What You Should Know About Commingled Assets

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One of the most challenging aspects of any divorce proceeding involves the division of assets amongst spouses. It's common for couples to intermingle their finances with one another throughout the relationship for any number of reasons, whether it's to buy a house or handle everyday expenses. This is what's commonly known as "commingling," also called "transmutation" by some.

The following explains just how assets can become commingled over the course of a typical marriage and how the courts will go about separating those assets in an equitable fashion.

What Constitutes Commingled Assets?

Once a couple becomes married, it's usually not long before their assets become commingled in some form or fashion. For example, a married couple may decide to open a joint bank account and deposit funds from their own separate accounts. If one spouse decides to withdraw money from the joint bank account and deposit the proceeds into their separate bank account, then that bank account will likely become a commingled asset.

Asset commingling can also occur when dealing with homeownership. For example, any property purchased through a joint effort by both spouses is automatically considered a commingled asset. Even if one spouse enters the marriage with their own home in their own name, that asset can become commingled if the other spouse pays for or physically helps with the maintenance and upkeep of that home.

Are There Any Exceptions?

One notable exception for asset commingling usually involves inherited property. If a spouse receives an inheritance prior to the marriage, then those inherited assets are usually exempt from division during divorce proceedings. However, said spouse has to maintain those assets as completely separate from their marital assets.

If a spouse receives an inheritance during the marriage, those inherited assets usually won't be treated as marital property as long as the inheritance wasn't gifted to both spouses. If the commingled asset happens to be an appreciating asset such as a house or open land, then the equity built up in said asset during the course of the marriage may be subject to division. However, the proceeds totaling the original value of the property remains untouched.

Keep in mind that these exceptions can change depending on your state's divorce statutes, among other legal issues. It's usually good idea to find out from your divorce attorney whether your separate or inherited property is truly exempt from asset division

Can These Assets Be Separated?

Separating commingled assets can be done, but the process is usually lengthy and often fraught with contention and complications. Whether or not commingled assets can be separated also depends on the statutes followed by your state. Most states rely on equitable distribution laws that divide assets based on a spouse's contribution to said assets. Other states observe community property laws that divide assets equally, regardless of a spouse's level of contribution.

Regardless of the statute your state follows, you may be able to have certain commingled assets exempted as long as there's documented proof of separate ownership throughout the relationship. In the case of financial assets, such proof may come in the form of bank statements that provide a traceable route of ownership and use.

Does a Prenuptial Agreement Affect Commingled Assets?

Prenuptial agreements allow spouses to clearly define ownership of property and other assets prior to marriage, making it easier to prevent assets from being commingled during the relationship. However, this only applies in jurisdictions that recognize prenuptial agreements as valid contracts. A prenuptial agreement may also become invalid for any number of reasons, which underscores the importance of having a carefully drafted and properly executed agreement.

When Does Asset Commingling Become Beneficial?

Asset commingling can also be used as an estate planning tactic. For instance, separate properties can be transferred into joint ownership by married couples looking to avoid probate. If one spouse becomes deceased, the property is no longer subject to probate due to the other spouse's interest in said property. However, this can make it difficult to separate assets upon divorce.

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