Tracing To Establish What Property is Yours in a Community Property State

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 What Is Community Property?

Generally, anything a married couple accumulates during the marriage is considered community property; both spouses own an undivided share of the whole. Even if one spouse earned all the income while the other stayed home, this would still be true. Thus, anything acquired through community labor during a marriage is a community asset unless one spouse proves it to be their separate property.

When community funds are mixed with separate property funds, the account is known as a commingled asset. Commingling occurs when one spouse’s separate property is combined with the other spouse’s separate property or with community property to make the entire account available for community use.

To be entitled to reimbursement, the spouse must prove that some funds in the account are separate property. For example, an inheritance, a gift, or a financial account that existed before the marriage can be included.

On your Schedule of Assets and Debts, you will need to indicate which accounts and property you have a separate property claim to. To preserve your right to reimbursement, you must be able to “trace” the money back to a separate property source. It is not enough to blend assets to change their identity. Still, if it is impossible to trace back to the separate property source, the entire asset will be treated as community property and divided 50/50.

It is easiest to pull financial account statements back to before the date of marriage to show the money in the account(s) before marriage. In addition, you can show IRA or 401(k) statements for money in the account before you married. Unless you have a pre-marital agreement stating otherwise, any money contributed to the account during the marriage will be treated as community property.

To receive reimbursement at the time of divorce, you must be able to trace the money used to purchase the house back to a separate property source.

During a divorce, if you can show separate property funds were used to fund the down payment, make improvements to the home, or pay for the other spouse’s separate property, you will be entitled to reimbursement off the top when the house is sold, the rest will be split 50/50. Earrings used to pay the mortgage or improve the house are not recoverable unless the parties specifically agree otherwise in writing.

What Is Separate Property?

Separate property is property that is not community property and belongs to only one of the spouses. Although most property acquired during marriage is community property, a few items such as those listed below will be considered separate property even if they were acquired during the marriage.

Among them are:

  • Gifts and inheritances
  • Family heirlooms
  • Business-related personal property
  • Trust-owned property
  • Partner-declared separate property
  • Pre-relationship property
  • Separate property acquired with proceeds and not intended for both partners to use or benefit

Management of the Community Property

Each spouse owns one-half of the community property in a community property system. Spouses’ interests are equal, undivided, immediate, and vested. If a spouse contracts in another forum and consents to its applied laws, their domicile state cannot be changed. Depending on where they are domiciled, the law will apply.

The spouses have a fiduciary duty towards each other regarding community property. Removing community property without spousal notice or approval constitutes a breach of this duty. As soon as a spouse conveys or disposes of community property in fraud of the other spouse’s rights, the aggrieved spouse has recourse, first against the property or estate of the disposing spouse. If that proves unfruitful, the aggrieved spouse may pursue the proceeds.

In general, the right of spouses to contract with each other regarding their property rights varies from jurisdiction to jurisdiction.

Under the Uniform Marital Property Act, spouses are now free to enter into property transactions with each other. A couple has a constitutional right to exchange the community interest of one spouse in a property for the community interest of the other spouse in another property.

If a transaction between spouses is valid, it must be fair and reasonable and made voluntarily and understandingly. The fiduciary nature of the relationship requires full disclosure and ample time to consider the implications. Independent legal counsel should represent each party.

Property can be transmuted by an express declaration stating that the characterization or ownership of the property is being changed. Per the Uniform Marital Property Act, spouses may reclassify their property by gift or by agreement. Transmutation agreements are allowed in California, subject to strict disclosure and fairness requirements.

In many states, the husband has the exclusive right to represent the community in litigation involving community property unless there are special circumstances. A wife may, however, bring an action to prevent a transfer of community property made by her husband in violation of statutory restrictions. Furthermore, when the husband cannot maintain the action and the spouses’ interests are antagonistic, the wife can sue to recover community property.

Moreover, a judgment rendered against the husband concerning the title to real community property is not binding on the wife when it was obtained in fraud of her interest.

California allows spouses to jointly control and manage community property. In any transaction involving community property, most third parties require the written consent of both spouses in order to avoid the entire issue of which spouse had the authority to commit the property. The transaction will normally not proceed if one spouse refuses to consent.

Changing Domiciles

The state in which the parties move will regulate their future conduct and acquisitions. In any case, removal will not alter either party’s rights to the property in their possession, whose title had vested under the community property law. The community property law will cease to apply to property acquired in a state other than where the owner originally resided, and existing community interests will not be affected by the change of domicile.

Transporting property into another state and exchanging it for other property does not entail the loss of property rights. The separate property of a nonresident spouse invested in state land remains separate property; conversely, the separate property of a state spouse invested in state land is protected.

How Does Tracing Work?

The tracing process is used to distinguish between separate and community property. Often during the course of a marriage, couples join or commingle their property. Courts have difficulty determining what is separate property when assets are commingled. Keeping track of your separate property from the time you first acquired it until now is essential.

It will be commingled and separate property if you inherit a million dollars from your parents. Tracing that money may be difficult if you put one million dollars in a joint bank account with your spouse. For the court to determine if it is your separate property and not community property to share with your spouse, you would have to engage in tracing.

The commingling of separate assets may also require tracing a business owned before marriage and maintained during the marriage or improvements made to a home purchased before marriage with separate funds.

Can a Lawyer Help Me With Tracing?

During your divorce, determining what is and is not your separate property can have serious financial implications. Hiring a family attorney to ensure you get what you are entitled to is a good idea. A proper trace can be very difficult, and if it is not done correctly, you will lose the right to keep your separate property.

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