During a dissolution, a couple is required to split their community property in an equitable way. Community property includes any money, property, debts, or other assets that the couple acquired during the marriage. This is true even if only one spouse earned an income during the marriage.
In contrast to community property, an individual may possess separate property. Separate property includes property that one spouse owned prior to the marriage, gifts to one spouse, or inheritance.
When a court determines the division of property, it will attempt to do so in an equitable manner. To reach an equitable result, the court will consider the length of the marriage, the amount of community property compared with separate property, the needs of each spouse to care for children, and the ability of each spouse to care for his or herself after the divorce is finished. In Washington, the court has the ability to divide all property the spouses possess as part of the marriage or as separate property.
It is still important to determine what is separate property because it allows the court to determine whether it has divided the couple’s assets fairly. The court will also often allow one spouse to keep all of his or her own separate property—although if the couple has been married for a long time it may often give the other spouse a greater portion of the community property.
Separate vs. Community Property
Tracing is important because separate property can become marital property if it is commingled with other funds or assets that the couple shares. In order for separate property to stay separate, a person’s spouse should not have access to or control of the separate property.
For example, suppose Michael and Marilyn are getting a divorce. During the marriage, Michael received an inheritance of $1 million from a deceased relative. If Michael kept that money in a separate bank account that his wife could not access, that inheritance would be considered separate property and Michael could keep all of it in a divorce. However, if he deposited all of the money into a joint bank account, or made purchases that benefitted both himself and his wife, then the judge may decide that part of the inheritance has become marital property.
In the same example, suppose Michael spends $800,000 to purchase a new home and puts the remaining $200,000 in the couple’s joint bank account. If Michael put the house in only his name, it will likely remain separate property. If both Michael and Marilyn are listed on the mortgage or they live together in the house for an extended period of time, it is more likely that a judge would consider the house to be marital property.
Tracing Commingled Funds
In the example above, tracing becomes important when Michael needs to track down the remaining $200,000 of his inheritance. He cannot simply tell the judge that any money left over in the couple’s bank accounts up to $200,000 counts towards his inheritance and should be considered separate property. Instead, he and his attorneys must prove that the money left in the couple’s shared bank account came from his inheritance rather than from the couple’s joint incomes.
This is done by tracing the path of the money through the joint bank account. Starting with the initial deposit, Michael would need to provide detailed records of deposits and withdrawals to show how much of the money left over in the joint account is from the inheritance rather than the marital estate.
The same process happens if the couple purchases property using commingled funds. If Michael bought a $25,000 car, the car could be considered either separate or community property. If Michael can prove that the money for the car came only from his inheritance, and that Marilyn was not a driver or owner of the vehicle, then it may be separate property. But, if Marilyn can show that the funds for the purchase trace back to the couple’s joint incomes rather than from the inheritance, the car would be community property that would get divided during a divorce.
Help for Couples
Tracing money or property in a divorce is often a complicated process that requires the help of both a skilled attorney and competent financial professionals. When a couple owns a business, rental property, or a significant amount of separate assets, it may take months to sort through and trace all of the separate and marital property.
In high-asset divorces like these, alternative dispute resolution methods can help couples keep the costs of a divorce down. Arbitration and mediation can be used to decide on which spouse owns which property without a lengthy court battle.
At Pacific Northwest Family Law, our attorneys use methods like these to help divorcing spouses create a settlement that fits their unique needs. For more information on tracing property in a divorce, or to learn how you can keep your separate property out of the marital estate, contact Pacific Northwest Family Law today by calling 590-572-3700.