When “Yours” becomes “Ours”
The division of assets during a divorce can be very contentious. Both parties frequently want to reclaim assets they brought into the marriage as separate property. But separate property has a way of becoming marital property, and Kirkland & Sommers established case law in 2015, successfully arguing that certain assets had become marital property due to the way they had been handled.
Protecting Your Assets
If you are bringing money into a marriage, whether it’s in the form of a retirement account, investment account, or even a home, one of the keys to maintaining your claim to this money is traceability. If you will be combining your separate account with other marital funds, your investment can easily become “our” investment during a divorce. To reclaim the funds and all the interest earned on it, you must be able to show evidence tracing the current account value back to your original separate contribution. The court has established that traceability is key.
Traceability means showing how much the asset was worth at the time of the marriage, then showing all the changes in the value between the date of marriage and divorce. For investment accounts, the best evidence is statements for the entire marriage. If it is a 15-year marriage, the court is looking for 15 years’ worth of statements. These statements show not only the growth (or losses), but also whether any withdrawals were made. If all the statements can’t be located, sometimes hiring an expert to testify can help prove the separate property claim. Real estate is a little more complicated. If improvements were made to real estate, it almost always requires an expert witness to differentiate how much value the improvements added to the property versus how much the property appreciated simply because of a rise in the housing market.
If you are the party claiming certain funds are separate, and all that money and interest earned on it belongs to you, the burden of proof to establish this is on you. Your testimony and spreadsheets showing how much interest you think your money earned is not “evidence” in the eyes of the court. Unless you are a professional accountant or other professional in the investment business, you may need to hire an expert witness to prepare documentation.
Rollovers and Tax Penalties
Have you rolled over a pre-tax investment account into a Roth IRA, or another instrument that will incur tax penalties? If so, and you paid those taxes with marital funds, you may have lost your right to claim any further interest or appreciation on your original investment. For example, consider the following scenario:
- Upon marriage, John puts $10,000 from an investment account into a marital investment.
- Jane adds another $2,000 to this account.
- The account earns interest and reaches $40,000 after several years.
- John and Jane decide to convert this account to a Roth IRA but owe taxes on it.
- $8000 tax bill is paid for jointly by the couple.
- The new account’s value grows to $125,000 at time of the divorce.
- John claims $35,000 of that value is his alone because his calculations show that his $10,000 would have earned that much interest on its own.
- Jane claims the $8000 tax penalty was paid for out of marital funds. John has no evidence to prove that it wasn’t.
- The court rules that John is entitled to his initial $10,000 back, but all the interest earned has become marital property because the tax penalty was paid for by marital funds.
Dividing Home Equity Isn’t Any Easier
Many couples start out with a home that one person bought before the marriage. If that house is sold immediately and a new property is purchased jointly, of course all the equity in that house will belong to the party who owned it separately.
However, if you remain in that house for a period of time after marriage, and you pay for the mortgage and updates or repairs out of joint funds, your separate equity in that house will stop growing and any further equity will become marital property. You can claim your original down payment and how much equity you had in the house at the time of the marriage, but once you start paying for it with marital funds, it becomes “our” house.
It’s Complicated!
These are just two ways how what is “yours” can become “ours”. There are many others. It’s not easy, regardless of which side of the claim you’re on. That’s where your divorce lawyer comes into the picture. Expert divorce attorneys like the team at Kirkland & Sommers will ask you the right questions to help determine what’s separate and what’s marital. We will advise you if you should hire an expert witness to prove your claims. You might be ready to agree with your spouse on issues of interest or equity based upon their original investment, and not even realize that your contributions turned those assets into jointly-owned property until your lawyer starts asking you questions.
Clearly, when assets are in play, you need to consult an expert in the field of divorce. Call Kirkland & Sommers today for a free consultation and see how we can help you get a fair and just divorce settlement.