Tracing of Cash Activity for Identification of
Separate Assets – Always the Separate
Claimant’s Burden?
by David V. Hanzich MBA CPA ABV CFF CVA
As any 1st year divorce attorney knows, the burden of proof in identifying “Separate” assets (cash, investments, etc.) is on the person that is making the claim for separate property in a marital dissolution. Is there any occasion that would require the opposition to prepare a tracing analysis if the other party is making the separate property claim?
I would say that tracing of cash assets is the most costly and detailed analysis required for fraud and divorce matters. There is no short cut to prove the location of assets or to identify the characterization of cash as separate or community property.
Financial tracings can become extremely complex when the trail of cash transactions involve the tracing of “separate” cash assets through “community” bank accounts or when separate cash is moved from and to numerous bank accounts over a number of years. It is further complicated when it is necessary to identify bank activity occurring during marriage to determine the characterization of those transaction and it’s affects on separate or community assets.
The criteria for a successful tracing are as follows:
1.Separate property funds were available at time of acquisition
2.Separate funds were actually withdrawn;
3.with the intent to acquire a separate property asset
4. Disclosure of intent to use separate property to acquire an
Asset (1)
The financial documents used to prepare a tracing analysis involve bank statement copies, cancelled checks, deposit vouchers, withdrawal slips, and check registers identifying the source of cash deposits and identification of payees for all disbursements.
So, at the risk of providing the opposing counsel evidence of his/her client’s separate property, is there any occasion that would require one side to prepare a tracing analysis for the other side? 99.9% of the time, the person making a separate claim will prepare a tracing analysis, subject to cross examination and review of the underlying evidence.
In a recent case, the respondent claimed he used separate property to invest in an apartment complex during the marriage. This purchase occurred approximately a year into the marriage. He claimed his separate account held sufficient cash to make the investment. (There are other criteria. However, we’ll focus on the tracing aspect). Our risk was that the respondent could show sufficient separate cash available for the investment located in a separate account. In addition, the respondent was a real estate broker with a history of investing in real estate. However, when you reviewed the detail of the “separate” account, there were certain transactions that occurred during the marriage that were not identified.
We obtained the respondent’s financial records and prepared a tracing of cash transactions from the date of marriage to the date of purchase. From our analysis, we noted a number of deposits that were made into the separate account during the marriage which we identified as community (or income earned by the respondent during the marriage). One of the rules when preparing a tracing is that when community expenses are paid during the marriage, community assets, if available, are used first to satisfy the payments for community expenses. When community funds are depleted then separate assets are used to pay community expenses. Following the rule, we noted that at times only separate cash was available to pay community expenses, eventually depleting any separate cash within the separate account.
In addition, we noted a distinct pattern related to community cash deposits made into the separate account during the marriage. Every time a significant deposit was made during the marriage, the respondent would immediately transfer the money over to a “separate” investment account (which had a zero balance as of the date of marriage) showing no intention of using his separate funds. The investment account was eventually used to fund the investment purchase. We proved that there were no separate funds available at the time of the purchase. Had we not prepared our own tracing, it could have been difficult to rebut the respondent’s separate claim without reviewing all of the detailed information and doing our own work. The judge agreed with the petitioner and our analysis that the million-dollar plus property was a community asset. It’s the claimant’s burden, but in some situations you may need to look under the hood yourself.
Be careful out there!
Dave H.
(1) Complex Issues in California Family Law, Second Ed., Vol. D, Tracing Separate and Community Funds, Dawn Gray, Stephen J. Wagner, 2010, LexisNexis, Mathew bender
