The Importance of Characterizing Property
Why does establishing the character of an asset as community or separate property matter in a divorce? When you get a divorce, the court will only make a just and right division of those assets which are considered to be community property. An asset qualifies as community property if it was acquired while the parties were married.
The trial court will not divide assets that are considered to be the separate property of the parties. Any property acquired before marriage, during the marriage by way of gift or inheritance, or after divorce qualifies as the separate property of the party who acquired it. The parties can also formally agree in writing to treat certain acquisitions as either community or separate property upon divorce.
For example, if a Hank bought a car before marrying his wife, bought a truck during his marriage, and bought a motorcycle after getting a divorce, his wife, Wanda, only has a direct interest in the truck he bought while married to her.
Why Is Tracing Necessary?
Sometimes property that would otherwise qualify as community property turns out to be a party’s separate property. Returning to the example above, if Hank purchased the truck from the money he inherited in his sole name, he can argue that the truck is also his separate property because he used separate property funds to acquire it.
Tracing can be used to show that community property is actually separate property and vice versa. The tracing process requires a thorough record of transactions between the final acquisition and its source of funds. Fortunately, computers automatically record many business and financial transactions these days. Such records are crucial to establishing a reliable and comprehensive paper trail from which specific assets can be traced to their source.
One of the most common situations where tracing is a significant issue involves separate property that has been commingled with community property.
Consider an example where Hank received an $85,000 cash inheritance which would ordinarily be considered his separate property. If Hank deposited the separate inheritance funds in a bank account that also contained community funds from his and Wanda’s employment, the separate funds are considered to be commingled with community funds. This is because money cannot be readily distinguished and separated from other money based on its source.
The Tracing Process
The tracing process requires accurate characterization of the source of funds used to acquire property. For example, to claim community property as separate property, the party must provide clear and convincing evidence that the source of funds was their separate property. Conversely, claiming a community interest in separate property using tracing requires evidence of a community property source.
In situations involving commingled separate and community funds in a financial account, there is a legal presumption that the entire fund has a community property character. As a result, any property purchased using funds from that account is presumed to be community property subject to division upon divorce. To rebut this presumption, one must trace the acquisition of property to the separate funds in the commingled account.
In Texas, there is sometimes a presumption that separate funds sink to the bottom of the account, and that community funds are used first. Therefore, property purchased from the commingled account can be traced to separate property if a party can demonstrate that any community funds had been exhausted by the time the property in question was purchased.
For example, imagine that Hank deposited his $85,000 separate property inheritance in a community property bank account that had $15,000. If Hank purchased a $60,000 sports car immediately after depositing his inheritance, the law presumes that he spent $15,000 of community funds and $45,000 of his inheritance to acquire the car. Hank’s spouse, Wanda, might claim a community interest in part of Hank’s car.
To rebut this presumption, Hank could submit evidence that the community funds were exhausted before buying the sports car. For instance, if Hank first spent $10,000 on renovations to the family home, paid $3,000 to satisfy family debts, transferred $2,000 into a college fund for his children, and then bought the $60,000 sports car, he would have a good claim that the sports car is his separate property, acquired with his separate inheritance money.
Get Access to Qualified Legal Counsel at Coker, Robb & Cannon
The division of community property in a divorce can be a complicated issue requiring the services of a sophisticated financial expert and divorce attorney. At Coker, Robb & Cannon, Family Lawyers, we have the experience and comprehensive understanding of Texas family law to guide you through complex matters such as tracing certain assets to community or separate funds.
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