EP 209: Why “Tracing” is Important to Determine Separate & Marital Property

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In divorce, one of the big questions is whether something is separate property or marital property. If it’s separate property, than the person who had it before divorce keeps it. And if it’s marital property, the value needs to be split amongst the people divorcing. And so, one of the questions that we deal with a lot and I help people navigate is how do prove whether something is separate property or marital property. And what do I mean?

Well, the most common is an inheritance. If an inheritance was given to one person, is that still considered separate property or is it marital property? Inheritances, sometimes they’re small, but sometimes they are very big because they can be a parent’s lifetime of savings. Could be something like a retirement account, where there was money in the account before you got married and then it grew during the marriage. But how much of that is marital property that you split and how much of that is considered separate property?

What about the house? Same deal is what if you bought it before you were married. Does a person who bought the home beforehand own the house or not. It could be things like trust, business interest. There’s a lot of different assets and many different questions that can arise when trying to determine whether something is separate or marital property. It’s a big deal because if you prove that something’s separate property, it doesn’t get split, but if you prove it’s marital property, the value does get split as part of the divorce process. But the big challenge is, is how do you prove something is one type of property or another.

And it’s an important discussion and something that we work with on a lot of our divorce calls or coaching calls, I should say, for people going through divorce or preparing to go through divorce. And the difference or figuring out the answer can often mean the difference between hundreds of thousands of dollars that one spouse gets or has to give up or even millions of dollars in some cases depending upon the asset.

The problem with this subject is it’s really complicated and I’m going to discuss a term called tracing. It’s T-R-A-C-I-N-G, tracing. And that’s going to be the subject of today’s episode. And it’s the process of figuring out whether if something is separate or marital property. And to compound things further is sometimes an asset that you’re discussing or even a debt in some cases that you’re discussing can be both separate and marital property at the same time. And so, figuring out what it is can be extra complicated. And really for the sake of this episode, I want to focus really on just two things. I want to introduce you to the subject, but the two things I want to focus on are one, getting the appropriate documentation. And two is hiring the appropriate financial experts.

So, the first and biggest and most complex challenge with tracing assets is having the documentation. And for the sake of the example, I started the episode with different types of examples, but we’re going to take a retirement account for the sake of an example as I walk through this episode because it’s easy to illustrate the point as to why this gets complicated. One of the biggest issues with getting the documentation is that it can be old. If you’ve been married 10 years, then you have to go back and get statements from 10 years ago. If you’ve been married 20 years, then it could be 20 years ago. If it’s been 40 years, then you’re trying to get documentation from 40 years ago. And as businesses change, as the world changes, a lot of the institutions that you may have had at the beginning don’t have those account statements at in their records anymore. Sometimes they might only have a year or three years or five years.

And so, trying to go back and get 10 or 20 years or 30 years of data is very difficult. But the important part is, or why this is so important, is that you need to be able to track where every dollar came and went to the extent possible over the timeline of your marriage. Now, here’s a really important question to ask your attorney because state laws really differ on this subject, but many states have laws in place that property is assumed to be marital unless you can prove it as separate. And so, you really need to be careful because other states have different rules regarding this. So I don’t want to generalize too much on this point, but this is why getting the documentation is important is if you can’t prove or oftentimes if a spouse can’t prove that the property is indeed separate, it’s marital property. It needs to be split.

Now, depending upon what side of the issue you’re on, that could be good for you or that could be bad for you. And we’re going to talk about some ways around it. But the point of that is you need to be keeping good records and you need to be keeping your account statement. And oftentimes, if you walk into your local bank or you call Fidelity or you’re financial firm up and you ask for records, they might say, “Well, we only have a couple of years worth and that’s all we can provide.” Well, that doesn’t really help too much, but believe it or not, you might just have to keep digging and they might actually have more records than they will initially tell you. One of the things I always encourage you to do on coaching calls is don’t stop at the first no, where they say they only have X amount of records. Most financial firms have many, many more years of records than they will initially tell you. The challenge is you have to figure out who will provide you access to them and how to get access to them, particularly if it’s for your account.

For a variety of reasons, they are legally required to keep many years of data. And sometimes it’s in paper format, sometimes it’s in a warehouse somewhere, but they often have that information for you to get. And so even if you get a first no when trying to get the financial data, don’t worry. There will be more opportunities if you keep digging and it may require some help with an attorney regarding a subpoena to see officially what that firm has in terms of data.

Now, ideally also for yourself, if you’re thinking about this, I encourage you to keep good records, keep backups of all of your records, particularly for important accounts over the years because having a snapshot of those can come in handy when it comes to something like tracing. Now, there’s also an easier solution to all of this and this is… I don’t want to get your hopes up too much because this easy solution does not work in all cases. And when it works it’s great, but to be fair, most of the time it doesn’t work, but sometimes it does and it is worth bringing up. And particularly if you can avoid a bunch of legal fees and expensive fees, I’m going to get to fees and financial experts in the next section of this episode. But if you get this easy solution, I encourage you to use it and it works for both parties.

If you come up with a reasonable guess. And that is that you guess, you estimate. You make an estimate of how much of a certain asset was separate and how much of a certain asset was marital. So, if you know that there was an inheritance and it might have come 15 years ago, that you got an inheritance or a spouse got an inheritance and it might’ve been at the time $112,363. Well, no one really remembers the exact amount, but if you both think it was around about a $100,000 and you’re willing to agree that it was about a $100,000, and you can move on, then move on. Rather than trying to track down, you’re going to spend that extra $10,000 or $15,000 just trying to track down all the records and you might’ve been better off just estimating.

Now, it doesn’t always work that you come up with a reasonable estimate and there’s reasons in the divorce process you might want to estimate too high or too low, but if it gets you to a reasonable point. And my whole goal with everyone’s divorce is to get this done as quickly as possible in good enough shape and as reasonable as possible. And if you can do this reasonably, and it’s an ethical guess, I always say we don’t want to screw anyone, but if the estimate is reasonable and your both willing to agree to the separate property estimate, that is the easy solution. But that doesn’t work in all cases. And oftentimes, this is very complicated in terms of tracing assets, as are many issues in divorce. Now the other question is… So, part one is just gathering the documentation, while part two is getting the information and how do you get someone to analyze the information that you may be looking at.

And that’s with the help of a financial expert. And so, most attorneys have good relationships with financial experts, particularly good attorneys will certainly have a good relationship with a financial expert. And it’s usually someone who is a CPA or a forensic accountant and their job is to trace assets. Their job is to figure out where money came from and where it went and what value is there to be split for the purpose of the divorce. And the first thing they’re going to ask for is come up with whatever documentation you have. Sometimes when looking at the documentation, they might have to make some estimates of their own. They might say, well, the account grew at X amount. We don’t think there were any deposits or withdrawals. The market went up this amount. So, we think that 70% of this portion of this account is marital and only 30% is separate.

Or they might go the other way around. But the point is a financial expert is there to try and make the best estimate or best guess or use their expertise to figure out precisely in some cases how much, what assets are available. And the other thing… When you come with a financial expert, one of the things I always say is if you can get a neutral financial expert to do the tracing that both lawyers and both of you as clients agree upon and people divorcing agree upon, then almost always you should go with the neutral. But if your spouse, for example, hires a financial expert and they spend $5,000 or $10,000 or $30,000 or $50,000 looking at these records or more in some cases, but if they go through this process of looking at the records and the details and everything else, I always say this. If your spouse is writing a check to someone and they’re working for your spouse, how do you think the conclusions going to look?

Most of the time, the vast majority of the time, the conclusion they’re going to come up with is going to be in your spouse’s favor. And so, if that’s the case, you’re going to likely want your own financial expert to analyze things as well and come up with their conclusion. I’m willing to bet that that conclusion will be more akin to what you are looking for on your side. All of that said is if we have two financial experts on top of two divorce attorneys on top of any other number of people that get involved in the divorce process, it becomes very expensive.

One last section I want to cover when it comes to tracing is that tracing is not an all or nothing proposition. It’s not the case that something is often 100% marital or 100% separate. Sometimes, an account that may be mostly separate still may have marital portions to it. And the episode after this is going to be on how do you keep separate property separate and also basically the ways to figure out if separate property indeed has marital components as well to it, so it’ll help both sides depending upon what issue you’re facing. But one of the things that could happen, and let’s just say you got… Let me use very, very simple math. Let’s say you got an inheritance of $100 and you put it in your separate account. And that was 10 years ago. Well over time, that $100 grew to $110 because you were getting interest or maybe dividends or whatever the case from that $100 account.

Well, it could be the case that $10 of income is actually marital property, but the original $100 is still separate property. And what you’d have to figure out is, well, how much did you actually get and how much income came in? And so, it’s another layer of complication that even though tracing sometimes could mean an asset is 100% separate. Sometimes it can mean it’s 100% marital, but other times it could be a gray area. And you need to be prepared for the gray area and understand the nuances and the complexities of the gray area, is yet another thing that you may be thinking about in the divorce process.

The point is it’s complicated. You have to get your documentation. You need an expert to help you interpret the information and go through the information and provide an expert opinion that you could use during negotiations or in court if it comes to that. But you need to really understand, or I want to introduce you to this topic, because it’s something that’s very relevant in many of the coaching calls. And I want you to be informed and have some things to think about as you consider what assets you’re actually going to be splitting as part of the divorce process.