In Family Law, tracing is the method by which a party proves that funds in a particular account are, or were, used to acquire separate property. Family Code section 760 holds that all property acquired during a marriage, regardless of source, is community property, it can sometimes be a difficult and expensive endeavor to try to perform a tracing. In California Family Law, there are three ways to prove a tracing: 1) Direct Tracing; 2) Exhaustion 3) Total Marital Recapitulation.
A direct tracing is the most elaborate of the tracing methods. It is also the most expensive method of tracing property. It involves tracing separate property from its receipt before or during the marriage through the present. If that separate property is commingled with community funds in a particular account, then every transaction in that account must be analyzed to determine if an expense was community or separate or whether further receipts were from community or separate sources. It is not difficult to see how cumbersome this can be but, in many situations, there is no choice but to use this method.
The exhaustion method is much easier than a mechanical tracing. Exhaustion works like this: There is no need to trace the path of separate property funds over a given period of time, if, at the time an asset was acquired, there was no community income or assets available to begin with. An important part of the exhaustion method is the family expense presumption. This presumes that, when community and separate funds are commingled, the family expenses are paid from community funds first.
Let’s use an example. Let’s say in Year 1, Wife receives a $1,000,000 inheritance. The parties have a combined salary of $5,000 per month. The mortgage on the community home is $5,500 per month. 3 years later, Wife acquires a vehicle with the funds.
Instead of showing the path of the separate property funds through every transaction leading up to the purchase of the vehicle, it is enough to prove that community expenses exceeded community income between the time she received the inheritance and the time she purchased the vehicle. In this example, the mortgage alone exceeded the community income, so this would be relatively easy to prove.
Total Marital Recapitulation
Total Marital Recapitulation is similar to exhaustion, but instead of looking at what the family’s expenses were at a given point in time, total marital recapitulation allows someone to only show that, over the course of the marriage, community expenses exceeded community income. However, this method is only allowed if records aren’t available through no fault of the party claiming the separate property.
The problems with tracing can be avoided. Generally, it is recommended to always keep separate property truly separate. The most difficult tracing problems arise when separate money and community are commingled together in the same account. It is also wise to keep records that will allow one to trace their separate property over time.
Tracing issues are complicated and it is important to have an attorney guide you through them in a divorce. The consequences of comingling separate property funds in a community property account can become a very costly mistake.
Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding tracing separate or community property assets. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.