Tracing Separate Property: How Bridge Can Help

Property issues can get really confusing really fast. Before you make any financial decisions about your divorce, you need to discover all the facts about separate property in Arizona. 

Arizona law defines separate property as: “property that one spouse owned before marriage or acquired during marriage by gift, devise, or descent, and that isn’t subject to division by the court in divorce proceedings” (ARS 25-213). 

Separate property is different from other types of marital assets. Let’s take a look at separate property, why you need to know about it, how to trace it, and the ways we can help.

What are Community Assets?

Community assets is the term used to describe any property that you acquired during the marriage. These assets could include cash accounts, stocks, 401(k)s, and/or houses. How these assets are divided in a divorce depends on the state you live in, but usually, each spouse gets half of the community property. 

However — and here’s where things start to get sticky — if one spouse owned a house before the marriage, then that house would be considered separate property and would not be divided in a divorce. As you can already see…

You need to keep records of how your assets were acquired

If you know who acquired what asset and when they acquired it, then it makes an equitable division of property much easier during a divorce settlement.

For instance, in many cases, spouses will sell the house and split the proceeds from the sale with their ex-spouse as part of their settlement agreement, or decide how to divide it up some other way by court order. The idea behind dividing an asset up when a couple divorces is for it to be equitable to both parties involved. 

If you know what your spouse’s interests are —- and you have a good relationship with them — you can work with them to find an equitable way to divide things up so everyone is satisfied with their settlement after divorce.

The trouble starts when one or more spouses owns separate property — that is, property that is not classified legally as a community asset. 

Separate Property vs. Marital Property

In a divorce, how property is divided can be very complicated.

The first step is to determine which assets are separate property and which are marital property. 

  • Separate property is any asset that was owned by either spouse before the marriage, or that was inherited or gifted to either spouse during the marriage.
  • Marital property, on the other hand, is any asset that was acquired during the marriage (see community property above). 

Commingled Property

The hardest financial part of any divorce is figuring out how properties are divided, and that’s made even more complicated when there’s been a commingling of assets

What is commingled property? 

Simply put, it’s any separate property of one or both spouses that has been commingled (combined) with community property assets.For example, if one spouse enters the marriage with a 401(k) plan with their employer, that would be their separate property.  However, if during the marriage, they continue to make contributions to the plan, those contributions and the growth on them are community property and the account has been commingled. 

A common form of commingled property is residential real estate. Let’s say a spouse owned a house prior to marriage. They sold their home and moved in with their new spouse. The money from the sale of that home is separate property… unless the spouses reinvest that money in a joint asset such as a bank account or buying a home together. Then, it becomes a commingled property.

Other examples of commingled property include an inheritance deposited into a joint account and an investment made with deposits made both before and after the marriage. The way that most divorces address this issue is by tracing back all transactions on joint accounts to determine which spouse paid for which share of those transactions with his or her own money.

What is Tracing in Family Law?

In family law, tracing is the process of identifying and separating property that is considered separate property from property that is considered marital or community property

Tracing can be important in a divorce because how properties are divided can have a big impact on each spouse’s financial future.

Why Tracing is Important in a Divorce Situation

When a couple gets divorced, their property must be divided between them. This can be a complex process, especially if the couple owns a lot of valuable assets.

One of the first steps in dividing property is to determine which assets are separate property and which are marital property. This is where tracing may play a part.

Why Should You Need to Trace Separate Property in a Divorce?

In a divorce, you and your spouse will need to divide your property. Any property that either of you acquired before you got married is considered separate property. This includes property that was inherited or gifted to you. 

If you commingled your separate property with marital property, you may need to trace it back to its source. This can be a difficult and time-consuming process, but it’s an important one that can affect your financial well-being for years to come. It’s especially critical if you suspect your soon-to-be-ex-spouse is the type who could hide assets, destroy property, or fritter away the money in jointly owned accounts. 

Consequently, you need to hire a professional. Don’t just look for a family friend. Get someone skilled and experienced in divorce financial advising. This person may need to provide expert testimony in court, so the more qualified and seasoned they are, the better for you. 

What are the Methods of Tracing?

Financial advisors and other experts may use different methods to trace separate assets.  

One way is through direct asset tracing. This is when you look at each asset and try to determine which spouse owns it. This can be a tricky process, but luckily there are some helpful ways to do it. If you have any doubts about who an asset belongs to, you should use the paper trail to figure out what happened with the property. 

For example, if one spouse bought something on their own, they would likely keep the bill of sale or receipts for that purchase. They may also include invoices in their records. The other party could also just ask them how they acquired it! However, these methods can still be difficult. That’s why it might make sense to talk to a financial professional about how properties are divided in a divorce. 

Professionals can also use the clearinghouse method of tracing. First, they’ll come up with a list of all your marital assets and separate them into two categories: separate property and marital property. Then, they’ll decide how much value has been transferred from one category to another over time (the changes). 

Next, they will categorize how much value was given away as separate property as well as how much value was received by receiving marital property (from its change). Finally, lawyers need to identify what percentage of changes were made by either spouse. That way lawyers or financial advisors can find out how properties should be divided in a divorce.

A third method of tracing is called the family expense presumption method. Under this method, the tracer tries to show that property purchased from commingled funds was actually bought after the commingled funds had been exhausted. 

As an example, let’s say a couple had a bank account worth $5,000. The husband deposited $10,000 from an inheritance into that account. While the account still contained that $10,000, the couple paid for an upgrade to their home. In this case, the husband may be entitled to reimbursement because the court presumes the money for the upgrade came from the husband’s separate $10,000 asset.

If this seems confusing, don’t worry. You’re not alone. The process of dividing marital assets is complex and complicated. That’s why you need a competent professional on your side.

How Bridge Can Help

It can be difficult to figure out how properties are divided in a divorce, especially if the couple has commingled their assets. Bridge can help you trace your separate property so you can get what you’re entitled to. Contact us today to learn more about how we can assist you.