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Asset Tracing in a Divorce Case
What role does asset tracing have in a divorce case?

In most divorces the couples come to court with all sorts of assets. Some of the assets are titled jointly, some are shared, and are never intended to be shared. Asset tracing is simply the process of the documentation and supporting of a claim that a marital asset is exempt property.

In most divorce cases the equitable distribution of marital property is the most grinding aspect of the process. Earning money and saving it is no easy task in today's world. Moreover, as people get older it is not easy to replace assets that are lost to the other spouse in a nasty divorce case. The task of determining what assets is subject to equitable distribution is often an extremely arduous task. All property that is owned by one spouse individually or jointly is presumed to be marital property subject to distribution unless it can be shown that it is exempt from distribution. See, Painter v. Painter, 65 N.J. 196 (1974). The burden of proof for the exemption claim is on the party seeking it.

In summary, in many divorce cases it is very often unclear what assets are subject to equitable distribution. Many divorce clients only come to court after they have lived together for a longer period of time. The longer the marriage then it is more difficult to separate non-marital and marital assets. It is extremely important to keep exempt assets separated once a person gets married. If a spouse has a prenuptial agreement then it does not have much value if he mixes his exempt assets with his wife. If a spouse has property that he inherited then these assets should be only titled in his name. The spouse should not add his wife on the mutual fund account, bank account, or brokerage account that originally only contained exempt assets. In summary, it is critically important to keep exempt assets separate from the other marital assets. If a spouse mixes exempt assets and marital assets then it may be impossible to determine what percentage of the "marital pot" actually consists of exempt assets. A prenuptial agreement is useless unless the exempt assets are kept separate from the marital assets.

What does the term transmutation mean?

Transmutation is the process of turning separate property into property subject to equitable distribution. Some typical examples include the gifting of property from one spouse to another, the commingling of property by joining of assets, and the use of joint property. The term transmutation refers to the situation where non-marital property is slowly converted into marital property during a marriage. Therefore, the spouse who originally owned the non-marital asset loses his right to claim that the asset is exempt from equitable distribution.

The documentation and support of a claim of exempt property are typically done by using a process called asset tracing. Unfortunately the tracing of assets is often very difficult. In many high dollar cases, it is necessary to engage a CPA to assist in proving or disproving the separate nature of the property through an asset tracing accounting. The resulting documentation should demonstrate that at the date of complaint the asset is either exempt, marital or a combination of the two.

The asset-tracing process can range from the examination of documents that existed at the time of marriage to creating schedules that detail years of financial transactions involving the asset in question. The methods used are designed to demonstrate that the asset qualified as exempt property at the date of marriage and then to trace the exempt ownership and/or all transmutations of that asset up to the date of complaint. To establish this claim, it is often helpful to retain the services of a CPA. Moreover, the client must obtain paper proof through discovery to prove that the asset is exempt. For instance, in the case of real estate, the gifting documents such as gift tax returns, the will, the letter of a gift, the deed and checks that would be critical evidence of the payment of consideration and of the source of those funds.

A common example of transmutation occurs when a newly married couple purchases a home. Quite frequently, one spouse purchases a house just before the marriage. Quite often the new husband uses his money and then purchases a home so that the couple has a place to live. Thereafter, the husband then makes all the mortgage payments over the next twenty years. If the couple eventually gets divorced, a key issue is whether the marital home is an exempt asset or whether it has been transmuted into a marital asset.

An argument can be made that the marital home is a non-marital asset, and that it is exempt because it was purchased by the husband before the marriage. In all likelihood this argument will not be successful. Even though the house was purchased prior to the marriage, only a small portion of it is really a non-marital asset. All of the mortgage payments, and the corresponding increase in equity, were made during the marriage with, presumably marital property. As these marital funds were applied to a non-marital asset, the asset slowly took on a marital character with each monthly payment. The home in this example was transmuted from non-marital property into marital property.

I purchased my home before I got married to my wife…

We are now getting divorced, and my wife's lawyer is now trying to claim that my home and my other financial investments were transmuted into marital property. How can I assist my lawyer to refute my greedy wife's claims?

During the client interview process, you should list all of your exempt and/or transmuted assets. The following records and information should be obtained and given to your legal counsel; All documents regarding the acquisition of the property and the source of funds used to acquire it, in addition to the name of the titleholder. Also, you should provide all of the records and the details that relate to any dispositions or conversions of all or part of the property in question. These documents include bank statements, investment statements, real estate closing statements and any other documents regarding the source of funds for the transactions.

Can property that is acquired by inheritance be transmuted into marital property?

If a spouse inherits or is gifted any property during a marriage, then that property under New Jersey divorce law is a non-marital asset. This property will remain exempt provided that the inherited property is not transmuted into marital property. If the gifted or inherited property is placed in co-ownership with the other spouse (checking account, savings account, stock brokerage account, a property deed, car title, etc.), then the gift or inheritance can be deemed to be a gift to the marriage. Therefore, the originally exempt asset can be changed from a non-marital asset to a marital asset.

Your spouse does not get a piece of your inheritance. The court cannot and will not divide non-marital property as same is not part of the marriage and is awarded to the party that owns it. However, once again it is important to emphasize that a spouse should keep any of their assets that were acquired by inheritance separate from the marital assets. If an inheritance consists of mutual funds and stocks, then these funds should not be jointly titled in both spouses names. These assets should only be titled in the name of the spouse who received the inheritance.

What is the key New Jersey case on the issue of transmutation?

The key case on this issue is Pascale v. Pascale, 274 N.J. Super. 429 (App. Div. 1994). The main doctrine of the Pascale case is that there is a strong presumption that marital property is owned via a joint tenancy, and it can only be overcome by clear and convincing evidence. In the Pascale case, the wife sold her premarital stock that she owned before the marriage. The proceeds were then used to pay for the down payment on the marital home. At the closing, the marital home was deeded in both spouses names. After a long marriage, the parties eventually got divorced. After many years of litigation, the court held that the wife made an interspousal gift to her husband. Moreover, the court held that the wife did not retain a separate ownership interest in the proceeds derived from the sale of the stock.

In summary, the Pascale court further held that the parties jointly titled marital home could be classified as entirely marital even though the wife had sold premarital stock and used the $35,000 sale proceeds for the down payment on the home. Under New Jersey case law, the court acknowledged, that property owned by a spouse prior to marriage remains the separate property of that spouse and it is not subject to equitable distribution. However, the court pointed out that interspousal gifts are subject to equitable distribution. The court held that the wife's stock was clearly identifiable as premarital property and that the proceeds of the stock sale were clearly traceable. However, the court held that the testimony of the parties and their standard of living proved the parties did not have any intent to preserve the separate ownership interest of the proceeds obtained from the sale of the stock.

Here the couple married at a young age, they did not have any significant assets, and they shared all of their assets during their marriage. Moreover, the court held that the decision to purchase the marital home and title it jointly was a joint decision, as was the decision to sell the stock and apply the proceeds to their down payment to reduce their joint mortgage indebtedness. Moreover, before any marital problems ensued, neither spouse took any affirmative stem that would tent to prove an intent that the stock was not an interspousal gift. Therefore, under these circumstances the court held that the home was subject to equitable distribution even though it was purchased in part with the proceeds from the sale of the stock.

In summary, the Pascale court held that it is permitted to recognize that the purchase of a home may be more traced to one souse than the other. However, the court held that it is not compelled to equitably distribute the proceeds of the marital home in accordance with the original financial contributions of the spouses.

What is the standard of law that a court uses to analyze whether a spouse's conveyance of separate property into joint title creates a gift?

In many marriages the spouse with more assets will convey or give separate premarital property to the other spouse. A key issue then arises whether the separate property should remain an exempt asset, or whether it is transmuted into marital property. New Jersey adheres to the view that a spouse's conveyance of separate property into joint title presumptively creates a gift to the marital estate. Therefore, the separate property is transmuted into marital property. Nonetheless, the spouse who contributed the property can rebut this presumption if he or she proves that he or she did not intend to make a gift.

Before I was married, I had $50,000 deposited in my own individual savings account…

However, once I got married, I deposited these funds into a joint savings account with my wife. I am now getting divorced. Is the $50,000 that was deposited into my original savings account now subject to equitable distribution?

Maybe. This scenario would once again trigger a transmutation analysis. Transmutation disputes often arise when separate funds have been deposited into a joint account or when marital funds have been placed in an account that originally contained only separate funds.

As discussed above, the general rule is that a transfer of separate property into joint names evidences a gift to the marital estate. Therefore, the transferred property becomes marital property. Most of the New Jersey case law has held that combining marital and separate funds in an account transmutes the separate funds to marital property only when it is impossible to trace the separate funds. If the funds in the account can be traced of "uncommingled" then most courts will try to allocate between the marital and the separate property.


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