• Robert Tsai

Methods of Tracing

Updated: Jun 19

There are two basic forms of tracing: item tracing and value tracing. Item tracing is utilized for non-cash assets whereas value tracing follows cash assets. Several methods are utilized under value tracing including the clearinghouse method, identical sum inference, the minimum sum balance method, the community out first rule, and the pro-rata approach.

Item tracing traces a non-cash asset back to its inception of title to determine its permanent character. Value tracing on the other hand traces the life of an account, identifying all funds brought into and out of the account. In value tracing, each deposit and check must be accounted for. A variety of value tracing methods determine how exactly these transactions are accounted for.

The clearinghouse method can be utilized where a series of separate property deposits were made into a community property account and were withdrawn in identifiable amounts within a short period of time. The identical sum inference method can be utilized in a similar manner, but for a single separate property deposit into and subsequent withdrawal out of the account. On the other hand, the minimum sum balance method is utilized when the account is mostly made up of separate property, community property is deposited into the account, and there are only a few identifiable transactions. As long as the balance never falls below the amount proven to be separate property, this method presumes that any money used in the identifiable transactions is community property, and all that remains in the account is separate. Similarly, when an account contains both separate and community property, the community-out-first rule presumes that community property is being spent first, and separate property is only spent once all community property is gone. Finally, under the pro-rata approach, when an account contains both community and separate property, withdraws are presumed to be made in equal proportion to the balance of each kind of property in the account. For example, if an account contains $2,000 in separate property and $8,000 in community property, any withdrawal will be presumed to be 20% separate property and 80% community property. While multiple methods for tracing do exist, the community-out-first rule is the most common method utilized today. In fact, a party seeking to use a method other than the community-out-first rule has the burden of justifying why an alternate method should be allowed.

If you need help navigating the different forms of tracing, contact the Law Office of Robert Tsai, PLLC at 832-278-1995.

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