Often, couples who decide to divorce after many years of marriage discover their “separate property” and “community property” has become “commingled.” In other words, they don’t know how to determine where “separate property” and “community property” begins and ends with regard to their finances. This issue can be very important in a divorce because “separate property” will be completely free of consideration when dividing marital assets, and will not be considered in a final settlement of the marital estate.
Most believe there is no way to figure it all out, especially if the marriage spans many years. However, “separate property” can be sorted out from “community property” if there is a paper trail or other records that can be brought into play. It is called “tracing,” and can be effectively done by a financial expert, such as myself, or a forensic accountant, if necessary. This challenge is more common that most people realize, but it not insurmountable,if monthly statements are available from financial institutions. (Thanks to today’s digital technology and online banking, most of us can access and store financial statements indefinitely.) By reviewing these files, we can trace the account and find an ironclad separate property amount.
Over the years, married individuals may have received gifts of cash, valuables, collectibles, vehicles, real estate, etc. from their spouse, family members or friends. This is considered separate property. Or, one spouse may have inherited cash, real estate, stocks and bonds, jewelry, valuables or other property. This is also considered separate property. In addition, if one spouse is in an automobile accident, for example, and sues the other driver’s insurance company, and gets a settlementor judgement, this is also considered separate property.
One of my clients had received cash gifts from her mom throughout a 35-year marriage. Her husband’s divorce attorney claimed that the account was community property because of commingling, even though she had the account long before marriage. When her mom died, she then inherited more assets. The inherited funds were readily identified as separate. But what about the annual gifts? Yes, they were “separate property.” But the income on those accounts, all invested in mutual funds, was “community.” AND because these accounts were all invested in mutual funds, the dividends were reinvested. So, community shares were purchased with dividends and the capital gains (meaning appreciation on the shares) was commingled between the community and the separate estates. By using “line-by-line” tracing of financial institution records over the years, and the “community out first” rule, I was able to clearly define her separate interest. The “community out first rule” means that because the couple pulled funds from the account over the years in order to support themselves due to the husband’s underemployment, “community” funds were already distributed over and over again. In effect, the “community” part of the account was spent, while preserving the “separate.”
If you are facing divorce, and believe you may have commingled “separate property” with “community property” over the years, you may want to engage a Certified Divorce Financial Analyst, like myself, to help you trace these funds and make a determination before you begin the divorce process. Proving this can have a significant impact on your final settlement.