What is Tracing?
Tracing is a method used in divorce cases to identify and prove the ownership of separate property, even when it has changed forms or been mixed with community property. In Texas, property acquired during a marriage is generally considered community property, meaning both spouses have an equal interest in it. However, certain assets, like property owned before marriage or acquired through inheritance or gifts during the marriage, are considered separate property.
The challenge arises when separate and community property are mixed, or when the separate property has “mutated”—changed its form. Tracing helps you establish which part of an asset is yours alone and which part belongs to both you and your spouse.
How Tracing Works
There are several methods for tracing assets, depending on the type of property and the situation:
- Item Tracing: This method is used for non-cash assets. You must show how the property was originally obtained and then trace each change in its form. For example, if you owned a house before marriage, sold it during the marriage, and used the proceeds to buy a car, that car remains separate property, even though it was purchased during the marriage. You need to provide documentation showing the flow of funds from the house sale to the car purchase.
- Value Tracing for Cash Assets: This method involves tracking cash assets that have been mixed with community property. Several techniques are used in value tracing:
- Clearinghouse Method: You deposit a large sum, like an inheritance, into a community property account and immediately withdraw it to place it in a separate account. The key here is that the deposit and withdrawal amounts must be equal or nearly equal.
- Identical Sum Inference Method: Similar to the clearinghouse method but allows for a small time gap between deposit and withdrawal. The inference is that the funds withdrawn are of the same character as those deposited.
- Minimum Sum Balance Method: This method is used when the balance in an account never drops below the amount of separate property deposited. The assumption is that the separate property remains intact in the account.
- Community Out First Method: In accounts where separate and community funds are mixed, it is presumed that community funds are spent first, leaving the separate property intact.
- Pro Rata Method: This method is used when both separate and community funds are combined in an account. The final balance is divided proportionately based on the original amounts of separate and community funds deposited.
The Importance of Keeping Records
The process of tracing can be time-consuming and requires meticulous record-keeping. The cleaner your records, the easier it will be to prove which assets are your separate property. While we don’t plan for divorce when we marry, keeping clear financial records can protect your assets if the unexpected happens.
Good record-keeping isn’t just important in divorce—it’s also crucial if one spouse faces bankruptcy. Proper tracing can protect the non-filing spouse’s separate property from creditors.
Marital Agreements: A Proactive Approach
One of the most effective ways to safeguard your separate property is through a marital agreement. Whether it’s a prenuptial agreement before marriage or a postnuptial agreement after marriage, these legal documents can clearly define the character of each spouse’s property, reducing the need for tracing in the event of a divorce.
This is especially important if one spouse owns a business. A marital agreement can ensure that the non-business-owning spouse is protected if the business encounters financial difficulties.
While tracing can be complex, understanding the process and keeping detailed financial records can make a significant difference in ensuring that what’s yours stays yours.
