FAMILY LAW NEWSLETTER
Establishing Separate Property
Through Asset Tracing After Burford
by David Melton
© 1998 David Melton & Associates
The 1997 Colorado Court of Appeals decision in In re Marriage of Burford1 changed, or at least clarified, property settlements in the following areas: (1) the methodology that the courts must use to determine separate property; (2) application of asset tracing methodologies to establish separate property; and (3) types of information to be presented to the courts.
Trial Court Order
In the Burford case, the trial court determined:For example, assume that a stock brokerage account, containing three assets with a total fair market value of $1 million, is the separate property of the wife at the beginning of the marriage. At the end of the marriage, the brokerage account is still worth $1 million. Under the "netting" methodology used by the trial court in Burford, the brokerage account would remain the wife's separate property with no marital component.
. . . the increase in value of the husband's separate property, as a whole, in arriving at the value of the marital estate. From the figure representing several assets' increase in value, it subtracted the decrease in value suffered by several other assets and considered this "net" increase in all of the assets in determining the value of the marital estate to be divided. This resulted in the court evaluating the existing marital estate at a figure substantially lower than would have been computed by a straightforward application of Section 14-10-113(4).2
Court of Appeals Decision
The Court of Appeals disagreed with the netting methodology applied by the trial court in Burford. In essence, the appellate court ruled that there are two distinct steps to a property division. The first step is to evaluate the marital estate, wherein the court must determine the proper amount of marital property by calculating the appreciation of each individual separate property asset during the marriage without reducing this marital appreciation by the depreciation of any other separate property. The second step is dividing the marital estate, wherein the court may consider any increases or decreases in the value of the separate property of the spouse during the marriage or the depletion of the separate property for marital purposes.3
In Burford, the Court of Appeals acknowledged that while the trial court's division of marital property was not necessarily inequitable, it was, nonetheless, "based on a miscalculation of the value of the marital estate"4 or failure to apply the statute properly.
Application of Asset Tracing Methodologies
To see how the methodology mandated by the Court of Appeals in Burford would change the previously described stock brokerage account example, each individual asset within the brokerage account must be traced. Assume on the date of marriage the brokerage account contained three assets: Stock A, worth $333,333; Stock B, worth $333,333; and a money market account worth $333,334. Assume further at the end of the marriage that Stock A is now worth $1 million, Stock B is now worthless, and the entire money market account has been spent on family living expenses during the marriage.
With this fact pattern, under Burford, the brokerage account at the end of the marriage would consist of $333,333 in separate property and $666,667 in marital property. The marital property component is $666,667 of marital appreciation of Stock A, and the separate property component is $333,333 in separate property traced back to Stock A's value at the outset of the marriage. Separate property of $666,667 has been depleted during the marriage.
The court may consider this depletion of separate property in its final award of marital property, but depletion of separate property does not automatically result in an offsetting award of marital property. Depletion is a factor to be considered in the equitable division of marital property, rather than a calculation component in determining separate or marital property.
When Separate Property Changes Form
Determining the separate and marital components of a brokerage account, or any other asset, is rarely as simple as in the above example. When separate property changes form, the asset tracing task can become complicated.
When one unique tangible asset is exchanged for another unique tangible asset, the asset tracing is relatively straightforward. However, when the proceeds of assets sold are deposited into a bank or money market account, for example, it becomes difficult to distinguish one dollar from another. This is made more complicated when marital property is commingled with separate property in the bank or money market account. The questions then become: (1) what happens when a purchase is made out of the bank or money market account that has become commingled; and (2) what is the nature of the assets purchased from the commingled account.
The answers are theoretically simple but sometimes practically complex. Under CRS 14-10-113(2)(b) and (3), if the party claiming separate property cannot answer the above questions to the court's satisfaction, the property will be presumed to be marital property. The following sections discuss how a party claiming separate property can satisfy the court that he or she has produced an asset tracing accounting sufficient to overcome the presumption that all property acquired during the marriage is marital.
Attributes of a Successful Asset Tracing
A properly prepared asset tracing should be in accordance with the Colorado statutes and case law, presented by using generally accepted accounting methodologies. The asset tracing should categorize all transactions that have occurred to a separate asset, from its creation until the end of the marriage, into separate and marital components. The categorization of each transaction should be consistent with the Colorado statutes, case law, and facts and circumstances surrounding the asset.5
Asset Tracing Transactions And Events
An analysis of CRS 14-10-113 indicates that there are three categories of transactions or events that affect separate property:
1) transactions/events that create separate property;While a detailed discussion of all transactions and events that fall into these categories is outside the scope of this article, a "Transaction/Event Code" list from the book Accounting Guide to Asset Tracing, An Accounting Guide to Establish or Refute the Existence of Separate Property in a Marital Dissolution6 is included on page 58 as the Appendix to this article.
2) transactions/events that create a marital component to separate property;
3) transactions/events that reduce the separate or marital component of property.
Nature of Separate Property
The Colorado statutes that define separate and marital property indicate certain attributes of separate property:Certain asset tracing principles are particularly important in tracing separate and marital components of assets that have changed form.
- Under CRS 14-10-113(4), appreciation of separate property under CRS 14-10-113(2) and (2)(a) and (b) is considered marital property. Separate property created under these subsections of the statute does not increase after it is initially created. It can only stay the same or decrease in value. This type of separate property includes property acquired prior to the marriage; property acquired by gift, bequest, devise, or descent; and property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent.
- Separate property created under CRS 14-10-113(2)(c) and (d) can increase in value after it is initially created. It can stay the same, increase, or decrease in value. This type of separate property includes property acquired by a spouse after a decree of legal separation and property excluded by valid agreement of the parties.
- Separate property can acquire a marital component and become a combination of separate and marital. This is because under CRS 14-10-113(4), appreciation of separate property created under 14-10-113(2) and (2)(a) and (b) is considered marital property.
Black's Law Dictionary defines "commingle" as "to put together in one mass."7 As it relates to asset tracing, commingling refers to the mixing of separate and marital property in the same asset or account. When separate and marital property are mixed during a marriage, there is a presumption that the entire asset or account is marital.8 The presumption is overcome by a showing that the property was acquired by the method listed in CRS 14-10-113(2). In other words, a presumption that property that exists at the end of a marriage is marital can be overcome by "uncommingling" the asset. This is accomplished by the process of asset tracing.9
The concept of fungibility is closely related to the issue of commingling of marital and separate property. Black's Law Dictionary defines "fungible things" as "moveable goods which may be estimated and replaced according to weight, measure, and number. Those things one specimen of which is as good as another, as is the case with half-crowns, or pounds of rice of the same quality."10
The most common fungible asset encountered in asset tracing is money. It is virtually impossible to distinguish one dollar from another in a bank account or a money market account. Additionally, in this modern society, assets are rarely traded or exchanged directly for other assets. They are almost always sold for money that is immediately deposited and commingled with other funds in a cash or brokerage money market account.
Once a previously separate asset is sold, converted to cash, and commingled into a fungible-type account, it becomes necessary to perform a detailed asset tracing of that account. This is necessary because any asset subsequently purchased from the account, or withdrawal from the account, cannot be properly classified into separate and marital components without first knowing the amount of separate and marital property in the account immediately before the purchase or withdrawal. In other words, the components of a fungible-type asset account must be accounted for on a cumulative basis.
For asset tracing purposes, it must be determined whether an asset account is viewed as an asset entity separate from its underlying components, or as an aggregate asset--a collection of assets within the account. For example, under a strict entity approach, in a stock brokerage account containing five stocks and a money market account, the brokerage account itself would be considered the asset for tracing purposes. Under the aggregate approach, the underlying stocks and cash account would individually be considered the assets for tracing purposes.
Cash accounts, as discussed in "Fungibility," above, by their very nature must be traced using an entity approach. Money market accounts are similar in nature to cash accounts, in that they are fungible and generally do not have gain and loss transactions apart from dividend income credited to the account.
Brokerage accounts are partly fungible and partly not fungible. Most brokerage accounts hold specifically identifiable assets in addition to fungible cash or money market-type assets. Therefore, in this author's opinion, a proper brokerage account tracing should use an aggregate tracing for all specifically identifiable assets (securities) held in the account and an entity tracing approach for all fungible cash or money market-type assets held in the account. This approach would appear to be consistent with Burford.
When specifically identifiable assets are sold, then deposited into a money market account, and new, specifically identifiable assets are purchased from the money market account, the tracing process must, by necessity, combine both aggregate and entity tracing methods to trace all assets properly in a brokerage-type account.
Distributions and withdrawals from a separate asset reduce the separate asset.11 While the withdrawal from the separate asset may create another separate asset, the specific asset from which the withdrawal occurs will be reduced by the amount of the withdrawal.
When the withdrawal is made from an asset that contains
both marital and separate property components, the withdrawal must be categorized
as marital, separate, or a combination of both. This process can become
quite cumbersome in an asset tracing accounting, with each withdrawal requiring
an analysis of its nature. The following methods of categorization may
Pro Rata Method: Under this method, the vacation home would consist of $33,333 of separate property and $66,667 of marital property. Under this method, the distribution or withdrawal from an asset containing separate and marital property would always be proportional to the relationship of separate to marital property contained in the asset account at the time of the withdrawal to purchase the exchange property.
Intent or Facts and Circumstances Method: Under the intent method, the vacation home would consist of $100,000 of separate property and no marital property. Under this method, the distribution or withdrawal from an asset containing separate and marital property would be determined by the contemporaneous intent of the party withdrawing the funds. To the extent that enough separate property exists in the asset to purchase exchanged separate property, the resulting exchanged property would be classified as separate property.
CRS 14-10-113 does not explicitly endorse either method.
Information Presented in Light of Burford
When the dust settles, practitioners must determine how the property settlement landscape will be changed by Burford. The Court of Appeals in Burford stated that the trial court's original property settlement may have been equitable, but was arrived at by using the wrong methodology. The question then becomes what types of financial information a party should present to the court for it to arrive at the same conclusion using the correct methodology.
Clearly, more marital property will be created by using the Burford methodology. In addition to presenting the court with an accounting of separate and marital property, practitioners will need to present data related to the overall decrease in value of a spouse's separate property and whether that property has been depleted for marital purposes. The court would need this information to arrive at its former property division, by awarding more marital property to the spouse suffering a decrease in separate property. If individual judges choose to put little weight on this additional information, the Burford case will indeed have changed the property settlement landscape in Colorado.
1. 950 P.2d 682 (Colo.App. 1997).Column Eds.: Bonnie M. Schriner, a sole practitioner in Denver--(303) 458-5100; Lesleigh Wiggs Monahan of Polidori, Gerome, Franklin & Jacobson, LLC, Lakewood--(303) 936-3300
2. Id. at 686.
3. CRS 14-10-113(d).
4. Supra, note 1.
5. Melton, Accounting Guide to Asset Tracing, An Accounting Guide to Establish or Refute the Existence of Separate Property in a Marital Dissolution (Aspen: David Melton & Assoc., 1998), Ch. 2 at 2-3. The book is available by calling David Melton, CPA, CVA, in Aspen at (970) 925-2979.
6. See id. at Ch. 2 for a detailed discussion of each Transaction/Event Code.
7. Black's Law Dictionary (4th ed., rev.).
8. CRS 14-10-113(3).
9. In In re the Marriage of Renier, 854 P.2d 1382 (Colo.App. 1993), the Court of Appeals agreed with the wife that the trial court improperly calculated the parties' marital property without requiring the husband to trace his ownership of stocks and options he owned at the time of the marriage. "Thus, apart from the issue of the marriage, the additional 1,534 shares potentially could be classified as husband's separate property. However, to retain its separate character, premarital property must be traceable to specific assets." In In re the Marriage of Stedman, 632 P.2d 1048 (Colo. App. 1981), the Court of Appeals stated, "The presumption is that property acquired during the marriage at issue is marital. Section 14-10-113(3), C.R.S. 1973. And while a party may trace property acquired during the marriage to have been purchased with his separate property, thus maintaining its separate property character, the husband has failed to do so here as to the claimed $40,000 in savings." In In re the Marriage of Van Genderen, 720 P.2d 593 (Colo.App. 1985), the Court of Appeals agreed with the husband that the trial court erred in finding that the note, certain liquid assets, and an automobile were marital property rather than property acquired in exchange for premarital property. The court agreed that the husband had overcome the statutory presumption that these assets were marital because he had traced these assets to the parent company, which was incorporated before the marriage.
10. Supra, note 7.
11. While CRS 14-10-113 does not explicitly state that distributions and withdrawals from a separate asset reduce the separate asset, logically, they would reduce the value of the particular property from which they are taken.
12. Oldham, "Tracing, Commingling, and Transmutation, "XXXIII Fam L. Q. 224 (Summer 1989). This is not to be confused with the CRS 14-6-110 on joint liability for family expenses, which states that "the expenses of the family and the education of the children are chargeable upon the property of both husband and wife, or either of them, and in relation thereto they may be sued jointly or separately."
This newsletter is prepared by the CBA Family Law Section. This month's
article was written by David Melton, CPA, CVA, a sole practitioner in Aspen,
|A. Transactions/Events that Create Separate Property
(1) Property acquired prior to date of marriage
(3) Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise or descent
(4) Property acquired by a spouse after a decree of legal separation
(5) Property excluded by valid agreement of parties
(6) Transmutation of property Colorado Uniform Dissolution of Marriage Act,
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(2)
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(2)(a)
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(2)(b)
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(2)(c)
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(2)(d)
Colorado Uniform Dissolution Marriage Act,
B. Transactions/Events that Create a Marital Component to Separate
|(1) Appreciation in value of separate property during the
(2) Income during marriage
(3) Use of marital property to carry, maintain, or improve
|Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(4)
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(2) &
C. Transactions/Events that Reduce the Separate or Marital Component
(2) Depreciation in value
(3) Commingling (separate property commingled with marital property and not uncommingled through asset tracing)
(4) Transmutation of property
|Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113
Colorado Uniform Dissolution of Marriage Act, CRS 14-10-113(3)
Colorado Uniform Dissolution of Marriage Act,
From Accounting Guide to Asset Tracing, An Accounting Guide to Establish
or Refute the Existence of Separate Property in a Marital Dissolution.
© 1998 David Melton & Associates. Used with permission.
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