September/October 1999

Asset Tracing Discussed at Annual Family Law Conference

I recently had the honor of making a presentation to the 1999 Family Law Program in Los Cabos Mexico, sponsored by the Lawyers Public Information Foundation of Colorado.  The presentation, entitled “Pitfalls & Pointers on How to Win the Separate vs. Marital Property Battle” covered issues related to using asset tracing as a means to either establish or refute the existence of separate property in a marital dissolution.  One asset tracing issue sparked a lively discussion during my presentation.  When performing an asset tracing, on a brokerage account for example, is it the individual stocks in the brokerage account, or the brokerage account as a whole that should be traced to determine marital appreciation of separate property?

Those of you who have read my article Establishing Separate Property Through Asset Tracing After Burford published in the January 1999 Colorado Lawyer, or have read my book, Accounting Guide to Asset Tracing, An Accounting Guide to Establish or Refute the Existence of Separate Property in a Marital Dissolution know that I advocate tracing each individual asset within a brokerage account as the proper tracing methodology.

Tracing the Brokerage Account

For example, assume that a stock brokerage account, containing three assets with a total fair market value of $1,000,000, 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 $1,000,000.  If the brokerage account itself were the asset to be traced, the brokerage account would remain the wife's separate property with no marital component.

Tracing Individual Assets in the Brokerage Account

Assume on the date of marriage that the brokerage account contained three assets, Stock A worth $333,333, Stock B worth $333,333, and a money market account worth $333,334.  Further assume at the end of the marriage, Stock A is now worth $1,000,000, 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.  My problem with tracing only the net appreciation in the brokerage account can be illustrated by the following analogy.  In the above example, suppose the stock certificates were held in a desk drawer during the marriage.  I think most people would agree that since Stock A and Stock B are clearly different individual assets, appreciation on each asset must be calculated to determine the proper amount of marital appreciation on each asset.  Why then should the amount of marital appreciation be different just because these same assets are held in a brokerage account?  Saying that the brokerage account is the asset to be traced is like saying the desk containing the stock certificates is the asset to be traced.  A brokerage account has, in and of itself, no value.  It is only an accounting mechanism to hold individual assets.

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