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Divorce & Property Division: How Tracing Can Prove Who Owns What

Divorce & Property Division: How Tracing Can Prove Who Owns What
Hendershot, Cannon & Hisey, P.C.

Divorce cases are all unique, but many involve the need to divide various assets and debts shared by spouses. If that sounds like a difficult task or tedious chore, it’s because it very well can be – especially when spouses have complex financial arrangements. Fortunately, there are ways to effectively navigate matters of complex property division and property characterization. One of these is a method known as tracing, which involves determining when an asset was acquired.

When Tracing May be Used in a Divorce Case

Matters of property division focus on distributing the “community estate” between two divorcing spouses. In order to do this, spouses need to properly characterize their assets as community property (which is divisible in divorce) and separate property (which isn’t), and then find a way to divide that community property – either through out-of-court negotiations or mediation, or by litigating the matter in court.

Even in cases where spouses don’t have significant disputes and want to try reaching a settlement, those settlements still require due diligence to ensure either party is entering into a fair deal, not to mention communication and compromise. You need to know what’s on the table and where negotiations can begin, which is why tracing, at least to some degree, may be necessary.

Although “tracing” in its most basic form may be necessary in all types of property division matters, there are some divorce cases where it assumes even greater importance. These can include a number of situations that require spouses to actively determine what’s community and separate property, and protect their share of marital assets. Examples of these situations may include:

  • Disputes and disagreements over asset characterization or other property division / financial aspects of a divorce.
  • Commingling, which means assets that may have once been separate property have become, in part or in whole, community property subject to division in divorce.
  • Spouses concealing or hiding assets, which may include omitting financial documentation, re-locating assets, or other forms of marital fraud that require division of undivided property.
  • High net worth and large marital estates where spouses have a great deal of assets, or unique and complex assets, such as investment properties, a business or professional practice, rare collectibles or antiques, inheritances, retirement accounts, and more.

Community Property Presumption: Proving Separate Property

Distinguishing between community property (which are generally assets acquired during marriage) and separate property (which are assets acquired by one spouse prior to marriage or as an inheritance or gift) can be a crucial part of property division, especially in complex and contested divorce cases. It also requires a certain level of proof to be met.

In Texas, the law presumes assets owned by spouses to be community property subject to division in divorce. As such, the burden of proof falls on the spouse who believes they have separate property which shouldn’t be divided. What’s more, overcoming Texas’ community property presumption requires a level of proof known as “clear and convincing evidence.”

Clear and convincing evidence is much more than a smart-sounding phrase. It is a legal standard used by judges when interpreting the facts and evidence they are provided, and determining whether a person seeking separate property status for a certain asset has met their burden of proof. Unlike the burden of beyond a reasonable doubt, the standard of evidence used in criminal cases, clear and convincing evidence does not require the absence of doubt, but rather a reasonable amount of certainty that what’s being asserted by one party (such as a spouse who says an asset is separate property) is true.

Because there is a need to meet the burden of proof when saying something is your separate property, one of the most effective ways to do so is by tracing. As the name implies, it’s a method which requires you to trace the origins of an asset to determine when it was purchased or acquired.

Tracing Assets: Titles & Money

If you are a spouse who believes a there are assets that should be characterized as separate property, meeting your burden of proof can provide leverage as you negotiate a fair settlement, or allow you to position yourself in a favorable manner when litigating your case in court. This means you’ll need to prepare accordingly and effectively trace when an asset came to be in your possession.

Tracing can be a challenging task that varies in scope depending on the type of asset. As an example, consider real estate:

  • Real estate – If you’re attempting to prove a home, investment property, or other real property asset is your separate property, you will need to establish when title in the property came to be in your name. This may be a date of purchase before marriage, which could mean the asset it separate property. However, matters are not always that simple, especially if a once separate property piece of real estate became community property, such as when funds were commingled and a non-owning spouse contributed in some manner to the separate property’s upkeep or improvements, or when a home was deeded into the name of both spouses at a certain date. Tracing can help determine what an appropriate community property share would be in these situations.

As shown by this example, directly tracing the title alone may not always be enough. You may also have to follow the money and bank statements, which can be complicated if the money comes from a commingled bank account. One commonly used method to address this focuses on the theory that when spending does occur, it is community funds which are spent before separate funds are used.

This theory, sometimes referred to as the exhaustion method of family expense presumption method, has developed over years of Texas case law, and there are a few ways to illustrate it:

  • Two spouses own a joint account with a balance that never exceeds $3,000. After marriage, one spouse is granted a large inheritance from a relative, and the entire amount of that inheritance is deposited into the joint account. Following that deposit, the spouse who inherited used funds to purchase a rental property. Even though funds in this situation are technically “commingled,” the separate property funds (i.e. what came from the inheritance) can be segregated from the community property income. In a divorce, the spouse who was gifted the inheritance could use tracing as a means to show when the deposit was made.
  • A husband deposits $10,000 generated by his a business he owns into a bank account. He and his spouse then made withdrawals which totaled $11,000. Because the business income never amounted to or exceeded the amount of the withdrawals, the evidence supports the theory that no community funds were used to support the business, meaning only the business-owning spouse’s separate property was utilized.

These are only hypothetical examples, and while they may help convey the general approach to tracing assets and funds in divorce, it’s clear there are numerous issues which can make the task much more complex. Whatever the situation may be, a proven attorney can help you navigate the process with the resources, experience, and insight you need, and protect your fair share.

Hendershot, Cannon & Hisey, P.C. is well-versed in detecting, tracing, and recovering assets in divorce cases throughout Houston and the state of Texas. If you have questions, call (713) 909-7323 to speak with a lawyer from our family law team.