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The time and circumstances of its acquisition determine the nature of property as separate or community. The Texas Constitution, Article XVI, Sec. 15, defines Separate Property as all property, both real and personal, of a spouse owned or claimed before marriage, and that acquired afterward by gift, devise, or descent, shall be the separate property of that spouse; 1
Asset characterization relates to applying marital property law, presumptions, and tracing. Tracing has been defined as a process that “involves establishing the separate origin of the property through evidence showing the time and means by which the spouse originally obtained possession of the property. Zagorski v. Zagorski, 116 S.W.3d309 (Tex. App. –Houston [l4thDist.] 2003, pet. denied) Hillard v. Hillard, 725 S.W.2d 722, 723 (Tex. App. – Dallas 1985, no writ.) The beginning point in the characterization and tracing of property is the statutory presumption that property possessed by either spouse during or on the dissolution of marriage is community property, TFC Sec. 3.002. This presumption may be overcome by identifying and tracing the property claimed as separate to a separate source of funds or credit used in its purchase. McKinley, 796 S.W.2d 540. 2
The degree of proof necessary to establish the property as separate property is clear and convincing evidence. As a general rule, mere testimony that property was purchased with separate funds, without any tracing, is insufficient to overcome or rebut the community property presumption.
The five most common reasons for tracing are:
- To establish the separate character of funds or assets held on account during the marriage;
- To establish the separate character of an asset acquired during the marriage from separate funds or assets;
- To support a reimbursement claim by demonstrating the use of funds or assets by one marital estate to benefit another marital estate;
- To defeat a reimbursement claim from one marital estate to another by demonstrating the benefit was paid by the estate receiving the benefit; and
- To prove or disprove a reimbursement claim or economic contribution pursuant to TFC § 3.401 et. seq.
This tracing usually involves a large quantity of bank, brokerage, and municipal fund statements and the development of assets and liabilities. A proper tracing requires all the financial records to be input into spreadsheets, generally in Microsoft Excel. The monthly bank statement, including deposits and disbursements, must be entered, and the running balance must be reconciled. Transfers between accounts must be recognized, and all transactions allocated between the inventory of community funds and separate funds and the allocation of mutations of assets should be recorded. The same detail of tracing must be prepared for brokerage accounts. In accordance with Tex. R. Evid. 1006 exception, summaries of voluminous records will be created in spreadsheets. From the summaries, a tracing schedule reflecting the community and separate property balances and the reimbursement claim and economic contribution is prepared.
The tracing expert must be well-read on the family code and court cases, which define the proper tracing method and tracing rules.
Methods of Tracing.
There are basic principles for tracing and clearly identifying separate property. Typically, tracing schedules will utilize a “community out first” rule and may also employ other theories.
The theories or principles of tracing have been identified as:
“Community out first” rule;
Minimum sum balance method;
Identical sum inference rule and clearinghouse method;
Item or asset tracing;
Value tracing; and
Pro-rata approach;
A significant barrier to tracing is dealing with the large volumes of documents, bank statements, checks, deposits, wire transfers, brokerage statements, credit card statements, and other personal and real property that must be analyzed, generally by manually inputting data into MS Excel worksheets. It is estimated that 99% of tracing experts must manually input the data.
Applying the “community out first theory” to the volume of data is intimidating, but it can be handled easily by DIO—a proprietary financial investigative program developed by Sage Investigation, LLC over the past 20 years. The program uses algorithms and will reduce the time needed to create the worksheets, reduce the human interaction with the data, and be more efficient. DIO will lower the cost of tracing without losing any quality of work. It will generate the analysis of the voluminous records into a detailed worksheet that will reflect the required community vs. separate property tracing format. The detail can be summarized into assets and liabilities schedules for use in mediation or trial. The DIO software is very beneficial in divorce tracing of funds, income tax cases, and cases that require following the movement of money.
If you are faced with a divorce matter that requires tracing assets and liabilities or a complex financial investigation, contact Sage Investigation, LLC. DIO is waiting to help you process the case data, help your client follow the money, and advance the development of your case. To learn more about helping your client, contact Retired IRS Special Agent Edmond J. Martin, Chief Investigator at Sage Investigations, LLC, email edmartin@sageinvestigations.com or call 512-659-3179. You can also visit our website: www.sageinvestigations.com and view the CVs of our team.
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References:
http://law.justia.com/constitution/texas/sections/cn001600-001500.html
Characterization and Tracing Marital Property in Texas by Michael P. Geary of Peary, Porter & Donovan PC.
