Valuation & Litigation Services Blog

Asset Tracing in Divorce: Just Like Tracing as a Kid?

As children, we honed our hand-eye coordination and drawing skills by tracing pictures using extra-thin tracing paper. Believe it or not, tracing also has a role in the financial aspects of divorce.  When a couple gets divorced, their assets are typically divided between them. 

Understand Ohio's law regarding marital property
Under Ohio law, the assets of each spouse in a pending divorce may be classified as either "marital" property (divided between the couple) or "separate" property (retained by the owning spouse) depending on how the assets were obtained.  Assets obtained prior to the marriage or received by gift during the marriage are generally considered “separate” assets.  Assets obtained during the marriage with marital funds are generally considered “marital” assets. 

Recognize the importance of dates and documentation
The tracing process for cash and investments in marketable securities can be relatively straightforward when the necessary documentation is available.  Ideally, a bank or investment statement from just prior to the date of marriage can be used to substantiate the separate nature of an account.  If marital assets are not added to the separate accounts, generally any appreciation or earnings are considered separate assets, as well.

Things get a little more complicated when marital assets are commingled with separate assets.  For example, assume that the husband had a 401(k) plan prior to the date of marriage.  The balance in the account as of the date of marriage would be considered a separate asset, but any future contributions during the marriage would typically be considered marital in nature.  Therefore, it is necessary to calculate the marital/separate portions of the 401(k) account at regular intervals over the course of the marriage so that any appreciation/depreciation can be appropriately apportioned as either marital or separate.  The tracing process in this case typically involves the review of 401(k) statements from the date of marriage through the date of divorce.

Investment activities: determine involvment
Another wrinkle must be addressed when analyzing investments in companies in which a spouse is actively involved (typically privately-held companies, but publicly-traded companies may also apply depending upon the facts and circumstances of the case).  If the wife has a separate investment in a privately-held company that is purely a passive in nature (she has no input or impact on its operation), any appreciation during marriage is generally treated as separate in nature, similar to a pre-marriage investment account that holds various marketable securities.  On the other hand, if the wife comes into the marriage with a separate investment in a privately-held company in which she is an active participant, any appreciation during marriage may be considered a marital asset.  The tracing process in this case involves documenting when and how the wife received her ownership interest in the company as well as determining the value of the ownership interest on either the date it was acquired (if during the marriage) or on the date of marriage (if obtained before the marriage) .  Therefore, tax returns and transaction documents are typically reviewed and the services of a valuation expert may also be necessary.

As with tracing any picture as a child – the more complex the picture, the more difficult the tracing.  The same holds true for tracing analyses in divorce matters.  Some tracing aspects in a divorce are simple, just like tracing a circle on a piece of paper.  Complex tracing analyses, on the other hand, require a much more significant investment of time and resources.

If you have questions regarding the information in this article,  division of marital property,  or are in need of a financial plan following a divorce, dissolution or separation, please call me or any of the professionals in our Businees Valuation and Litigation Advisory Group at 440-449-6800.

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