What are the Tracing Methods in a California Marriage Dissolution?

The tracing methods in a california marriage dissolution action was addressed in the recent decision in the Marriage of Simonis, wherein Jennifer and Alan Simonis were married for 27 years and separated in September 2015.

While married the parties ran a farm where they grew crops, and they raised cattle.

Evidence presented at trial suggested Jennifer bore some recordkeeping responsibility for the farm operations during the parties’ initial period of separation, and Alan maintained Jennifer was in control of accounting for marital assets for at least a month after the parties separated.

But other than this early period of control over accounting records, between the date of separation and the date of trial on reserved issues to divide the community estate approximately five years later, Alan retained control of the three main non-real estate assets that belonged to the community: cash on hand, crop income from 2015 crops, and a herd of cattle refered to as the TCB Herd.

In the time during which Alan controlled the assets, he commingled the cattle, cash, and income with his separate property. Alan also made payments on various community debts using commingled funds.

At trial in 2020, the trial court looked to long-established precedent regarding the tracing of commingled assets during marriage, found that Alan had failed to meet his burden to trace his separate property interest in the cattle or his use of separate property to pay down community debts, and divided the bulk of the community estate accordingly.

The court made no specific order regarding the value of the cash on hand or the 2015 crop income, but it noted the court’s continuing jurisdiction over unadjudicated assets and liabilities under Family Code section 2556 when ruling on posttrial motions.

On appeal, Alan argued the trial court incorrectly interpreted and applied case law regarding how to characterize the separate and community interests in commingled assets and payments on community debts.

He argued that an aggregate tracing analysis—where the court would total up all cash derived from the three non-real estate assets and compare that to the total he paid on community debts to identify his separate property payments on debts without regard to when debts were paid—is an appropriate tracing analysis here.

Additionally, Alan argued that the trial court ought to have determined the value of the non-real estate community assets at the date of separation.

He argued that the court contributed to its own inability to calculate a value for those assets at the date of separation in how it managed the admission of evidence about the value of community assets during the trial, be that in its questioning of Alan or in its treatment of possible documentary evidence in possession of both parties.

The trial court stated that when community and separate property are commingled, each type of property will retain its character so long as the components of the commingled assets can be adequately traced to their community and separate sources.

Payments may be traced to a separate property source by showing community income at the time of the payments or purchase was exhausted by family expense, so that the payments or purchase necessarily must have been made with separate property funds.

Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in California is community property.

Statutory exceptions include property acquired by gift, bequest or devise, or descent; and rent, issues, or profits from separate property earned during the marriage.

When a married person commingles their separate property with community property, the mere commingling of separate property and community property does not change the status of the property interests.

However, if the separate property and community property interests have been commingled in such a manner that the respective contributions cannot be traced and identified, the entire commingled fund will be deemed community property pursuant to the general community property presumption.

California case law has long held that the community property presumption applies to property acquired during the marriage from an account or fund in which the spouse has commingled their separate funds with community funds, but if the funds used to purchase the property at issue can be traced to separate property the purchased property will be deemed separate property.

The burden of proving separate funds were used to acquire the property—in order to overcome the community property presumption—is on the spouse asserting the acquired property’s separate status.

As recognized by the trial court, California courts generally recognize two methods for tracing separate and community property interests in comingled funds: “direct tracing” or “family living expense tracing,” which is also called the “recapitulation” method.

“Direct tracing” requires specific records reconstructing each separate and community property deposit, and each separate and community property payment as it occurs.

The “recapitulation” method requires showing that community income was exhausted by family expenses at the time the purchase or payment at issue was made. 

The recapitulation must be sufficiently exhaustive to establish not only that separate property funds were available to make the payments, but that they were actually used.

As with direct tracing, the record must demonstrate that community income was depleted at the time the particular asset was acquired.

In In re Marriage of Epstein, the California Supreme Court recognized that, as a general rule, a spouse who, after separation of the parties, uses earnings or other separate funds to pay preexisting community obligations should be reimbursed therefor out of the community property upon dissolution. (i.e., "Epstein Credits")

The trial court did not err in finding an aggregate analysis could not meet Alan’s tracing burden.

LESSONS:

1.         Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in California is community property.

2.         Statutory exceptions include property acquired by gift, bequest or devise, or descent; and rent, issues, or profits from separate property earned during the marriage.

3          When a married person commingles their separate property with community property, the mere commingling of separate property and community property does not change the status of the property interests.

4.         When community and separate property are commingled, each type of property will retain its character so long as the components of the commingled assets can be adequately traced to their community and separate sources.

5.         California courts generally recognize two methods for tracing separate and community property interests in comingled funds: “direct tracing” or “family living expense tracing,” which is also called the “recapitulation” method.