Best Practices for Tracing

All of the below best practices are implemented by Sage Investigations, LLC in the bank analyses and the tracing analyses through algorithms and DIO, a proprietary technology.

  • Utilize technology to convert account activity from paper or PDF formats to a format that can be digitized (e.g., Excel or database format)
  • Ensure an accurate running balance throughout all traced accounts ➔ RECONCILE
  • Establish a method of linking transactions between accounts, so one can quickly and reliably trace funds forward and backward.

Tracing of Separate and Community Property

In the past, tracing computations were done manually using spreadsheets, but now with computer coding, manual operations have been turned into computer processing of transactions in a database. The computer code allows the consideration of all possible scenarios.

Texas Law states that if the property cannot be proven to be separate by the preponderance of the evidence, then it is community property.

Tracing of transactions was established to meet the burden of proof and maintain the separate property.

The four TABS found in the tracing analysis for State Bank Account #123456 are described as follows:

  1. Account Analysis – This TAB contains the analysis of bank account #123456, reflecting the following twelve columns for each transaction. They include the date (Line #9 to Line #12488), type of transaction, Credit (deposit) amount, Debit (expenditure) amount, Running Balance (reconciled to the bank statements), name of the file documenting the transaction, Note (Description), summaries of Cash, Transfer, Trail, Tag, and Non-Classified.
    1. The next set of columns includes the green tracing columns for the Separate Property Funds of Spouse #1, which includes three columns – Separate Credits, Balance, and Debits and a notation if the item is used in the Separate Analysis (Detail) and Summary Analysis TABs.
    2. Similar columns in Blue are prepared for tracing the Community Property Funds.
    3. The columns in Orange are prepared for tracing the Separate Property Funds of Spouse #2.
    4. The examiner classified the deposits to Account #123456 as the evidence was reviewed, processed, and input into the workbook. The deposits were classified while reviewing the deposit slips attached to the bank statements, notations on the bank statements, or other evidence provided by the client. The classifications are uniform in an attempt to be consistent with similar transactions. Because of time constraints, not all deposits are classified but are designated as non-Classified items. Therefore, the non-Classified items are not considered part of the reimbursement claim and are processed as Community deposits.
    5. In the past, the computations for each row and Column were made manually. With the aid of computer technology, the process is much faster and more accurate, and modifications can be calculated and rendered quickly.
  1. Separate List –The system creates “trails” and “search terms” (Column A & B – System Markers) using the list in Column B, along with Column C; the expenditure of separate funds can be selected by inserting a “Y” in Column C. Column E & F are used to help identify the nature and description of the item selected. The System Markers are created by the examiner and coded into the data in the bank account analysis as it is prepared.
  2. Separate Analysis – The system creates this once Column C is completed and activated. It renders a detailed list of each transaction from the tracing columns (Green, Blue, and Orange) and replicates the summary totals for Spouse #1, Spouse #2, and the Community funds.
  3. Summary Analysis – This is created by the system and summarizes the detail and totals to arrive at the reimbursement claim for Spouse #1 Separate Property Fund.

How is community property tracing determined?

Tracing Credits (Deposits) – When deposits occur within a bank account, they can be assigned to three different funds: Community Property, Spouse #1 Separate Property, and Spouse #2 Separate Property. Deposits are categorized by notations on the bank statement, deposit slips, or other evidence. They can have multiple ownership classifications, including a deposit of community funds with separate funds in the same deposit slip. If there is no classification for the Credit, the transaction by default is considered Community Property Funds as per Texas law.

Tracing Debits (Expenditures) – When expenditures occur from the bank account, their ownership is determined by the balances in the Community and Separate Funds.

The debit assignments are as follows:

  1. If a Community Property Fund balance exists, the expenditure is charged against Community Property Fund under the Community First out First in First Out (FIFO Method).
  2. If the Community Property Fund balance moves to zero, the Separate Property Fund balances are In this case, there are two Separate Property Funds, one for Spouse #1 and the other for Spouse #2.
    1. If both Spouse #1 and Spouse #2 have Separate Property Fund balances, then the remaining portion of the transactions are divided evenly between the two Separate Property Fund balances.
    2. If only one person has a Separate Property Fund balance, the amount is removed fromwhoever has the Separate Property Fund
      1. The Separate Property Fund balances cannot go
      2. If the Separate Property Fund reaches zero, then the other individual’s Separate Property Fund balance is checked for any remaining
    3. If neither individual has Separate Property Fund balances available, then the Community   Property Fund balance is allowed to go

Note: Spouses #1 Separate Fund Balance + Community Fund Balance + Spouse #2 Separate Fund Balance = Bank Account Running Balance.

Note: Separate Property reimbursement happens in the places where the Community Property Fund balance goes to zero and money starts being used out of the Spouse #1 Separate Fund Balance.

Note: Loan payments considered for a reimbursement claim must be limited to principal payments and not include interest, insurance, or other costs. Therefore, an amortization of each loan must be prepared to arrive at the principal amount only.

See Example of the Claims for Reimbursement