August 24, 2020

Asset Tracing in Divorce – Separate Property vs. Marital Property

By Ashley DeCress, CPA, ABV, CVA, Manager, Advisory Services

Asset Tracing in Divorce – Separate Property vs. Marital Property Marital Dissolution

When thinking about divorce, Kanye West’s well-known lyric — “she gon’ leave with half” – is nearly right on the money. Although West’s song doesn’t give a detailed answer to property division, he’s not far off from the basic rule according to Ohio law – all assets accumulated during the marriage are to be divided equitably between the parties.

Assets accumulated by a couple during their marriage are considered “marital property.” These assets can include real estate, personal property, bank/investment accounts, and retirement accounts (regardless of legal title). The income from, and appreciation of, separate property from a spouse’s contributions is also considered marital property (for example, a spouse’s efforts and contributions to a particular asset, such as an ownership interest in a business, may also be considered marital property).

Ohio statutes define “separate property” as all real, personal and intangible property that was: 1) owned before the marriage; 2) inherited; 3) gifted; or 4) awarded for personal injury (excluding lost wages occurring during the marriage or medical bills paid with marital funds). Separate property also often includes appreciation in the value of assets that was not the result of efforts or contributions of the spouse (e.g. increase in value of an investment portfolio of publicly-traded securities).

While Ohio law recognizes separate property, all assets are presumed to be marital unless a spouse can trace and document that an asset is non-marital.

How Do I Trace Separate Property?

The first step in tracing separate property is to compile an accurate account of all assets and liabilities of the spouses. Once that list is complete, each asset (or liability) should be characterized as either marital or separate property. Due to the burden of proof that exists with establishing the presence of separate property, it is necessary to include sufficient documentation to prove the existence of a separate asset (including when and how the asset was obtained).

Although the tracing process can be relatively straightforward for some assets, others may require significant time and resources to complete, such as the following:

Shares of stock gifted to a spouse by his/her parents during the marriage.

If the spouse obtains proper documentation, this would be considered a separate asset. However, if the shares of stock were put into a joint account, this commingles the asset, and a tracing of the joint account would be necessary in order to determine the separate portion of the current balance.

Real estate owned by a spouse that was purchased before the marriage.

This would be considered a separate asset. However, if mortgage debt was paid off during the marriage with marital funds, a distinction would need to be made regarding the equity of the house at the start of the marriage and the amount of marital funds used to pay down the mortgage debt since that date. There could also be additional tracing complications if the real estate was improved during the marriage using marital funds.

Retirement accounts.

The retirement contributions made by a spouse prior to the marriage would be considered a separate asset. As of the date of marriage, however, any subsequent contributions (and the appreciation of those contributions) would be considered marital. Because the retirement account would include both separate and marital contributions, it would be necessary to determine the portion of both over the course of the marriage and allocate any appreciation accordingly.

It should be noted that the tracing analysis required in each of the examples above could have been simplified had marital and separate assets not been commingled. Even in commingled situations, though, if proper documentation exists then separate property can be documented and claimed in a divorce proceeding. This separate property tracing may result in a scenario in which a spouse does not “leave with half,” while an equitable division of marital property is still achieved.