This is the third post in a four-part series about preparing for the financial strain of the California divorce process.
Untangling Your Marital Estate During Divorce: Mitigating Unnecessary Stress
As discussed in our previous posts, every divorce is different. Of course, the marital circumstances of each case differ; but procedural aspects of each divorce can vary greatly as well. Some couples reach an agreement on the division of all or some of their marital/community estate early in the divorce process, and others end up spending time and money in divorce court. To the extent possible, the earlier spouses are able to come to an understanding on the eventual division of their finances, the better. This does not necessarily mean the severing of all financial ties. Often, issues like child support and spousal support, maintaining a family home, or dividing retirement accounts can keep a couple financially linked for many years after they are legally divorced. By ‘division of finances’ we mean the independent management of financial accounts and expenditures post-separation.
An earlier post briefly touched upon the issue of date of separation, Determining Your Date of Separation. Namely, that post-separation earnings and property acquired after separation are generally each spouse’s respective separate property. In theory, this is an easy concept to grasp – the relationship has ended, each person is living his or her own life, and, from a divorce perspective, all that’s left to do is finalize the divorce and divide the marital estate. However, life is rarely so simple. What often happens is one spouse continues to deposit his or her paycheck into a community property account. Or, a spouse will continue to incur credit card debt on a joint credit card even after the parties have separated. This happens for a number of reasons. Some are out of necessity, others a simple matter of oversight. As a result, separated spouses may unintentionally continue to commingle funds.
The commingling of funds happens when community property assets or debts are mixed with one spouse’s separate property assets or debts. This can be a very complex, divisive issue. To keep it relatively simple, let’s examine hypothetical examples of commingling:
Spouse A and Spouse B separate. Throughout their marriage, Spouse A and Spouse B had one joint checking account that they each deposited their paychecks into. After separating, Spouse A opens a separate account that she now deposits her paychecks into. Spouse B, however, continues depositing her paychecks into the old joint checking account. As a result, the money in their joint checking account is comprised of both community property and Spouse B’s separate property. In order to determine what portion of the account is community property vs. Spouse B’s separate property, family law attorneys, often with the assistance of accountants, do what is called a tracing analysis. A tracing analysis identifies the source of funds in an account as community property or separate property. Based on how the funds have been mixed, a determination is made as to how the account should be apportioned (i.e., what percentage of the account is community property vs. separate property).
The use of joint credit cards post-separation provides a similar example. After Spouse A and Spouse B separate, Spouse A opens her own credit card and uses that credit card for her regular expenses. She also pays off the credit card bill each month using her post-separation income. Simple enough. However, Spouse B continues to use the joint credit card, which had a sizeable balance at the time of separation. Although Spouse B continues to incur charges on the joint credit card, she also pays down the credit card balance using funds that were in their joint checking account. As a result, the question becomes not only what portion of the credit card debt of the joint credit card is community property, but also how much the community should be reimbursed for the joint credit card payments coming out of the joint checking account.
If the above makes your head spin, know that this hypothetical is about as straightforward of a tracing issue as we ever come across. Unfortunately, no one exists in a vacuum, and tracing analyses are rarely so simple. In fact, when it comes to very valuable, long-held accounts, performing a tracing analysis can be one of the most expensive and time-consuming aspects of a case, not to mention one of the most divisive. Even the most amicable of divorces can devolve into acrimony when, rightly or wrongly, spouses begin accusing one another of misappropriating funds and other financial indiscretions.
Issues related to the comingling and tracing of funds do not arise during every divorce. When they do, an experienced attorney can help you resolve the issue, and as discussed in our next post, there are some steps you can take to help avoid, or at least mitigate such issues.
By: Matt Jennings
Attorney at Johnston, Kinney & Zulaica LLP