divorce in the Golden State, you may need help understanding which assets and debts are yours, which belong to your ex-spouse, and which belong to the community (both of you). That is because, in California, the court presumes that all property acquired during a marriage is community property (and the court strives to divide community property equally in the event of a divorce). Keep this in mind as you are listing assets and debts and examining your ex-spouse’s disclosures for evidence of omitted assets.  However, if you spent separate property to acquire or improve community property, you are entitled to get that money back—so long as you can prove it. 

You have a few options to sort out any separate property claims from the community, each with varying degrees of complexity. 

Option 1: Keep Separate Property Separate

Unfortunately, for many individuals going through a divorce, this advice may come too late to be helpful, but by far the simplest way to make clear what property should fall squarely into “your” bucket is to keep your separate property separate. This means keeping separate property in a stand-alone account (not adding community property funds to this account) and not spending separate property funds on community property assets.

Examples of separate property include:

  • Everything you owned (real property, furniture, accounts, etc.) before the marriage.
  • Gifts you received during the marriage to just you.
  • Any inheritances you (and you alone) received.
  • Rent or profits from separate property assets.

Once you and your spouse have separated, separate property also includes earnings received and assets acquired after the date of separation. By contrast, community property includes earnings received and assets acquired during the marriage, rents or profits from community property assets, and (under most circumstances) the proceeds of a personal injury case .

If you avoid “commingling” community and separate property funds like this, then identifying what belongs in “your” bucket is as straightforward as it can possibly be. Although some are able to keep their separate property separate, many of us, for whatever reason, end up putting separate property funds in a community property account, or vice versa, throughout the course of a marriage. However, commingling assets does not necessarily mean you give up your right to your separate property.

Option 2: Direct Tracing Method

If you have commingled funds, identifying what belongs back in “your” bucket may be complicated, but not impossible. Remember, the court presumes that all property acquired during a marriage is community property. The person spending separate property funds or trying to reclaim separate property is the one responsible for rebutting this presumption. 

One way to rebut this presumption is called the “direct tracing” method. Direct tracing is a method of connecting the dots between separate property (typically assets held before the marriage or an inheritance received during the marriage) and assets acquired or improved during the marriage. These assets can include real property as well as bank or brokerage accounts. 

For example, if you can provide statements from your separate property bank account showing that an investment (or improvement) made during the marriage was paid for by your separate property funds, then you may be entitled to a reimbursement. (One exception is if you waived your right to reimbursement in writing.)

In this example, as with all examples of direct tracing, you need to show that it was specifically your separate property funds that were used. It is not sufficient to simply show that you had separate property funds available to make the purchase or improvement. If you lack adequate paperwork, you may be better served with the exhaustion method.

Option 3: Exhaustion Method (a.k.a. the Family Expense Presumption Method)

If you commingled funds and did not keep an adequate paper trail of how you used separate property funds to acquire or improve assets during the marriage, you have one more option: the exhaustion method, also known as the family expense presumption method. 

The exhaustion method is appropriately named. It refers to a situation where there were no community funds available to buy or improve an asset or contribute to a bank or brokerage account. Since no community property funds were left, then the court understands the only other source of funds would be your separate property.

In this scenario, the court makes the assumption that where a couple has commingled funds, the money that gets spent first on family expenses is community property. In other words, the court knows that, given an option, we would save our separate funds rather than spend those down on community expenses.

Before You Begin Direct Tracing Community Property

As you may suspect, both tracing methods can be expensive. Worse still, unless you kept meticulous paperwork, you will often not know if your approach will be successful until after it is completed. Good divorce attorneys will help you decide on the best approach and will recommend forensic accountants or other financial experts, as appropriate.

In community states like California, the burden is on the individual hoping to protect their separate property claim. If you know you commingled separate property with the community during the course of the marriage, be sure to raise that consideration as soon as possible in the proceedings so you can find a resolution that works for both of you, or track down the paperwork you need to prove your separate property claim. 

 

At Van Voorhis & Sosna, we know the complexities of divorce and separate property claims in the Bay Area because family law is our sole focus. We offer legal advice and representation based on integrity, trust, and understanding. Contact us today, or call 415.274.2530 to schedule a free legal consultation.

 

The content provided on this website is for informational purposes only and does not, and is not intended to, constitute legal advice. Information on this website may not constitute the most up-to-date legal or other information, and you should contact an attorney to obtain advice regarding your particular issues or problems. Use of and access to this website do not create an attorney-client relationship between Van Voorhis & Sosna and the reader. 

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