Don’t Underestimate Marital vs. Separate Property Disputes in Divorce
Marital and separate property disputes in divorce can be of the most hotly contested issues. What are marital assets in a divorce? Can separate property become marital property? Forensic accountants have a unique perspective which can make the difference in negotiations and trial.
The Forensic Accounting Deskbook by Miles Mason, Sr. JD, CPA, published by the ABA Family Law Section
For a much more detailed discussion, see The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, Second Edition, authored by Miles Mason, Sr. and published by the ABA Family Law Section. This updated edition of one the ABA’s most popular resources explains the practice of forensic accounting and business valuation and how to apply it in family law cases. It provides a practice-focused introduction to the core financial concepts in divorce, such as asset identification, classification, and valuation, income determination, expenses, and more.
See Mason’s complete list of the 10 Big Divorce Financial Mistakes.
VIDEO TRANSCRIPT:
Tracy Coenen: We’ve talked a little bit about some of the factors that go into determining whether something is separate property or marital property, but let’s go through that in a little bit of an orderly fashion. What are some of the most important factors that should be considered?
Miles Mason: Who owned the asset prior to the marriage? How was it acquired? By inheritance or gift? Was it the result of a personal injury or award? And before or after the marriage? Each state law is going to have very specific answers to those questions. It could be a proceed from the sale of separate property invested somewhere else. Then you get into the tracing issue because yes, while money is a liquid asset, if you have $50,000 as a result of a sale of a piece of property, and then it goes into one account, and then there’s another $50,000 withdrawal, then you can trace it through a series of transfers or investments.
That makes a pretty good claim that that was the separate property. Then of course appreciation of separate property is going to be, can be, very complicated or can be very simple depending on state law. Also, we’re looking for property acquired during the marriage with separate funds. How is that handled? That could be a complicated issue. Then a property separate by agreement, whether you get a prenuptial agreement, postnuptial agreement, and then income generated from an asset acquired prior to the marriage. Look at what efforts were used to create that income.
Tracy Coenen: What exactly are the types of things that may cause separate property to become marital property?
Miles Mason: Right. The two main ways are commingling and transmutation. Commingling is simply just like it sounds. Taking separate property and mixing it in marital property. We see that most often if there’s an inheritance and you put money in a joint bank account or a joint investment account. Then, of course, transmutation. We already talked about most of the time transferring an asset from one to another. The third way that could be done is where the other party, the other spouse, ends up making a material contribution to the preservation or appreciation of an asset.
My favorite example to talk about there is where we had a case in our state where a wife received $600,000 in an investment account, and the wife did not work. The investment account was solely in her name, but that investment account generated interest income, dividend income, capital gains, because it was a general stock portfolio, and the husband paid the taxes every year on the income generated in that account. The husband at the time of the divorce, the account had appreciated, I believe somewhere around $180,000, and that became marital property.
Thank you to Tracy Coenen, CPA, CFF for inviting me to join her in this video series. Tracy is a nationally recognized forensic accountant practicing in Milwaukee and Chicago.
