Marital Property: What’s Mine is Mine and What’s Yours is Mine—or Is It?

Forensic accountants are key in the division of marital property in divorce.

Forensic analysts in marital litigation support must understand the nuances of jurisdiction. Going beyond the normal practice of tracing, this overview explores three additional approaches that are essential to reclassify property formerly thought of as separate to marital property.

Marital Property

Beyond the analysis of the income tax returns, the valuation of the family business and preparation of the Financial Affidavit,  forensic accountants can be of substantial support in divorce cases as they establish the limits of the marital estate and identify where property has been transmuted.  Familiarity with the legal theories that apply in a jurisdiction prepares you to be a contributing member of the team and avoid an inadvertent error in guiding clients at a time of upheaval.  

The concept of jurisdiction in a family law matter is important for several factors, including the definition of which property of the parties is subject to division by the court.  It is not unusual that counsel will review the options in various states a couple has financial and other ties to in order to file where it is most advantages for his or her client. This scenario is becoming more common as professional clients are generally more transient and may easily have amassed assets across or lived in several different states.  The situation will also be encountered when the client is in the military and will most likely have been stationed in various locations throughout his or her marriage and career.  Thus, the forensic professional should understand the concept of property in the state(s) in question. 

Recently, I consulted in a case where as many as four separate jurisdictions were in play based on child custody, divorce filing, division of property and the couple’s state of residence/domicile.  Because of the complexity of such fact patterns and the potential for missteps, consulting with legal counsel is strongly recommended, as well as making no exceptions in a “pro se” case.

Currently, there are  nine community property states: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and sometimes Wisconsin. In community property states, the characterization of property is determined at the time property is acquired. Generally, property acquired during marriage is community property. This applies to both assets and liabilities. Which was  acquired during the marriage through the parties’ work and effort is thusly owned jointly and divided in divorce. There are always exceptions, including the presumption that property acquired by gift or inheritance during a marriage is separate property. The remaining states do not dictate the concept of community property.  States vary in their treatment of division and some call for an “equitable distribution” of community property.   Wisconsin considers itself such a state despite statutory provisions for community property. 

An excellent resource to begin an engagement with and refresh an understanding of the local law, is the American Bar Association’s(ABA)  “Marital Property in the 50 States Guides” available to any member of the Family Law Section of the ABA and published in the Family Law Quarterly.These give an overview of the states’ current law on the matter of property division and  the variables which may be meaningful in your support of a client’s property division engagement.  The ABA family law section also hosts resource articles on each of the states’ approaches and key developments of interest.

Generally, property acquired prior to marriage is characterized as separate property.  Over the course of a long-term marriage or because clients are not knowledgeable about consequences,  property that was sole and separate can be transmuted into marital or community property. 

The need to identify marital vs. separate property may lead the forensic expert  to categorizing assets or liabilities which have been converted, either intentionally or unintentionally, from separate to marital.   The approach used to support the conclusion and document your work, which could be extensive and time-consuming, will vary based on several factors. The simplest, though not without challenges, approach may call for a tracing engagement. Yet, there are  other approaches to identifying the marital portion of separate property  if accepted by the law of the state of jurisdiction for the case.   Consumption Approach, the Van Camp Approach and the Pereira Approach are discussed and demonstrated in the article:  Conversion of Separate Property into Marital Property in Divorce: The Theory of Transmutation, by Rufus & Miller,  The Value Examiner, July/August 2012.

[author] [author_image timthumb=’on’]http://www.rufusandrufus.com/images/rjrufus.jpg[/author_image] [author_info]Robert J. Rufus, DBA,CPA, CFF, AFI is president and managing principal of Rufus & Rufus, CPAs in Huntington, WV.[/author_info] [/author]
[author] [author_image timthumb=’on’]http://www.rufusandrufus.com/images/ljmiller.jpg[/author_image] [author_info]Laura S. Miller, MFE, CFA, AVA, AFI is a forensic analyst with Rufus & Rufus. [/author_info] [/author]