Unraveling the Web: Tracing Marital and Separate Assets in Matrimonial Disputes

Matrimonial disputes often contain webs of transactions that make identifying marital and separate property difficult. Tracing of marital and separate assets holds a crucial role in ensuring fair distribution during divorce proceedings. This article explores the importance of tracing, the documents required and techniques to follow to conduct your own tracing. These techniques assist in establishing the origin and ownership of assets and should offer you a basic understanding of the necessary support: 

Understanding Marital and Separate Property: 

Before you begin a tracing, you must first understand the difference between both marital and separate property.

Marital property: Assets acquired during the marriage. 

Marital property refers to assets and possessions acquired by a couple during their marriage, which can include shared income, real estate, personal belongings, investments, among other types of property. The classification of property as marital is generally determined by the laws of the jurisdiction in which the couple resides.

In the context of divorce or legal separation, the characterization of property as marital is significant because it often influences the distribution of the assets between the spouses. In many jurisdictions, marital property is subject to equitable distribution. This is not to be considered equal, but instead, a “fair and just” allocation based on circumstance that arise from the marriage and various other factors, such as the length of the marriage, each person’s financial contributions and the financial needs of each party pending terms reached and lifestyle analysis. 

A question then arises: Is all property that is accumulated during a marriage automatically categorized as a marital asset? While complex, the answer is no. Not all property acquired during marriage is automatically classified as marital.

Separate property: Assets owned before marriage or acquired through inheritance or gift. 

In contrast to marital assets, separate property includes assets that were owned by one spouse before the marriage or partnership, received as a gift (non-recurring) or inheritance during the marriage. Further, separate property can be determined by legal agreement during marriage such as a prenuptial or postnuptial agreement.

Separate property therefore is exclusively designated to one spouse and is generally not subject to division during the divorce proceedings. The classification of property as separate is important in determining how assets will be distributed between the spouses upon divorce. During the examination of such assets, they are “separated” from items that require equitable distribution or split.

The following are common categories of separate property: 
Pre-marital assets: Property owned before entering the marriage is typically considered separate. This can include real estate, investments, personal belongings or any other assets acquired prior to marriage. However, if the real estate contributes rental income and is commingled and used for marital expenses, its categorization may be contested.  
Inheritance: Property received through inheritance, either before or during the marriage, is often categorized as separate property. As with real estate, it is crucial to note that commingling or joint use of inherited assets can complicate the determination. 
Gifts: Assets received as gifts by one spouse, whether from the other spouse or from third parties, are generally treated as separate property. Again, careful documentation is essential to establish the nature of the gift. In addition, gifts that are recurring can also be contested.  
Property designated as separate in agreements: Certain property can be separately designated through the use of legal agreements, prenuptial or postnuptial, further outlining how it should be treated in the event of divorce. 

It is important to emphasize that the classification of property as separate can vary depending on jurisdictional laws. Situations may arise where the line between marital and separate property may become blurred, especially if commingling of assets exists or if separate property has been used for the joint benefit of both spouses. 
Typically, courts will aim to equitably distribute the categorized marital property while respecting the separate property rights of each spouse. In order to establish the separate nature of certain assets, in addition to seeking legal advice, individuals and attorneys consider the use of a forensic accountant to establish fair and accurate determination of the categorization of each asset.  

Essential Documents for Tracing: 

Before we begin reviewing technique, the following documentation should be considered essential in developing a tracing of marital and separate property: 
Tax returns: Review joint and individual tax returns and identify sources of income and assets. 
Financial statements: Personal and business financial statements include personally maintained financial and business financial statements. Often, courts require individuals to file Statements of Net Worth and Marital Balance Sheets during divorce proceedings.  
Prenuptial and postnuptial agreements: Ensure to examine terms related to asset division and determine the classification of assets as either separate or marital.  
Gift and inheritance documentation: This is a particular area that is often underrated and overlooked: Gift letters and inheritance documents provide additional details to the separate and marital property during the life of a marriage. Often, if the “gifts” are large enough, they could be considered sources of income and, therefore, part of a calculation of imputed income.  

Techniques for Tracing Assets: 

The following are general techniques to begin tracing for Marital and Separate Property during a divorce proceeding: 

A. Documenting financial transactions – This requires the individual, if no expert is engaged, to document, trace and analyze the transactions of each account.

1. Bank statements
2. Investment accounts
3. Credit card statements

B. Review of property records: Reviewing deeds and mortgages established ownership, dates and transactional history. Much of this information may be public depending on your jurisdiction.

1. Deeds and titles
2. Mortgage documents

C. Engaging a forensic expert:

1. Hire a forensic accountant to analyze financial records.
2. Identify discrepancies and hidden assets. 

While knowing that type of documents to rely on and review, the following are suggested steps to conduct a tracing of assets: 

1. Review the transaction descriptions: Start by carefully reviewing the descriptions provided for each transaction in the bank statement or investment account. Descriptions often provide information about the nature of the transaction, and may include names of individuals, entities and bank accounts. This often can determine the purpose of each transaction: personal food, shopping, gas, payment of mortgage, transfers and wires. 
2. Identify deposits and withdrawals: Categorize transactions into deposits and withdrawals. Deposits represent money coming into an account, while withdrawals represent money going out. Account statements often make this step clear, noting the various deposits and withdrawals separately. Check images are also often provided and attached to bank statements, offering important details to be documented further.
3. Look for patterns and regular transactions: Identify any patterns or regular transactions, such as monthly bills, salary deposits or routine expenses. This can help distinguish regular financial activities from unusual ones. However, recurring transfers and ATM withdrawals may also be a significant sign of hidden assets and should be handled with a questionable mindset. For instance, each day or week, someone withdraws a payment of $200 from an ATM. This leads to the question, what are the funds used for? Where are the funds deposited?
4. Check for joint accounts: If the account is joint, differentiate between transactions made by each account holder. This is crucial for determining individual contributions to joint finances. This can be in the form of salary, separate account transfers or business income.
5. Match transactions with supporting documents: Cross-referencing transactions with supporting documents, such as receipts, invoices or contracts offers the support required to authenticate transactions with legitimate 3rd party documentation.
6. Examine date and time stamps: Pay attention to the date and time stamps of transactions. This information can be crucial in establishing a timeline of financial activities and assist in developing and establishing patterns and regular transactions.
7. Investigate unusual or large transactions: Identify and investigate any unusual or large transactions that are unknown and unidentifiable based on available documents.
8. Trace the source of funds: For deposits, trace the source of funds. Determine whether the money comes from employment income, investments, gifts or other sources. 
9. Analyze investment transactions: In investment accounts, analyze, buy and sell transactions. Identify the securities involved, the quantities and the corresponding dates to track investment activities. Note the source of original funds and how those funds continue to impact the investment account. These accounts can become commingled with marital funds.
10. Consult with financial professionals: If needed, seek the assistance of financial professionals or forensic accountants. Their expertise can be valuable in unraveling complex financial transactions and identifying any attempts to conceal assets. 
11. Document findings: Keep thorough documentation of your findings with supporting evidence such as receipts, invoices, contracts and agreements attached. Your documentation may consider charts and graphs that map complex transactions. This documentation can serve as evidence during divorce proceedings or legal disputes.

Tracing transactions requires attention to detail, a systematic approach and sometimes the expertise of financial professionals. It is an essential step in the process of understanding and categorizing assets, especially in the context of marital or separate property disputes.