Marital Property Tracing in Divorce

“What’s yours is mine, and what’s mine is yours” is a lovely sentiment, and one shared by most spouses during their marriage. Unfortunately, in divorce or dissolution, it can become the literal truth, often at the expense of one spouse.

Understanding Marital and Separate Property in Divorce

To understand why, you need a brief background in how property is divided in an Ohio dissolution or divorce. When couples split their property when they terminate their marriage, they are dividing marital property. Marital property is any asset acquired by either spouse during the divorce, regardless of whose name is on the deed, title, pay stub, or account. There are some exceptions: a gift or inheritance to one party is usually considered separate property and is not subject to division in divorce. Property owned by either spouse before their marriage is also considered separate property.

That sounds pretty straightforward, right? The problem is that assets don’t come with stickers on them declaring whether they’re separate or marital. To further complicate matters, assets that were once separate can become marital through a process known as “commingling.” For example, assume that Jamie and Lee are a married couple with a joint bank account. Jamie inherits $10,000 from her grandmother and puts it in that account. The couple continues to deposit their paychecks and make withdrawals from the account, making the balance fall far below the inherited sum at certain times and growing with new deposits above that amount at some points in time. Jamie’s inherited money has been commingled with marital funds in the account.

Also, assets can be partly marital and partly separate, like a retirement account that one spouse had before marriage but kept contributing to afterward. The bottom line is that when it comes to dissolution or divorce, it can be very difficult to prove that an asset, or part of an asset, is truly separate. The burden of proving an asset is separate property in an Ohio divorce falls on the person claiming that it is separate. Often the only way to do so is through marital property tracing.

What is Marital Property Tracing?

Marital property tracing means being able to track an asset back to its source to determine if it is marital or separate property. In the example of Jamie’s inheritance above, property tracing, might be impossible. Are the dollars currently in the bank account hers, or from earnings? Even if she can successfully show the inheritance and the deposit, the low point of the balance might be the only “separate property” she could receive. If Jamie had used her inheritance to buy, for example, a piece of jewelry or artwork, things might be different, especially if she had kept receipts showing the date of the purchase and the source of the funds. In divorce, with that documentation, Jamie would have a strong argument that the property was hers.

That is a relatively straightforward example, but there are more complex ones that arise frequently. One is the issue of retirement accounts. How do you prove that a retirement account you had before marriage is your separate property, especially if (as often happens) an employer changes plan administrators? Records from the old company are rarely transferred to the new. If you didn’t hold on to the quarterly statements you received, you may have a hard time finding the documentation you need.

Similarly, if you had a job before marriage with a 401(k), you may have left that position and needed to roll the 401(k) into an Individual Retirement Account (IRA), and then did so again with subsequent employers. The ability to trace part of the current holdings back to the premarital holdings is essential to proving that the account, or part of it, is separate property. Of course, when you are able to show the tracing to pre-marriage dates, the growth on that property is also considered separate property, and it takes a valuation expert to perform a passive-growth analysis.

Like retirement accounts, real estate is often one of the most significant assets in a marriage, and one of the most complicated. Often when couples buy a home together, one or both may contribute significant premarital (separate) funds to the down payment, perhaps from the sale of a previous home. If you and your spouse did something similar, you probably weren’t thinking at the time about how to get your pre-marital share back in the event of divorce. If you had the foresight to keep bank records from that time, along with the settlement statement from the sale of the old house and the purchase of the new house, you would have a much stronger claim.

Another common real estate scenario is when one spouse owns a house before marriage, and the other spouse moves in, the couple pay the mortgage and sometimes make improvements. The amount by which the mortgage was reduced from marital earnings can be a marital property asset. Likewise, if improvements added to the value of the property, that enhancement is also marital property.  If the mortgage on the house is refinanced after the marriage, a lender or title agent might suggest that the owner spouse deed the property back to themselves and to the other spouse. Unfortunately, that can raise questions down the road when dividing assets in divorce; was the interest in real estate intended to be a gift to the other spouse? Sometimes people change deeds as an estate planning mechanism, as well, and the same questions about donative intent also arise.

Want to Keep Your Property? Keep Your Records.

People often ask us how long they have to keep certain documents. We understand the concern; paper statements can quickly pile up, and may never be needed. But the fact is that documentary proof is the best (sometimes only) way to establish that certain property is separate, not marital. And you simply cannot count on banks, title companies, and retirement fund managers to maintain the records you need.  Many companies, if they keep your records at all, destroy them after seven years. And, let’s be honest: if you don’t have copies of statements and other records, would you even know how to contact a company to get copies of documentation?

When it comes to which records to keep and which to pitch, ask yourself: “Would this be helpful in proving when or how I acquired an asset?” If the answer is yes, err on the side of caution and keep the document. Hopefully, you will never need to divide assets in a divorce. But if you do, you’ll be better prepared to negotiate a fair settlement, or to offer proof to the Judge.

Of course, if you are reading this article, there’s a good chance that you are already facing the prospect of dividing up marital property. If that’s the case, then your best option is to work with an experienced family law attorney who understands the complexity of property issues in divorce. To learn more about marital and separate property and marital property tracing, contact Melissa Graham-Hurd & Associates to schedule a consultation.