In Texas, all property owned during the marriage is presumed to be community property of the parties, subject to division upon divorce. That presumption may be rebutted by showing that some assets are separate property of one of the parties. Separate property is that property that was owned by a spouse before the marriage or obtained through gift or inheritance.

But what happens when a spouse receives a gift of money and puts it in a bank account that already has community money in it. Can the separate funds be traced? Or is the separate property lost to comingling?

Richard Orsinger provides a very instructive article in the December issue of the Texas Bar Journal where he talks about the development of Texas family law as it relates to tracing separate property funds in a bank account.

In 1955, the Austin appellate court first applied the “community-out-first” rule to tracing funds in a bank account. This rule was adopted by the Houston 14th court of appeals in 1976 and the Corpus Christi court of appeals in 1990, and is widely held by family lawyers to be the current state of the law.

The community-out-first rule means that when separate property money is deposited into a bank account with community money, the separate funds maintain their character and “sink to the bottom” of the account – leaving the community funds to be spent first. So, if there were sufficient funds in the account to cover the separate balance at all relevant times, the separate balance would remain intact.

To prove the existence of the separate property funds, a tracing schedule can be prepared to show the balance of the community funds when the separate property went into the account, then trace the withdrawals as it affects each of the community and separate fund balances through to the present date, leaving the remaining community and separate fund remaining balances. Tracing schedules such as these are commonly used by family law attorneys and forensic CPAs.

To read the full article see Richard Orsinger Follow the Money.