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The Importance of “Tracing” the Nature and Origin of an Asset as Separate or Community When Getting a Divorce

The Importance of “Tracing” the Nature and Origin of an Asset as Separate or Community When Getting a Divorce

Spouses approaching divorce in California must be aware of the difference between separate assets and community property. In basic terms, separate property includes inheritance, gifts, and assets owned prior to the marriage – or after the date of separation. Separate assets are not eligible for division, which means spouses get to keep them in the event of a divorce. On the other hand, community property includes assets acquired during the marriage, and this property must be divided between spouses in the event of a divorce.

Sometimes, it is not clear whether a specific asset falls under the category of “separate” or “community.” In this situation, it may be necessary to trace the origin of the asset. This process allows spouses to establish the true classification of certain property and potentially experience financial benefits as a result. How does this asset tracing process work, and how can spouses in California use it to their advantage during a divorce?

 What is Asset Tracing in California?

When spouses trace assets in a California divorce, they attempt to determine the most accurate characteristics and sources of the property. The main goal is to determine the origin of the asset. Asset tracing may be carried out by divorce attorneys, forensic accountants, financial experts, or a combination of various professionals working toward the same goal.

Asset tracing can be used in many areas, not just divorce. For example, authorities may trace assets when examining a suspect’s financial activities. This tracing process can reveal crimes like money laundering, wire fraud, or tax evasion.

When Might a Spouse Want to Engage in Asset Tracing?

Asset tracing may be especially useful in divorces that involve commingled assets. A commingled asset contains a combination of both separate and community property. This may occur under a range of different circumstances. For example, a spouse might receive an inheritance during the marriage, which is always considered to be a separate asset. But what happens if they use these funds to pay off the mortgage on a family home purchased during the marriage?

The home was purchased during the marriage, so it is considered to be community property. However, the inheritance remains a separate asset even after it passes into the real estate. Therefore, the family home becomes a commingled asset that contains both separate and community property.

This same scenario can play out with a number of different assets. While inheritance commonly factors into the equation, separate assets may also include gifts or property acquired prior to the marriage. Each marriage is different, and commingled assets can become very difficult to unravel under certain situations.

That being said, asset tracing may be required in different situations as well. For example, spouses may be unable to agree upon whether an asset is separate or community property. This often occurs when the date of separation is unclear, and the property in question was acquired close to the date of separation. Usually, the date of separation occurs when one spouse moves out of the family home.

After a spouse moves out of the family home, they may purchase stocks within a few days. They may also exercise stock options or pre-IPO stocks that they earned as employment benefits. The other spouse may later claim that these financial transactions actually occurred prior to the date of separation – making them community property. Since a divorce can theoretically drag on for many years, these investments may skyrocket in value – representing an important source of financial security for both spouses.

In this situation, asset tracing can determine both the date of separation and the date at which the transaction occurred. This should help both spouses clearly identify whether the assets are community or separate property.

How Do Spouses Trace Assets in a California Divorce?

 There are two main methods when it comes to asset tracing in California divorces:

  • Direct tracing
  • Family expense presumption

The first method is perhaps the most straightforward, and it involves going through the financial records to “follow the money,” so to speak. Often, there are clear indications of who contributed to the property, who initially purchased the property, and the related dates. The direct tracing method is often attempted first by attorneys.

If the direct tracing method proves ineffective for whatever reason, the family expense presumption method may be more appropriate. This method is slightly more complex, and it essentially operates based on a key assumption: After the total community funds have been subtracted from the value of a property, the remainder must be separate property. This is considered to be a “presumption” since the court must assume that community funds are always exhausted before spouses turn to the remaining separate funds.

Because the family courts are asked to make this presumption, spouses may be required to provide a wide range of evidence. This evidence might include income statements, tax returns, expenses, receipts, and anything else that helps indicate the amount of community property that was spent by the spouses during the marriage. All of this expense and income evidence may be used to make calculations according to the family expense presumption method.

Note that the most appropriate tracing method depends entirely on your unique situation, and a family law attorney can help you select the best option after assessing the specific circumstances of your divorce. 

Where Can I Find a Qualified Divorce Lawyer in California?

If you have been searching for an experienced divorce attorney in California, look no further than Milligan, Beswick, Levine & Knox, LLP. Over the years, we have guided numerous spouses through the property division process in California. The difference between separate property and community property can be one of the most important distinctions in this overall process. Tracing may help spouses strive for positive results and lasting financial security in their post-divorce lives. Book your consultation today to explore appropriate legal strategies based on your unique situation.

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Stephen Levine, is a Board Certified Specialist in Criminal Defense — an honor achieved by only the top criminal law attorneys in California. Mr. Levine has over 40 years of experience in criminal defense and family law serving Southern California, and is a highly regarded Super Lawyer as well as AV Rated attorney.