EP 225: Commingling

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In this episode, I want to discuss an important term called co-mingling. That is the process in which you can inadvertently make separate property, marital property. Commingling is a very important term when it comes to divorce, and I’m going to use an example of an inheritance because it’s a very common example.

Let’s just say you receive an inheritance from your mom, I’m just going to make it up, and let’s just say you received $100,000 from your mom because unfortunately, she passed away. Well, if you receive that money, the perfect circumstance or the ideal circumstance is you deposit that money into a separate bank account and you never move it to your joint bank account and you only track and… In a perfect world, you don’t even spend that money. You save it for a rainy day.

But let’s just say you have to use some of it for a down payment on a house, and so you use that money for a down payment on a house. You and your spouse now have both of your names on the house, but that down payment came from that inheritance. That’s a common example that I hear almost every week. Or even you needed the funds for daily living expenses and you started mixing those funds in and you move that money to a joint account. Well, when it comes to the time of divorce, you have to say, “Well, hey, is that money, is it separate property or is it marital property?” And it starts to get really complicated because it depends.

Now, if you got that money first, and let’s just say you used it for life expenses, and you used that money and you put it in a joint account from that inheritance money into a joint account. Well, those funds may have become marital assets, inadvertently, because of that. Or if you used those funds for a down payment on a jointly owned house, does it immediately become marital property? Now it gets a little bit more complicated. This subject is very complicated and it depends on your individual circumstances, but I want to give you the highlights as to what you’re going to be thinking about if this is an issue in your divorce.

Conversely, you could be on the other side of this situation too, where your spouse got an inheritance, and sometimes it’s a pretty substantial amount, and you’re trying to figure out, “Well, hey, we used some of that inheritance for these one, two and three things. Does he or she get credit for that money? Does that money come back? Is that joint property? What’s the deal? What do we get to do with that?” So that is where this process becomes very important to understand from both sides of the spectrum.

So the first part, and the term that I’m going to introduce to start, is called tracing. So the first word is co-mingling, and that’s the process of making a separate property, marital, broadly speaking. Now, tracing is a very important term, and that is figuring out where the money came from. Simple as that. So if you had, let’s just say, a gift from a parent, and let’s just say that gift came or that inheritance came eight years ago, and then five years ago you used that money to buy a house.

And then now fast forward five years, you’re facing a divorce situation. Well, you want to keep that inheritance separate, is my guess, and you don’t want to split the funds that your parent gave you. So how do you figure out and prove, basically, that that inheritance is separate property? And conversely, if you’re the one who’s contesting this situation, you’re going to have to make your spouse illustrate where all of that money came from and have the records for it.

So that’s where tracing comes into play. Very simply, it’s just figuring out where the money came from and going through that process of, “Hey, eight years ago, those funds were deposited into this account. And then five years ago, it was wired to this company for the down payment on the house.”

And you need to go through that process and have all the steps involved, and it’s not an easy one oftentimes. So here’s where one of the most important things you’ll hear me always talk about is having good documentation. That’s the problem and that’s really the biggest challenge with co-mingling is having the documentation.

If you’ve been married for a long time, and I speak to people who’ve been married 20, 30, 40 years oftentimes, and you may not have clean records for where every dollar went. It’s something that’s very important to think about because state rules can vary on the subject in terms of what you should do in those situations.

And one of the things you’re going to really need to focus on is gathering documentation. Because sometimes in a state, the burden is, and really you need to talk to your attorney about this point because there are a lot of nuances on the burden, but some states will say, “Hey, unless it can be proved it’s separate property, it’s automatically marital property.” Other states have a little less restrictive or a little bit more flexible burden on that very point.

So you really need to understand what’s happening, but the clean way to figure things out is to have records. So to get records, you can… The first thing is that even if an account is old, you might not be able to log into your Bank of America account or Chase account and see records more than two or three years old. But if you walk into your local Chase branch, or you set up an appointment, you may be able to get records from the time you’ve had the account.

I’ve been in banks with clients before where you go and you figure out, “All right, well, here’s the time that we had the account” and they’ll go back and they can go to the bank and get 10 years of records. It might take a couple of hours, but it is a very doable thing to do when you go into the bank.

Now, it can be tough and you still may not have all of the records, but also look for old correspondence. If you’ve had the same email account, or if you have any mail, or if you keep a safe or a file cabinet with important documentation. Or sometimes if it’s related to an inheritance, you may have or you may need to contact the old attorney who handled the paperwork if an attorney handled it.

Or your sibling, sometimes maybe you don’t have it, but if you have a brother or sister or something, you might be able to contact them and figure out what kind of shreds of evidence sometimes it is, particularly, we’re talking about something 10 years or eight years in the past, you may have to keep things clean. Now, sometimes it’s not a big issue when it comes to documentation and you have everything there. But if you don’t, those are some tips I would suggest for you.

Now, let’s just say not all things are clean and smooth, and let’s just say this is going to become a big issue between you and your spouse as part of the divorce process. What do you do? That is you’re going to have to bring in some experts. There are forensic accountants and CPAs who do this work and can help figure out, “All right, what part is separate? What part is marital?”

And sometimes they may even come up with estimates. But if you get a good accountant, they will look at what of information that you have or that your spouse has, and they will say, “Okay, well, I can see 70% of the picture” and they’ll say, “Okay, well, from my best judgment, I think this amount of money is separate property and this amount of money is marital property.” They can sometimes estimate or even trace with imperfect information where funds came and went.

So if you have a lot of money at stake, and sometimes it is, if you’re dealing with hundreds of thousands, if not millions of dollars that you’re trying to figure out, “Hey, what is separate property? Hey, what is marital property?” Then you should strongly consider getting an accountant or a forensic accountant to help you.

Now in a perfect world, and I always say this about hiring experts who do valuation or forensic accounting, et cetera, is in a perfect world, and we’re talking about divorce so almost nothing is perfect, you would get a neutral person to look at all of the available documentation that you and your spouse agree upon. And will have that person analyze everything, prepare a report, and those are the numbers that you use to determine separate or marital property.

Now, that’s not always the case. Certainly, I see all the time where one person is hired by you, one person is hired by your spouse, and they come up with very different valuations of what is separate property and what is marital property from the co-mingling and the tracing that they do. And you have to basically fight it out, unfortunately, or come up with a middle ground.

So something to think about, but as I said in the previous episode is really to the extent that you can keep things separate and avoid making things separate, or making separate property marital, you should. Now, not all the time are you walking around your life and thinking that I’m going to get divorced tomorrow and therefore I need to have done these things eight years in advance.

I understand that life doesn’t work that way and so you shouldn’t necessarily feel bad because you’ve made the wrong decision, but you do need to… Or you didn’t have the records, or you didn’t keep things as cleanly as you would like. But even despite that is you need to get on top of and start collecting and getting the information on all the records that you don’t have and start planning for the future and putting yourself… I always say this is even in an imperfect situation and imperfect world, you need to start putting yourself in a very good or the best situation you can for the future to ensure, or at least to help ensure, that things are going the way that they should through the divorce process.

And if you gather up as much documentation as you can, you gather up some of the records, you might not be able to get 100% of the money back or prove 100% is one way or the other, but hey, if you get 80% of the way there or 70% of the way there, you are still in a much better position than before.

So the important term for this episode is co-mingling. And if you are thinking about your individual circumstance, this is a really complicated term, both legally and involving individual circumstances, and involving your state’s laws, but I would type in co-mingling in your state and I would look at some attorney websites. I would contact your attorney and figure out, “Hey, what do I need to be thinking about both good or bad when it comes to co-mingling in my situation?” Because it can mean the difference in many thousands, hundreds of thousands, or in some cases, millions of dollars that go from one person to another.