Many families and spouses have complicated financial situations involving assets that each spouse earned prior to the marriage or purchased using their separate assets. Dividing your family’s assets into categories of “yours, mine, and ours” often requires careful planning and attention to detail while the marriage is healthy. When that doesn’t happen, you may have to rely on marital property tracing methods to get those assets back during divorce.
Community Property vs Separate Property
This blog recently addressed the differences between community property and separate property, and what happens when those pools of assets get mixed, or commingled. To summarize, California family courts generally give each spouse an equal share of the community property in a divorce. That includes marital property distribution of almost everything accumulated by either party during the marriage, including their wages, income, and returns on investments.
In contrast, one spouse’s separate property – property that he or she owned before the marriage, inherited or received as a gift, or accumulated after separation – is generally awarded to that party, without any share given to the non-owning spouse. However, when separate property gets mixed with community property or is used to support or maintain the family, it can become commingled, and shift that property from the separate property pool into the community property pool.
Property Tracing Methods in California Divorce
California law presumes that all property acquired during the marriage counts as community property. This is because in most households, spouses and parents combine their resources to handle the family’s affairs. When separate property appears commingled, the owner spouse often must engage in marital property tracing, demonstrating its separate nature, and distinguishing it from the marital property to be distributed by the court.
Maintaining Separate Accounts
The most straightforward way to trace separate property starts long before either spouse is considering divorce. If either or both spouses have substantial separate property assets, they should carefully manage their family finances to keep those properties separate. That can include:
- Holding bank, investment, or stock accounts in one spouse’s name only
- Limiting separate real estate to non-family purposes, such as rental properties
- Avoiding using separate assets to pay for marital property or expenses
Unfortunately, many spouses who own separate property don’t receive this advice before they begin making financial and family decisions that could result in commingling. In those cases, asset tracing can help to protect the value of that spouse’s premarital or extra-marital assets.
Direct tracing “follows the money” using bank statements and transfer receipts to connect value in commingled accounts or assets back to their separate property sources. For example, if you contributed premarital savings into a shared investment account, your attorney or an expert forensic accountant can prove where that money came from, and that it was separate in nature. When direct tracing connects marital assets to separate property, the owner spouse may be entitled to reimbursement for their non-marital investments (unless they waived reimbursement in writing). This makes the direct tracing method a powerful tool for claiming back money and property that was inadvertently commingled during your marriage.
However, direct tracing depends on a paper trail. Without bank statements, records, and receipts, even an expert witness won’t be able to show the court where to draw the line between your money, and your family’s community property.
Exhaustion or Family Expense Presumption
Where there isn’t a paper trail, you may still be able to accomplish property tracing and shield separate property assets using the “exhaustion method” or “family expense presumption.” California law assumes that when a couple has commingled previously separate funds, it first uses up community property before dipping into the separate assets of either party. Under the exhaustion method, your attorney or forensic accountant will need to show that there were no community assets available to purchase the commingled property, deposit into the jointly titled account, or improve the family home. The family expense presumption is based on the idea that if you had had joint assets to spend on the investment, you would have used them. Because you didn’t, the asset in question was not truly commingled, but instead was an asset obtained using separate property.
What Happens if a Spouse Conceals Community Property in Divorce?
Marital property tracing can also sometimes refer to funds that go the other way: where one spouse tries to conceal marital assets or transfer them into separate accounts. In California, it is illegal to hide marital assets in a divorce. Willful non-disclosure can result in civil penalties like attorney fee sanctions, or even criminal perjury charges. In addition, the spouse hiding community property may lose any claim to that property in the California court’s marital property distribution.
Just like when identifying separate property, marital property tracing will likely require extensive discovery into your spouse’s financial assets and accounts, and may involve hiring a financial expert who can trace those marital assets’ movement out of the community property accounts and into other, hidden investments or bank accounts. That can be difficult and expensive.
The best thing that spouses can do to prevent the concealment of marital assets is to be proactive while the couple is still married. Spouses who are actively involved in the family finances are generally better able to identify where their money comes from and where it is going than spouses who leave paying the bills and managing the family’s bank accounts to their partner. However, many spouses don’t realize they need to monitor their spouse’s financial actions until it is too late. When that happens, marital property tracing can be used to get that money back and award it to the non-concealing spouse.
Getting a Fair Marital Property Division
As you can see, the identification and tracing of separate and marital property can be complicated, and often requires hiring a financial expert to help you connect the dots and prove which money and property are “yours, mine, and ours.” At Roberts & Zatlin Family Law, located in Temecula, California, our family law attorneys can help you use asset tracing to distinguish between separate and community property, helping you receive a fair marital property division as part of your California divorce. We invite you to contact us to schedule a free consultation to discuss your separate property claims and commingled property concerns. We look forward to working with you.