How Commingling Affects Division of Assets
Commingling is a term which describes the mixing of marital (community) property and separate property. In essence it could make separate property community or marital property.
In divorce, community, or marital property, is available for division of assets between spouses. The characterization of the assets available depends on what has happened with the assets during the interim of receiving them and expending them.
Typically separate property is property that is brought into the marriage by one spouse and was therefore, owned before the date of marriage. It could also be a gift given before or during the marriage to one spouse or an inheritance received before or during the marriage.
Frequently these separate assets become marital assets because of the behaviors and actions taken during the marriage. These are a few of the ways that the community may acquire an interest in the separate property. There are many other ways that separate property may become community, and in some states, such as Texas, any growth in appreciation of assets during the marriage automatically is characterized as community property, with or without any action taken by the spouse who owned the separate property.
If a spouse received a membership interest in a family business and one spouse received this as his/her separate property and placed this in a family revocable trust for estate planning purposes to avoid probate. This has now possibly been recharacterized as marital or community property by retitling the asset.
Another example is how the couple uses the money. If you inherit money and pay off joint debt or to buy a vacation home, the separate interest may no longer be separate but has now become marital or community.
You may also create a community interest in the property if you pledged the separate property as security for a loan.
In some states, your actions create a community interest in the property. If you were actively managing your stock positions during the marriage, you may create a community interest in the growth on the separate property. The original separate property may still be characterized as separate, but any actions devoted to the growth of the assets could be considered for the benefit of the community since they transpired during the marriage and the growth or appreciation may now be considered divisible as community or marital property. Similarly, this applies to a business owned before the marriage and growth during the marriage.
Separate property is not typically subject to division. However, it may be if it has been “transmuted” (turned into community property through its disposition) or if it has been commingled. In some states, if the separate property was placed into a joint account, it automatically is considered commingled and no longer retains its separate property nature. In other states, if it can no longer be distinguished from community property, then it becomes community. If the amount placed into the joint account never was depleted and still remains in the account), in some states, this the separate property is considered intact and traceable, therefore can retain its interest.
Commingling of funds happens when you have separate property that not kept separate and distinct from other community funds. Ideally, separate property as defined above, should be kept in a separate account, or titled separately, and no community funds should be used to maintain that property.
If for example, you inherited assets and did not keep it in a separate account but rather placed it into a joint account and used a portion for living expenses or for a down payment on a jointly owned home it could be considered commingled and its characterization may be changed to community property.
While there may be a possibility of the characterization changing from separate to marital, if you can trace the property back to the original source (account, transfer, etc.) it can mean reimbursement of those funds back to the person who inherited the funds. But the burden of proof is usually on the spouse who has the separate property and this is governed by state rules.
This burden could be very stringent in some states. Often you need exact tracing of records to the original receipt (legal paperwork, accounts, closing statements, emails, and other evidence) and then trace the flow of the funds through to the current state. Not all of this may be acceptable as evidence of proper forensic tracing.
Forensic accountants can help identify and trace this with the information you have and guide you for what you need to prove the separate property in the court. They will analyze the data and help prove your separate and marital property. Often, this may become a battle of experts as each spouse hires their own forensic accountant to validate the separate property to the extent that would be admissible and evidentiary in court.
If you are in mediation, an agreement from your spouse would be sufficient to identify what was separate. The tracing need not be as extensive nor as solidly proven. Even if you are able to prove some of it, it is sometimes worthwhile than expending additional resources to prove your separate property.
When dividing community property some states, the nine community property states including California, use a bright-line rule and divide property 50/50. Other states which are equitable distribution states use standards instead and consider a number of factors including, the income prospects of the spouses, the length of the marriage, number of children, etc.
It's important to intentionally protect separate assets with prenuptials or postnuptials or to keep the property separate without any action during the marriage.
Note: This article is for informational purposes only and is not intended to provide either tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters.
