Before the division of assets can occur, the parties need to determine which assets should be subject to distribution. The first step in determining the classification of assets as marital or non-marital is to analyze how the property was acquired. Three conclusions are possible:
Acquired during the marriage: Any assets purchased during the marriage that were purchased with marital earnings, are considered marital property. For example, a married couple purchases a home with joint money and maintains the home with marital earnings. In all likelihood, the home is a marital asset.
Assets acquired prior to the marriage: If one of the parties owns an asset, like a bank account, that was acquired prior to the marriage and maintains this asset separate from the marital assets, this asset would most likely be considered a non-martial asset. Typically, if a non-marital asset has appreciated in value during the marriage without the efforts of one of the spouses (passive appreciation), the appreciation is considered non-marital property. For example, if a wife has an investment account valued at $100,000 as of the date of the marriage, and she keeps the investment income in the same separate account. Most likely, the appreciation would not be subject to division between the parties.
Acquired by gift or inheritance: An asset acquired by one of the parties through gift or inheritance either prior to or during the marriage would most likely be considered a non-marital asset if it remains separate from the marital property.
If funds from a non-marital asset are mixed with joint assets, which is known as commingling, the non-marital asset could be considered a marital asset. If commingling has occurred, the parties may need to hire a forensic accountant to prepare a tracing analysis to demonstrate how the funds were maintained. Such an analysis is often necessary to prove whether an asset is or is not subject to distribution.
Therefore, when faced with a divorce, it’s important for the parties to analyze their assets and to verify how they acquired them. If issues arise as to whether an asset is marital property, a forensic accountant can provide invaluable assistance in resolving this issue by tracing the flow of funds or movement of the asset.
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Author: Melissa Soranno, CPA, CFF | firstname.lastname@example.org