One or both parties to a marriage will often come into the marriage with separate property. Separate property is property that is owned exclusively by one spouse, rather than jointly by both spouses. Separate property may also be received by a party during the marriage through gift or inheritance, or from income generated from separate property.

The parties typically give little or no attention to maintaining detailed records and documentation related to the separate property during the marriage—that is, until it is time to unwind the community estate.

During the divorce, the characterization of separate and community property can receive significant attention.

The mere commingling of separate and community funds in an account does not automatically alter the character of the separate property. Separate property monies keep their character as the funds move through accounts, entities, real estate investments, etc.—if the party can adequately “trace” such funds.

When separate property is commingled with community property, the spouse making the separate property contribution will often make a separate property claim related to the account or asset(s) purchased from the commingled account. The separate property claim assumes that the party making such a claim has not waived such right in writing. 

Community property is defined in Family Code Sect. 760 as “all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property,” unless otherwise provided by another statute. During the marriage, income and expenses are presumed to be community.

The burden of proof for supporting the separate property claim lies with the spouse making such a claim. If there are adequate records (such as bank statements, check copies, invoices), then a tracing can be performed. The tracing needs to document that the separate property funds were directly used to acquire the claimed separate property, not merely that such funds were available. The two methods typically used to support the separate property claim include:

• Direct tracing method: The tracing needs to support that sufficient separate property funds were available and actually expended to make the claimed separate property acquisition. The tracing typically consists of a detailed line-by-line analysis of account activity and can be more extensive and expensive when you have multiple bank or investment accounts that cover years or even decades.

• Family expense tracing method: Also referred to as the recapitulation method, the separate property holder must prove that community expenses exceeded community income. Therefore, the claimed separate property acquisition must have come from separate property funds. However, for the family expense method to be upheld in court, the separate property holder must show the income and expenses at the time of the acquisition, as well as the periods prior to the acquisition to prove there was no accumulation of community property.

Courts have determined either method is appropriate.

If separate property is used to acquire or improve community property, the separate property spouse can make a claim against the community for a simple dollar-for-dollar reimbursement (no appreciation right). Family Code Sect. 2640(b) states, “the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source.”

While this may include items such as down payments, payments for improvements, and payments that reduce the principal balance of a loan used to finance the purchase or improvement of a property, it does not include payments of interest on a loan or payments made for maintenance, insurance or tax.

When community property is used to improve separate property (or pay down a separate property liability) and the separate property asset is not easily divisible, the allocation between separate and community property is referred to as “apportionment” as it includes appreciation.

Consider dividing a pie: what portion is community and what portion is separate? California family law generally “apportions” assets differently depending on the type of asset. The party asserting a community interest in the separate property bears the burden of proof to support the community property claim. Here are three examples:

1. Separate Property Residence: First, you must show community property funds were used to acquire or improve the residence. Second, consider the increase in equity value from the time of the community property contribution to the date of trial. Lastly, apportion the balances based on the funds contributed by the community and the separate property. This analysis is commonly referred to as a “Moore/Marsden” apportionment based on the Marriage of Moore (In re Marriage of Moore (1980) 28 Cal.3d 366, 168 Cal.Rptr. 662, 618 P.2d 208) and the Marriage of Marsden (In re Marriage of Marsden (1982) 130 Cal.App.3d 426, 181 Cal.Rptr. 910).

2. Wholly Owned Businesses: Another form of allocation related to a separate property claim can come from the contribution of community efforts in connection with separate property (business). The common approach for such an analysis is referred to as a “Pereira/Van Camp” apportionment based on the Marriage of Pereira (Pereira v. Pereira (1909) 156 Cal. 1, 103 P. 488) and the Marriage of Van Camp (Van Camp v. Van Camp (1921) 53 Cal.App. 17, 199 P. 885).

3. Retirement or Investment Accounts: If contributions are made to a retirement or investment account during the marriage and after separation, then the portion contributed during marriage and the appreciation related to it would be community property. The portion contributed after separation and the appreciation related to it would be separate property

Recordkeeping is often a critical part of any of the situations noted above. For the most part, the days of receiving your bank statements in the mail and storing them in a filing cabinet or boxes for many years are gone. Today, most of us access our account information online. While this is convenient, people are less likely to store such information as it is generally available for several months, which is sufficient for current needs.

However, banks will typically only maintain the records in their system for seven years; going back further may be difficult or impossible. While maintaining supporting documentation and record retention should be important for everyone, it is critical to the person holding separate property. 

It is important to advise your married (or engaged) clients who either entered marriage with assets or inherited assets during marriage, to keep all bank statements, account statements, tax returns and other relevant financial records themselves (not relying on institutions’ record-keeping policies), regardless of whether a prenuptial agreement is in place. In many situations, if a party making separate property claims in divorce does not have documentation to support their claim, such a claim is lost.

The objective of this article is not to provide a detailed analysis related to the methods available to support a separate property claim and the applicable case law in such situations, but to bring awareness to these situations and highlight the importance of maintaining adequate records to support a separate property claim.