Q. My attorney has used the word "tracings" several times when
talking about how to figure out my community interest in property in my
divorce, and I really don't understand how this works. Can you give
me a simple explanation?
A. Simple - unlikely. But here's a thorough explanation!
Tracings may be required by California law in a number of settings in
order to find out what each spouse's share of the community property
is. They generally show up in several recurring situations, but unfortunately
for simplicity's sake there are numerous permutations of where tracings
come into play. Chief among them is where cash or assets that was used
to purchase property was "commingled" (think tossed salad with
separate property lettuce leaves and community property mixed vegetables)
at the time it was contributed. Please use the search engine at the upper
right to see my Blog Articles for the definitions of community and separate property.
Determining the community verses separate property attributes of an asset
that was acquired with funds contributed during marriage that were a combination
of each (CP and SP). This is called "characterization" - does
the asset belong in whole or in part to the community estate, or to one
party's separate estate, or both in different degrees? The community
component is sometimes earnings that were used to pay down secured debt
each month when, for instance, a mortgage principal payment is made for
a separate property asset
(a Moore-Marsden situation). It can include one time downpayments from joint bank accounts that contain
community income or earnings (or separate property accounts that may have
been commingled with joint funds or not or community property accounts
that include separate property components) further complicated in the
case of a refinance, and more.
It is extremely common that a community property asset (acquired during
marriage, possibly but not necessarily in joint names), or improvements
to it, traces partly or 100% to a separate property source. Many parents
'gift' their child part or all of the downpayment for the couple's
first home. Or, a separate property asset (acquired during marriage but
titled in one spouse's name alone - usually seen with real estate)
may be purchased using joint funds. In either event there is a tracing
right of reimbursement per
Family Code section 2640 to the respective community or separate property interests that bought
it, in the event of a dissolution or legal separation. FC §2640 is
in the top five of all California property division statutes and is critical
for an understanding of what your legal interests are if either spouse
has any colorable claims to separate property used during marriage. Many
middle income and high asset property division cases are a puzzle map
of assets that are not what they seem at first glance.
- There are a number of situations where reimbursement claims arise from
the payment of joint or separate debts using money that the other spouse
had an interest in (whether community funds or separate). Under limited
situations there may be a right for the community, or the other spouse's
separate property, to be reimbursed, but you will be required to trace
these funds to claim them.
Often intended or unintended transmutations have occurred.
Family Code section 852 is the chief transmutation statute, and another of the top five California
dissolution property statutes. Transmutations involve a change in the
character of property, from community to separate or from separate to
community or separate to the other party's separate property. These
commonly require tracings in order to establish the FC § 2640 interest.
For instance, husband and wife own a residence together in joint names.
It was purchased during marriage. But there is need for a refinance, and
one spouse's credit is bad. The parties agree that husband will borrow
the money, and the lender requires that wife sign a quitclaim deed before
escrow can close. Husband assures wife 'not to worry.' Wife signs
the transfer deed and doesn't seek legal advice. She has unwittingly
transmuted her community interest to husband's separate property.
Years later the property has appreciated. What is Wife's interest?
(Breach of fiduciary duty questions have to be the subject of a separate
Blog but, again, please try our search engine for more information!)
Did I say I would give a simple answer? No? Good!
In order to unwind transactions during marriage where monies and property
with separate and community property attributes have been mixed together,
the "separatizer" (the party seeking to establish their separate
property contributions to the community or separate property of the other
spouse or partner) has the burden of proof to present reliable tracing
evidence to the Court. In order to settle even mildly complex dissolutions
as between the parties without going to trial, this information must be
provided and laid out in a concrete manner to convince the other side
that you have the ability to meet your burden.
Here are some of the rules that apply the mechanics of tracings in dissolution
actions and legal separations.
If the commingled funds are used to purchase property, the party who deposited
the separate funds may attempt to trace the source of the funds used to
purchase the property to establish that it is separate because separate
funds were used to purchase it. This may overcome the presumption that
property acquired during marriage is community.
Marriage of Mix (1975) 14 Cal.3d 604.
If separate and community property or funds are commingled in such a manner
that it is impossible to trace the source of the property or funds, the
whole must be treated as community property.
Marriage of Mix, supra.
If the title to the property was taken jointly, tracing cannot be used
to overcome the presumption from the form of title.
Marriage of Lucas (1980) 27 Cal.3d 808, 813-814.
Direct tracing and tracing through family expenses are two independent
methods of tracing to establish that property purchased with commingled
funds is separate property.
Separate funds do not lose their separate character when commingled with
community funds in a bank account so long as the amount of separate funds
can be ascertained and at no time period were the funds spent down below
the balance of SP claimed unless replenished with SP instead of CP.
Marriage of Mix (1975) 14 Cal.3d 604.
If money is withdrawn to purchase specific property, questions of fact
that must be determined include (Marriage of Mix, supra):
The party seeking to establish a separate interest in presumptive community
property must keep adequate records. The party must show the exact amount
of money allocable to separate property and the exact amount of money
allocable to community property before it can be said that the money allocable
to separate property is not so commingled that all funds in the account
are community property.
Marriage of Frick (1986) 181 Cal.App.3d 997. If the payments claimed to be separate were
made periodically, each payment must have been made when separate property
funds were in the account and must have been accompanied by an intent
to use those funds rather than community funds.
Marriage of Higinbotham (1988) 203 Cal.App.3d 322, 329.
Tracing Through Family Expenses
The second method of tracing to establish that property purchased with
commingled funds is separate property requires a consideration of family
expenses. This tracing method is based on the presumption that family
expenses are paid from community funds.
If at the time the property is acquired it can be shown that all community
cash and income in a commingled account was exhausted by family expenses,
then all funds remaining in the account at the time the property was purchased
were necessarily separate funds.
Marriage of Mix, supra.
This method can be used only when, through no fault of the spouse claiming
separate property, it is not possible to ascertain the balance of income
and expenditures at the time property was acquired.
See v See (1966) 64 Cal.2d 778, 784.
The spouse claiming separate property must keep adequate records to overcome
the presumption that property acquired during marriage is community property.
See v See, supra. Most people don't.
The take-away: If you are contemplating a divorce and have tracing issues,
protect your records now so that they do not 'disappear.' It can
be very expensive to obtain bank statements and canceled checks dating
back years, and with all of the bank failures and mergers today these
records may become impossible to obtain. If you cannot meet your tracing
burden of proof, you lose on the particular reimbursement issue.
As you probably have guessed, tracings are quite expensive and typically
involve the assistance of a forensic accountant. Moreover, not just any
attorney will know what to do with this information!
Thurman W. Arnold, III