The Importance of Tracing The Nature and Origin of Separate and Community Assets During a California Divorce
During the property division process in California, both spouses must carefully assess individual assets to determine their nature and origin. The specific classification of an asset may have a dramatic effect on the property division process, and therefore the economic security of spouses. Often, the features of an asset are very obvious, and not much work is required to sort them into the correct category. In other situations, however, the specific type and nature of an asset may be much more elusive. In this situation, a “tracing” process may be necessary to determine key information about the asset.
The Distinction Between Community and Separate Property in California
To understand the importance of asset tracing during the property division process, you first must understand the distinction between community and separate property in California. An asset’s effect on your divorce depends heavily on whether it classifies as “community” or “separate.”
- Community Property: In California, property that spouses acquire during their marriages is “community property.” In other words, it is “communally” owned by both spouses. After a divorce, it continues to be owned by both spouses. As a result, it must be divided in a 50/50 manner.
- Separate Property: Family courts in California keep some property “separate” from the 50/50 division process during a divorce. This “separate property” may consist of:
-
- Inheritance
- Assets acquired prior to marriage
- Assets acquired after the date of separation
- Third-party gifts
When is Asset Tracing Necessary?
As you might have guessed, the distinction between separate and community property is not always clear-cut in California divorces. Often, one spouse will claim that a specific asset is separate, while the other may claim that it should be classified as community property.
When these disputes occur, it may be necessary to trace the nature and origin of the asset in order to determine its correct classification. Spouses may accomplish this goal in a number of different ways, and the most effective tracing strategy will undoubtedly depend on the specific nature of the asset in question. Here are a few situations in which asset tracing may be necessary:
- Commingled Assets: During a marriage, separate and community property may be mixed together into a single asset. In the legal world, this is known as a “commingled” asset. If you have a commingled asset in your marital estate, effective tracing may be required to “unravel” its separate and community aspects. This may be accomplished with a number of strategies – and a forensic accountant often assists with the process.
- Unclear Date of Separation: Recall that assets acquired after the date of separation are considered separate. If the date of separation is unclear, there may be considerable debate over whether certain assets qualify as separate. California courts define the date of separation in a highly flexible manner. This date may reflect the moment at which marital duties ceased, the day one spouse moved out, or the date at which joint bank accounts were closed. If this date remains unclear, the classification of certain property may also remain unclear. Evidence may be required to clearly show that the date of separation occurred at a specific time. For example, one spouse may prove that they moved out on a specific date.
- Transformation of Separate Assets: What happens if spouses use separate property to buy new forms of separate property during a marriage? The purchased property still classifies as separate – even though it was acquired during the marriage. For example, a spouse might receive $100,000 in inheritance. They might use this money to purchase a rental apartment. In the event of a divorce, the other spouse may claim that this rental unit constitutes community property. It will then fall to the other spouse to prove that they used only their inheritance to purchase the asset. This may require a tracing process using bank records and so on.
There are many other situations in which asset tracing may be necessary. The most important thing to remember is that this process is almost always possible, even if the assets seem to be very complex and multi-faceted. Engaging in the tracing process may be time-consuming, but it may also be well worth the effort when certain assets are exposed and made available to divorcing spouses.
Asset Tracing is Even More Important in the Modern Age
With the rise of cryptocurrencies, asset tracing is even more important for many divorcing spouses. As a tech-friendly state, California is home to numerous cryptocurrency enthusiasts. When these individuals divorce, locating assets held in crypto wallets may prove to be incredibly difficult. This is due to the anonymous nature of blockchain technology. Crypto enthusiasts may enhance this anonymity with a number of additional strategies to hide the source and pathway of funds from prying eyes. While this may prove advantageous to spouses seeking to protect wealth during divorce, it is nonetheless an illegal form of asset concealment.
In order to expose the presence and location of these assets, divorcing spouses may need to attempt complicated tracing strategies. While crypto is difficult to track and trace, it is by no means impossible. This is especially true if spouses purchase crypto through well-known exchanges. Many spouses who purchase crypto take the initial step of moving money out of a bank account and into an exchange. This creates a clear digital record of the assets in question, and various professionals can follow this trail to the location of the cryptocurrencies.
Where Can I Find an Experienced 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. We know that the community property system in California can be difficult to navigate at times. With our assistance, however, you can experience personalized guidance as you strive for economic security. Even if a single asset is misclassified during your divorce, it might have a very notable effect on your wealth during your post-divorce years. To learn more about the importance of effective asset tracing during the property division process in California, be sure to book a consultation today.
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.