An important part of the divorce process is the division of marital assets, which is governed by our state's unique community property laws. In California, property acquired from the date of marriage to the date of separation is presumed to be community property. Spouses have equal interests in their community's property. Conversely, property acquired before marriage, after the date of separation, or received by gift or inheritance is presumed to be the sole and separate property of only one spouse.
When there is a disagreement over the characterization of an asset, the person who made the separate property claim has the burden of proof. In most cases, the evidence needed to prove a separate property claim requires tracing the purchase of an asset to the spouses’ separate source of funds. This tracing requirement can be especially difficult when a spouse’s separate funds are commingled with community funds by depositing the funds into a joint bank account.
A recent appellate court decision* illuminates the challenges associated with tracing separate property funds to the purchase of community assets. In that case the husband deposited $412,787 of his separate property funds into a joint bank account he had with his wife, in order to pay for the construction of a house located in Big Bear. During the parties’ divorce, the husband sought reimbursement of his separate funds. At trial, the husband introduced into evidence a handwritten note that listed his separate funds which were used to pay for the construction of the Big Bear property. In addition, his wife admitted under cross examination that some of the husband's separate property funds were used for construction costs. However, the wife did not testify as to the amount of the husband's funds that were used. Unfortunately for the husband, the trial court concluded he failed to meet his burden of proof. As a result, the court denied his request for reimbursement of his separate funds used toward the construction of the house. The trial court’s ruling was upheld on appeal.
As one can see from the above illustrated case, there are strict tracing requirements related to separate property claims and the failure to adequately trace separate property funds can result in a huge loss of money. Meeting one's burden of proof can be virtually impossible when a spouse is unable to obtain documentation necessary to trace funds on deposit to a separate source. Thus, the importance of preserving and developing evidence related to separate property claims cannot be overstated. In this regard, the following tips may be helpful for anyone who is considering making a separate property claim:
First, it is highly advisable that people concerned with persevering their separate property to store important documents such as bank account statements, cancelled checks, and escrow documents in a safety deposit box or some other secure place;
Second, if it is not too late, consider entering into a premarital or postnuptial agreement that spells out in detail the separate property interests of the parties;
Third, avoid commingling separate property money with community money. Maintain individual accounts holding separate property without adding the other spouse to the accounts and do not transfer community funds into the accounts.
Fourth, find out early during the divorce proceedings if the opposing party is opposed to the separate property claim. Getting the other side to enter into a stipulation concerning the validity of the separate property claim will go a long way of bringing the case to a sensible conclusion. If, on the other hand, the opposing party contests the separate property claim, strongly consider taking his or her deposition to confirm key facts necessary to establish the tracing analysis; and
Finally, if the opposing party contests the separate property claim during the divorce, strongly consider hiring a forensic accountant to conduct a tracing analysis on the bank accounts in question. Nobody enjoys spending money on experts, but where there are large dollars in question, it is money well spent.
Marriage of McLain