In divorce, few issues carry more financial consequence than the identification, classification, valuation (where necessary), and division of property. This article provides a financial perspective on the analytical issues that commonly arise when distinguishing marital from separate property. It highlights the financial considerations that often inform these analyses, recognizing that the governing legal framework varies by jurisdiction and ultimately controls the characterization and division of property.
The list of questions and considerations extends beyond these. We acknowledge that states differ; this article is intended to be generally applicable across jurisdictions. Facts, circumstances, and state precedent are necessary starting points.
Although there are variations between states and jurisdictions, at a high level, the methodologies used to assess, analyze, and support these issues are commonly accepted and applied.
This article provides an overview of community property and equitable distribution states, highlights marital vs. separate property distinctions, and outlines practical forensic and valuation considerations in property tracing and marital estate division.
Community Property vs. Equitable Distribution
States generally follow either a community property or equitable distribution framework, which provides the foundation for how property is characterized and divided in divorce. From a financial perspective, many of the analytical tools used to classify, trace, and value assets are similar across jurisdictions, although the applicable law ultimately governs the decisions.
Marital vs. Separate Property
In divorce proceedings, property is generally classified as marital property (in some states, community property) or separate property. Although the categories themselves may sound relatively straightforward, disputes often arise when assets have changed over time through appreciation, marital contributions, or changes in ownership. These issues frequently require financial analysis to identify, trace, and evaluate in order to provide analyses and information that may assist the court in characterizing the property under the presiding law.
Marital Property
Marital property generally consists of assets acquired during the marriage through marital funds, marital efforts, or both and, subject to jurisdiction-specific exceptions, is ordinarily presumed to be marital or community property subject to division. Common examples include:
Wages and employment income earned during marriage
Retirement plan contributions made during marriage
Real property acquired during marriage
Investment or cash accounts funded with marital earnings
Business interests formed or grown during marriage
Not all property classification issues are as straightforward as the examples above. One common area of financial or forensic analysis involves assets owned before the marriage that appreciate during the marriage. Depending on the facts and circumstances, governing law, and the source of appreciation, some or all of the increase in value may be subject to division as part of the marital estate. This issue commonly arises with closely held businesses, professional practices, real estate, and investment accounts. In these situations, a financial expert is often asked to determine the value of the asset at the date of marriage and at the applicable valuation date(s), analyze the amount of appreciation, and evaluate the factors that contributed to that change in value. In some jurisdictions, the analysis may also require distinguishing between active and passive appreciation or evaluating changes occurring after the date of separation. In other jurisdictions, active vs. passive appreciation may be a non-issue due to presiding date for dissolution being current date. We wrote about this topic in a previous article, The Importance of the Valuation Date in Divorce.
Separate Property
Separate property generally refers to property attributable to one spouse rather than the marital estate. Examples of possible separate property include:
Assets owned prior to marriage that retain separate characteristics through the marriage
Items received individually by gift or inheritance (with the caveat that they retain separate characteristics through the marriage)
Certain personal injury recoveries (excluding lost wages in many jurisdictions)
Assets designated as separate by a valid prenuptial or postnuptial agreement
Assets acquired during marriage with separate funds
Distributions and subsequent uses from separate property (may vary by state and require supporting analysis)
Property or assets acquired after the date of separation or date of filing (may vary by state and require supporting analysis)
However, separate property status is not self-executing. The burden of proof may fall on either (or both) parties depending on the jurisdiction, and, in some cases, litigation strategy. As an example, an asset titled in one spouse’s name is indicia of ownership but not conclusive, just as jointly titled property is not necessarily marital property.
Forensic accountants are often engaged to evaluate the financial evidence underlying these classification questions. That analysis may involve reviewing account activity, identifying the source and use of funds, analyzing changes in value over time, and evaluating the available evidence.
Additionally, establishing and documenting the character of property often becomes more difficult over longer periods. Older account statements may be unavailable, funds may have been transferred through multiple institutions, or separate and marital funds may have been commingled in the same account. These factors can make tracing more difficult and increase the complexity of the financial analysis.
In Part 2, we will take a closer look at these issues, including how forensic accountants analyze tracing, commingling, transmutation, personal vs. enterprise goodwill, and active vs. passive appreciation when evaluating martial vs. separate.