Chasing Divorce Assets, Part 2
Distinguishing Separate Property
This four-part blog series addresses the sourcing of money and property in divorce proceedings to discover hidden assets and income, distinguish separate property from marital property and enforce or attack prenuptial agreements.
Distinguishing Separate Property
In jurisdictions employing a dual classification form of equitable distribution, there is a legal distinction between marital and separate property. Marital property is divided between spouses upon divorce. Separate property is exempt from equitable distribution, except for its appreciation in value, which may be divided. Separate property typically includes premarital property, gifts and inheritance, property designated as separate under a prenuptial agreement and property and income acquired after the date of separation. If separate property has been comingled, transmuted or retitled, tracing may be required.
Comingling, transmutation and retitling are three distinct, but closely related, concepts. Some but not all jurisdictions recognize comingling and transmutation principles.
Generally, comingling occurs when marital property is invested in separate property. If a spouse deposits marital earnings into a separate bank account, for instance, comingling may occur. Transmutation occurs when marital property is used to maintain or enhance separate property. When a spouse uses marital income to pay the mortgage on a separate property or takes a home equity loan to improve separate property, there may be transmutation. Retitling occurs when nonmarital funds are deposited into a marital account. If, for example, an inheritance is deposited into a jointly titled bank account, then retitling has occurred. Retitling is the most common and legally recognized means of converting separate property into marital property.
When assets have been comingled, transmuted or retitled, tracing is used to identify and segregate the marital and separate property components. Tracing also identifies increases in value of separate property.
Tracing can be a challenge because money is fungible. Once deposited into an account, dollars merge with the rest of the account and can only be separately identified through specific accounting conventions.
LIFO (last-in, first-out) and FIFO (first-in, first-out) are accounting methods applied to inventories of parts or supplies. A manufacturing business might acquire parts or supplies at different times, for different prices. When reporting income and expenses, the business must determine how much expense to report for the parts or supplies that were consumed to produce the product that was sold. Under a FIFO convention, the business will report the cost of the oldest parts and supplies. Under a LIFO convention, the business will report that cost of the newest supplies.
Similarly, when tracing marital and separate property, the components of a mixed bank account can be identified under a LIFO or FIFO convention. Generally, a LIFO convention will maximize the separate property component and limit the value of marital property that is exposed to equitable distribution. LIFO assumes that the marital property (which was added to a separate bank account during the marriage) was spent before any separate property was invaded. On the other hand, a FIFO convention assumes that the oldest dollars are consumed first, which is likely to invade separate property and preserve marital property.
For more information check out our video on distinguishing separate and marital property. To review your unique property tracing concerns with an experienced Pittsburgh family law attorney, call Pollock Begg at 412.471.9000.
With an MBA and more than two decades of experience handling complex financial affairs, Partner Brian C. Vertz excels at cases involving assessment of personal assets including premarital wealth and trusts, valuation of closely held businesses, executive compensation, medical and dental practices, and complex child support litigation. Brian was selected as the Pittsburgh 2019 Lawyer of the Year for family law through The Best Lawyers in America peer review process.