Tracing Separate Property in Divorce Cases
“Round and round and round we go and where we stop nobody knows.”
̶ Kim Stanley Robinson
In Texas, property owned by one spouse before marriage or acquired during marriage by gift or inheritance is that spouse’s separate property. Property owned at the time of divorce is presumed to be community property unless a spouse proves it is separate by clear and convincing evidence. Sometimes, separate property becomes commingled with community property. Sometimes, separate property is sold and the proceeds are used to buy new property. Proving what part of the resulting marital asset is separate property requires a careful process called “tracing.” Our divorce lawyers have the knowledge and experience necessary to address even the most complex tracing issues which arise in divorce proceedings.
Tracing Separate Property Funds
One common tracing issue that often arises in divorce proceedings is tracing funds on deposit in an account with a financial institution from before the parties’ marriage. The name of the spouse listed as the holder of the account does not necessarily mean that the money in that account is the separate property of that spouse. Funds on deposit before the marriage are separate property, whereas funds deposited after the marriage may be either community property or separate property depending upon the source of such funds.
Suppose one spouse has a checking account with $50,000 on deposit just before the date of marriage. If no funds have been deposited into or withdrawn from the account, and no interest has accrued, such funds would be the separate property of the spouse who owns the account. But, in most cases, transactions have occurred during the parties’ marriage.
Suppose that at the time of divorce, the account has $60,000 on deposit. You may think that $50,000 is separate property and the remaining $10,000 is community property. While it is possible you’d be correct, it is far more likely you’re not. Depending upon the facts, all of such funds could be community property, or all could be separate property. There have probably been a number of individual transactions in that account since the parties got married. Tracing each of those individual transactions over time is necessary to determine what portion of such funds is the spouse’s separate property and what portion is community property.
Commingling occurs when a spouse’s separate funds are mixed together with community funds in the same account. This may occur when a spouse continues to deposit a paycheck into the account he or she had before marriage. Wages earned by a spouse after marriage are community property. This may also occur when the account earns interest. Income from separate property is community property. To avoid problems with commingling, parties sometimes enter into premarital agreements.
From the above hypothetical, assume that the additional $10,000 on deposit in the account at the time of divorce all came from the spouse’s paycheck, there were no other deposits or withdrawals, and the account did not pay any interest. In that situation, the $50,000 on deposit on the date of marriage would be separate property, and the $10,000 deposited after that date would be community property.
Community Out First Rule
Typically, the actual facts of a case are not as simple as our hypothetical. There may be hundreds, or even thousands, of individual transactions in the account over time. One general precept of tracing is the “community out first” rule. Under that rule, in most cases, money spent from an account which contains commingled funds is considered to be community property until all of the community funds have been exhausted.
Consider an account with the following transactions:
2/14/18 $50,000.00 Date of Marriage
2/28/18 +$9,000.00 $59,000.00 Paycheck Direct Deposit
3/01/18 -$3,800.00 $55,200.00 Rent Payment
3/05/18 -$800.00 $54,400.00 Electric Bill
3/08/18 -$600.00 $53,800.00 Groceries
3/10/18 -$500.00 $53,300.00 Cell Phone
3/15/18 -$2,500.00 $50,800.00 Party Dress
3/17/18 -$1,500.00 $49,300.00 St. Patrick’s Day Party
3/17/18 -$100.00 $49,200.00 Uber
3/25/18 -$1,500.00 $47,700.00 Karaoke Bar
3/31/18 +$9,000.00 $56,700.00 Paycheck Direct Deposit
4/01/18 -$3,800.00 $52,900.00 Rent Payment
Under the “community out first” rule, each of the withdrawals between 2/28/18 and 3/15/18 would be deducted from the $9,000.00 of community funds deposited on 2/28/18. But the withdrawal for the St. Patrick’s Day exhausts those community funds and depletes $700.00 of the separate funds on deposit before the parties’ marriage. The Uber ride home and the karaoke party further deplete the separate funds before the next paycheck deposit is made. By 04/01/18, there are enough community funds available to again pay the rent payment. So, as of 4/01/18, $47,700.00 is the spouse’s separate property, and $5,200.00 is community property.
Consider tracing an account with hundreds or thousands of transactions spanning years of a marriage. Assuming that there are no other separate funds deposited into this account, the lowest intermediate balance during the course of the marriage will be the spouse’s separate property remaining in the account. This is called the “lowest intermediate balance” rule (LIBR). But sometimes, additional separate funds from another account that predates the marriage or from a gift or inheritance are deposited into the same account. Sometimes, the spouses have a number of different accounts and funds are routinely transferred into, out of, or between them. Untangling this web of transactions to prove your separate property by clear and convincing evidence requires both time and the experience of an attorney familiar with tracing principles.
Tracing Separate Property Tangible Assets
Money is not the only type of separate property that can be traced. Spouses often own tangible property, including homes and motor vehicles, at the time of their marriage which are their separate property. Over the course of a marriage, these tangible assets may be sold. Although income from separate property is community property, the proceeds from the sale of separate property remains separate property. This is true even if the value of the item of property has changed during the course of the marriage.
Suppose a spouse owns a painting by a famous artist that prior to marriage was worth $1,000,000. During the marriage, the artist dies and suddenly that painting is worth $10,000,000. The spouse decides to sell the painting. The full $10,000,000 is that spouse’s separate property. If the spouse then uses that money to buy a dream home in Preston Hollow and a McLaren sports car, both the home and the car are that spouse’s separate property.
Clearinghouse or Identical Sum Inference
In marriages where the spouses have a number of accounts, it is not uncommon for funds to be transferred between accounts, especially to make a major transaction. Occasionally, separate property funds will be transferred into an account which otherwise contains community funds in order to engage in the transaction. One example would be when a spouse transfers money from a pre-marriage separate property investment account into a joint checking account containing community funds to buy a home or motor vehicle. In that case, the account containing community funds is acting as a temporary repository for the separate funds used to make the purchase.
In tracing a spouse’s separate property, the law provides an inference in those cases. Where a sum is transferred into an account and then a like or substantially similar amount is transferred out of the account shortly thereafter, there is an inference that the spouses intended to preserve the separate character of the funds. This inference is particularly helpful in tracing separate property funds from an account with a financial institution into tangible property subsequently purchased during the marriage.
Proving Your Separate Property
Proving what marital assets are your separate property by clear and convincing evidence can be simple, or it can be very complicated. Most divorce attorneys understand the basic principles of tracing and can apply them in most cases. In marriages lasting several years, spouses are more likely to have accumulated large marital estates with multiple sources of separate property. Proving your separate property in those divorce cases can be a daunting and time-consuming task. The divorce attorneys at our firm can help you trace your separate property so that you can meet your burden of proving what assets are your separate property in your divorce proceeding.