Transmutation and Tracing: Property Division & Divorce

As you are likely aware, property can take on two distinct characterizations once a couple becomes married: separate or community. The distinction between the types of property has a critical bearing on the distribution of assets upon divorce. In a perfect world, the characterization of the property remains the same throughout the marriage and divvying that property up on dissolution is a straightforward matter. However, things are rarely perfect, and the nature of property changes through something referred to as “transmutation.” When “transmutation” occurs, dividing assets becomes increasingly difficult, as both parties are seeking to characterize property differently (e.g., the person who wants to keep an asset will seek to have it characterized as their separate property, while the person who wants a share of that asset will seek to have it characterized as community property).

This article will briefly address: (1) How property is initially characterized; (2) What separate property is, and how it works; (3) How separate property is “transmuted” into community property; and (4) How to rebut an argument that “transmutation” has occurred through the use of the tracing method.

1. How Is Property Initially Characterized at the Time of Marriage?

For purposes of community property law, or divvying up assets at divorce, “characterization of property” means the process of classifying property as separate or community. In Re Marriage of Rossin (2009) 172 Cal. App. 4th 725. The Court considers all relevant information in determining the nature of property. In Re Marriage of Foley (2d Dist. 2010) 189 Cal. App. 4th 521.

“Community property” means any “real or personal property, except as otherwise provided by statute, wherever situated, which is acquired by a married person during the marriage while domiciled in [California].”  California Family Code §760. While it is beyond the scope of this article, this definition applies throughout the marriage which ends upon separation (to put it simply, the end of the marriage occurs when there is a parting of ways with no intent to resume marital relations). As a practical matter, nearly all property acquired during the marriage will constitute community property. U.S. v. Berger (9th Cir. 2009) 574 F.3d 1202 (applying California law). If the property does not qualify as community property, it will likely qualify as separate property.

A married person’s “separate property” is comprised of: (1) All property owned by that person prior to marriage; (2) all property acquired by that person after marriage, provided it was acquired by gift, bequest, devise, or descent; and (3) the rents, issues, and profits of all separate property. California Family Code §770, subd (a).

In a nutshell, the entire concept of community property law is that marriage is a partnership, where each spouse utilizes their specific talents, resources, and energy for the benefit of the marital community; as such, it is necessary that all the fruits of those efforts be susceptible to transfer, survival, and common ownership. Franklin v. Franklin (2d Dist. 1945) 67 Cal. App. 2d 717; In re Marriage of Dekker (4th Dist. 1993) 17 Cal. App. 4th 842.

1. What is Separate Property, and How Does it Work?

Aside from custody, the characterization of property is the most highly contested issue during divorce; this makes sense, because the party who owns the separate property keeps that property after divorce. An individual is only entitled to a share of the community property. Naturally, people will seek to classify as much property as possible as their separate property. As a general matter, characterizing property as “separate” depends on four factors:

1. When the property was acquired; In Re Marriage of Foley (2d Dist. 2010) 189 Cal. App. 4th 521
2. What presumptions are in effect in relation to that property; Id.
3. Whether the property has been “transmuted”; In Re Marriage of Rossin (2009) 172 Cal. App. 4th 725 and
4. Assuming formal transmutation has not occurred, whether the actions of the parties have altered the character of the property nonetheless. Id.

Where the nature of a particular piece of property cannot be easily labeled, there are certain legal presumptions that come into play; chief among these is that family expenses are first paid from available community funds. Id. As a general rule, separate property is considered separate property from the start of the marriage through the end of it, unless something occurs to change the nature of that property; this is typical accomplished by an agreement between spouses, or by judicial decree. In re Marriage of Moore & Ferrie (1st Dist. 1993) 14 Cal. App. 4th 1472;  In Re Marriage of Rossin (2009) 172 Cal. App. 4th 725.  Thus, separate property does not become community property by virtue of the marriage itself, or its use in the marriage. In re Marriage of Weaver (2d Dist. 1990) 224 Cal. App. 3d 478. Property can be “transmuted” through an agreement between the spouses, but the more common dispute centers around whether or not property was “transmuted” through the conduct of one, or both, of the spouses.

1. How is Separate Property “Transmuted” into Community Property?

As noted above, the general rule is that the characterization of property as separate or community is determined by the date and method of its acquisition. Absent a gift or agreement, the nature of property can be changed by showing that either: (1) the nature of a transaction, suggests the property has changed character; or (2) the surrounding circumstances suggest that the character of the property has changed. Isom v. Slaughter (2d Dist. 1962) 200 Cal. App. 2d 700; In re Estate of Froling (2d Dist. 1951) 108 Cal. App. 2d 198. 

Example: Harry and Wendy are disputing whether or not a vehicle that Harry purchased is separate property. Harry purchased the vehicle during the marriage, so Wendy argues that the car is community property. Harry argues that because he had no source of income other than his separate property, his purchase of the vehicle must have been through the use of separate property, qualifying the vehicle as separate property as well.

Here, proof that Harry had no money aside from his separate property would justify the Court in concluding that the vehicle must be separate property. In re Barnes’ Estate (3d Dist. 1932) 128 Cal. App. 489. Further, recalling the presumption that the couple’s living expenses are paid out of community funds rather than separate funds, showing that community income is less than community expenses would justify a conclusion that any purchases were necessarily made with community property; this is referred to the “exhaustion method” of tracing.

1. How Do I Rebut the Presumption That a “Transmutation” Has Occurred Through Tracing?

As mentioned in the beginning of this article, distributing assets on divorce would be simple in a perfect world; neither party did anything to complicate the situation. The reality is that things are rarely perfect and commingling separate assets with community assets is one of the chief culprits. To be sure, it makes sense – nobody goes into a marriage expecting it to fail, why would they protect the identity of their assets in the first place?

The simple act of commingling separate and community funds is not, by itself, what complicates the dissolution process. Theoretically, it is possible to track the contribution of both types of property in relation to an acquisition during the marriage; however, if you cannot track (or “trace”) those funds, the presumption is that the funds and purchases are community property. In re Marriage of Braud (1st Dist. 1996) 45 Cal. App. 4th 797. There are two primary methods of tracing assets in a commingled account: “direct tracing” and “recapitulation tracing”, but they are not the only methods of tracing. See In Re Marriage of Ciprari (February 6, 2019).

Utilizing the “direct tracing” method, the parties identify the disputed asset (e.g., the asset the one party is arguing is separate, and the other is arguing is community), and trace the purchase price to separate funds within the commingled account. In order to accomplish this, the person arguing that the asset is separate property will need to provide extensive documentation showing every community property deposit into the account, as well as every separate property deposit into that account. Further, the proponent of characterizing the asset as separate must show that all the community funds were exhausted by showing withdrawals for community expenses (this is above and beyond the basic living expenses); if it can be shown that only separate property was available to make the purchase, then the proponent has likely met his burden.

Utilizing the “recapitulation tracing” method, also known as the “family living expenses” method, the proponent of the separate property characterization must simply show that the community’s income was less than the community’s expenses; this would lead to the inference that the only funds remaining were necessarily separate property.

Tracing can be an incredibly complicated process, but it can be made easier with the assistance of an attorney who has experience in the process. The attorney’s at Maple’s Family Law have litigated numerous cases where the character of a specific piece of property is at issue and can assist you in obtaining every penny you are entitled to in a dissolution. If you or a loved one are contemplating divorce, contact us today.