In California, there are three basic ways of tracing separate or communal property.

  1. Direct
  2. Exhaustion/recapitulation
  3. Mechanical Tracing

Lawyers and forensic accountants utilize these strategies to substantiate separate property claims against current and existing assets.

These techniques are described below.

(a) Direct Tracing

Direct tracing is the most fundamental of all the approaches. It matches an asset to its separate property source using documentation and evidence. This approach works for all serial acquisition scenarios, from the most basic to the most complicated. Complex investigations typically need a qualified forensic accountant’s preparation, implementation, and guidance on data and documentation.

The following methods can be used to perform direct tracing.

Single-Instance Direct Tracing

Single-Instance Direct Tracing is the most often used approach in direct tracing. On a single sheet of paper, this method of tracing can display a separate property deposit. The deposits might include items like a sale, a purchase, or a gift tied to a separate piece of property.

The monitory words are distinguished from other direct tracing approaches using the tracing term lump-lump. Even if lump-lump is cliched language, it is easily understood by anyone in the accounting field. This means that funds from separate property do not lose their community or separate property character as they move through banks. A mirrored transaction or identical sum tracing are other terms for it.

Serial and Compound Direct Tracings

As time passes, the tracing that is taking place gets more and more intertwined. When the number of tracing instances grows, tracing with the serial technique becomes challenging. The endeavor to trace becomes a liner if the instances of serial acquisitions remain separate from the rest.

On occasion, serial and compound direct tracing presents a difficulty to CPA professionals. It is critical for the professionals to produce a list of the tracing’s functioning assumptions and facts to ease out. Otherwise, keeping track of the facts is tough, and the specialists incur the risk of providing a tracing that the council does not comprehend.

When it comes to presenting serial direct tracings, there is no right or wrong method to do so. The narrative format should be used for serial and direct tracing reports. Footnotes are required. Everyone should be able to comprehend and comprehend the facts. In this circumstance, a tracing project map is helpful.

(b) Global Exhaustion / Recapitulation

This approach can be used instead of direct tracing. It’s used to get a macro picture of money during the marriage.

It’s frequently used in divorce settlements, especially when the separating party insists on not tracing for the separate assets claimed. This technique compares the community’s costs to its revenue in this case.

There are usually one or two pages of account schedules in the Recapitulations procedure. “Community income was $500,000, and $560,000 was spent on living expenditures and income taxes throughout the marriage,” for example, maybe an example statement from a simple recapitulation.

When combined with financial statements or revenue and spending sources, it is a reasonably affordable strategy. It’s a straightforward and easy-to-follow procedure. It’s sometimes used as part of a serial direct tracing method. Forensic specialists in settlements are likely to find it useful. This procedure is employed as a last option in the worst-case scenario when no records in banking account tracings exist.

(c) Mechanical/Spreadsheet Tracings

In general, forensic accountants have long been interested in spreadsheet tracing. It incorporates both the direct tracing and recapitulation tracing methodologies previously addressed. Deposits, cheques, investment accounts, and transactions are all subjected to these tracing principles. This procedure necessitates a significant amount of tracing work on the part of forensic professionals and personnel. It might have tens of thousands of lines of transactions that have been traced. It might be arranged in a logical order, with transaction details and accompanying reports spanning hundreds of pages. Even though all three tracing methods use the same legal concepts, spreadsheet tracing is used to track bank and investment account activity and balances.

We are here to help. The Certified Public Accountants (CPAs) at Miod and Company are here to help and can assist you in navigating the complexities of the characterization of property during divorce proceedings. Schedule a free consultation to find out how we can help.

Image Credits: Noelle Otto

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