Tracing Separate Property

It is to your advantage to see if the assets you owned prior to marriage can be excluded from the marital estate.  If you are successful, these assets will not be subject to equitable distribution (you get to keep all of it).

Assets that typically fall into this category are pension assets from a job you had prior to marriage, inheritances, real estate owed prior to marriage (other than the marital residence), investment accounts and personal property.

How an asset is treated during the divorce will depend upon your ability to show that no marital moneys have been added.  An example may help explain this issue.

You receive an inheritance of $100,000 from your Aunt.  You place the funds in an account in your name and have your broker invest the funds.  These funds remain in the account and are not used.  These funds are clearly yours and your soon-to-be-X has no claim on them.  If you withdrew $25,000 of the funds to put a new roof on your marital residence, those funds have now been “co-mingled” and are now marital property but the remaining $75,000 are still not marital property.

Things get more complicated, but not impossible, if you added funds to your account with the $100,000 in it.  Unless also from an inheritance, the funds that you added would be considered marital property and it is likely that your spouses’ attorney is going to try to say that due to the addition all of it is marital property.  If you can prove that the other funds were from an inheritance then you should be OK provided that the money was never withdrawn however the marital income that was added to the account will be subject to distribution.

If the funds were gradually withdrawn and used for marital purposes and then you replaced the money taken out; you are out of luck as the funds that were put back in were marital funds.

This can get even more challenging if you added marital assets and then took out funds over time.  The question will be: Which funds were taken out; the marital funds placed in the account or the inherited funds?  One of my past clients had this situation and we were able to show that the value of the account never went below the amount initially put in from an in heritance so she was able to retain that portion of the account.  She did give away the investment return on the funds over the 3 years the funds were in the account, but she got the principal amount separated.

Investment accounts follow the same logic.  The best thing to do is to not co-mingle the funds.  Open separate accounts once you get married.

Let’s look at real estate – If you owned a house prior to marriage and then lived in it and paid the mortgage through the years with marital income then the house is now marital property.  If you were smart and had a pre-nuptial agreement you could have determined an amount of equity that was in the house and set that aside.  Would be complicated if the house has fallen in value (as many homes have) and the amount of equity is less than what was initially invested.  Your spouse would claim that the mortgage reduction over the years trumps your initial investment and that you do not get your initial investment out.  Depending upon the amount you are fighting for will determine the amount of legal and financial analysis dollars you want to spend to try to get it.  This is a situation where you want to pick your battles.

The reality is that when you get married you typically are “all in” and use your pre-marital money to support your family.  Trying to separate them in a divorce can be challenging but with the right presentation and analysis may be doable.

The word of advice is that when you receive inheritances or have significant personal property prior to marriage sign a pre-nuptial agreement or if not, at least keep documentation as to the value of the assets that were in place.  The month before you marry get copies of the statements you’re your investment accounts or get an appraisal of your assets and place the documents in your safety deposit box, and do your best to never need them.

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