Asset Tracing to Establish the Existence of Separate Property in a Marital Dissolution - Part 2

Colorado Statute 14-10-113 allows for separate property to be exchanged for replacement separate property. A question often arises when a spouse intends to exchange separate property in a commingled fungible type asset account (that has been properly traced to comply with Colorado Statute 14-10-113) for other replacement separate property. What methodology should be used to determine the marital and separate components of the replacement property? Assumed for example, that a cash account contains $300,000 of which $100,000 is the wife's separate property and $200,000 is marital property. Also assume that the wife writes a check on the account to purchase a vacation home for $100,000 and it is the wife's intent that she exchange her separate property contained in the checking account to purchase the home. What is the compositional mix of separate and marital property in the replacement vacation home? Two possible answers are as follows:

Under the pro-rata 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.

This is a mechanical test and is easy to apply.

This method precludes, or at least severely limits a spouse's ability to exchange separate property. In the above example, why should a spouse not be allowed to use $100,000 of separate property in the cash account to acquire $100,000 of replacement separate property? This method, in effect, limits the spouse's freedom to exchange separate 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 intent of the party withdrawing the funds. To the extent that enough separate property exists in the asset to purchase exchange separate property, the resulting exchanged property would be classified as separate property.

This method allows a spouse the opportunity to exchange separate property without being forced to include a marital component to the exchanged property. Since it is not a mechanical test, it allows the court the opportunity to examine the spouse's intent along with the surrounding facts and circumstances.

This is a facts and circumstances test and is more difficult to apply than the pro-rata method.

Colorado Statute 14-10-113 does not explicitly endorse either method. I am not aware of any Colorado case law that explicitly endorses either method. Therefore, until there is controlling case law, it is presumed that the court will make its decision based on each individual judge's impression of the legislative intent of Section 14-10-113.