Asset Tracing

1. What role does asset tracing play in a divorce case?

In most divorces, the couple comes to court with all sorts of assets. Some of the assets are titled jointly, some are shared, and other assets are never intended to be shared. Asset tracing is simply the process of the documentation and supporting of a claim that an asset is property exempt from equitable distribution.

The equitable distribution of marital property is the most grinding aspect of the process in most divorce cases. 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 lost to a spouse in a nasty divorce case. The task of determining which assets are subject to equitable distribution is often an extremely arduous one. All property that is owned individually or jointly by one spouse is presumed to be marital property subject to distribution, unless it can be shown that it is exempt. See Painter v. Painter, 65 N.J. 196 (1974). The burden of proof for an exemption claim is on the party seeking it.

To summarize, in many divorce cases it is very often unclear which assets are subject to equitable distribution. Many divorce clients only come to court after they have lived together for a long period of time. The longer the marriage, the more difficult it is to separate non-marital and marital assets. It is extremely important to keep exempt assets separated once a person gets married. Even if a spouse has a prenuptial agreement, it does not have much value if he mixes his exempt assets with marital assets or his wife’s assets. If a spouse has property that he inherited, then these assets should be only titled in his name. A spouse should not add his wife to mutual fund accounts, bank accounts, or brokerage accounts that originally contained only exempt 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.

2. 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. Therefore, the spouse who originally owned a non-marital asset loses his right to claim that the asset is exempt from equitable distribution at the time of divorce.

Documenting or supporting a claim of exempt property is typically done by using a process called asset tracing. Unfortunately, the tracing of assets can be 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 asset tracing accounting. The resulting documentation should demonstrate that at the date of complaint the asset is 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. Again, to establish this claim, it is often helpful to retain the services of a CPA. Moreover, the client must obtain paper proof through discovery showing that the asset is exempt. For instance, in the case of real estate, gifting documentation such as gift tax returns, a will, a letter of a gift, a deed, or checks 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 often, a prospective husband uses his money to purchase a home just before the marriage so that the couple has a place to live. Thereafter, the husband makes all of 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 may 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. However, in all likelihood this argument will not be successful. Even though the house was purchased prior to 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, presumably with marital property. As these marital funds were applied to a non-marital asset each month, the asset slowly took on a marital character. In this example, the home was transmuted from non-marital property into marital property.

3. I purchased my home before I got married. My wife and I are now getting divorced, and her lawyer is claiming that my home and other financial investments were transmuted into marital property. How can I assist my lawyer in refuting my greedy wife’s claims?

During the client interview process, you should list all of your exempt and/or transmuted assets. Certain records and information should be obtained and given to your legal counsel – all documents regarding the acquisition of the property, the source of funds used to acquire it, and 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.

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

If a spouse inherits or is gifted property during a marriage, that property is a non-marital asset under New Jersey law. The property will remain exempt provided that it 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 to a marital asset.

Your spouse does not get a piece of your inheritance. The court cannot and will not divide non-marital property; it 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 assets acquired by inheritance separate from marital assets. For example, if an inheritance consists of mutual funds and stocks, then these funds should not be jointly titled in the names of both spouses. These assets should only be titled in the name of the spouse who received the inheritance.

5. 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; this presumption can be overcome only by clear and convincing evidence. In the Pascale case, the wife sold stock that she owned prior to 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 inter-spousal 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.

The Pascale court 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 inter-spousal gifts are subject to equitable distribution. The court noted 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 stock sale.

In Pascale, the couple married at a young age, did not have significant assets, and shared all of their assets during their marriage. Moreover, the court found 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 the down payment to reduce their joint mortgage indebtedness. Before marital problems ensued, neither spouse took any affirmative steps that would tend to show an intent that the stock was not an inter-spousal gift. 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 a premarital asset.

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

6. What is the standard of law used 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 as to whether the separate property remains 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.

7. Before I was married, I had $50,000 in my own individual savings account. 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. However, most 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, or “uncommingled,” then most courts will try to allocate between the marital and the separate property.