Forensic Accountant

Irina Anissimova, CPA, CFF

Separate Property Tracing

The party who has a separate property claim needs to provide proof of this property existence and separate character. Essentially he/she needs to show where this property originated from, what happened to it during marriage and where it ended on the date of separation, or trace it.

This is quite often easier said than done, especially if the marriage has lasted for more than 5 years. 

There are several major difficulties to overcome in the process.

First, it seldom happens that one party’s asset (a balance in a bank or brokerage account, a piece of real estate, securities, etc.) in existence on the date of marriage (or inherited during marriage) is still present in the same place and form on the date of separation. Real estate gets sold and replaced, money in the bank accounts gets transferred, combined and commingled, securities split or consolidate or may be sold or replaced with different equities as a result of mergers and acquisitions.

Second, people generally have rather vague recollections of past events and may sincerely believe that money was transferred from a separate account and immediately used to purchase a house, while in reality there was a time span of several months between these two events and it included a purchase of a vehicle and an expensive vacation. It is not uncommon to be told that there was just one separate account with a substantial balance at the start of the work and later in the process to find out that in fact there were several accounts with various balances in the same bank, all of them used differently.

Third, tracing relies on documents, and they may no longer be available. Most people do not keep bank, credit card and brokerage account statements for more than couple years. With the advent of digital storage financial institutions do not keep them either. What is worse, there are no uniform records keeping rules, each financial institution has its own. Bank of America keeps records for 10 years, Comerica – for 5, Chase for 7 and Fidelity is sometimes capable of digging up records from 1990’s.

There are two methods of tracing – direct transactional and indirect. 

The best proof of property’s separate character is provided by direct transactional tracing which consists of examining transactions in every account which at any point in time contained separate property. Transactional tracing is therefore time consuming and expensive. The end result of the process is a collection of seemingly endless tables showing activity in several accounts for the duration of the marriage (or since the receipt of a gift or inheritance).

Document requests for this work are multiple and often require research efforts at several financial institutions. An accountant will ask for statements from various bank and brokerage accounts, old check registers and other documents that may shed light on the character of deposits and withdrawals from the analyzed accounts (i.e. escrow statements, individual, business and estate tax returns and such). The whole process is rather akin to opening a can of worms and then chasing each one of them till it is put into a separate container.

Indirect tracing is mostly used to fill in gaps in transactional tracing when some of the documents are not available. Essentially this method represents a system of plausible assumptions and estimates, combined with all available data, which is intended to describe what happened to the separate property and where it was at the date of separation.

Here is an example of the indirect tracing approach. Suppose, the only available statements from a savings account cover the last five years of the marriage, but one of the parties claims to have had this account for ten years and to have opened it with proceeds from the sale of a separate property house prior to the marriage. If tax returns for the last ten years are also available and the account in question is identifiable on those returns, it may be possible to account for interest income and to reconcile the account’s ending balance to the amount of sales proceeds on the escrow statement issued ten years ago.

There are not many ways to make tracing quicker and cheaper. Because this work requires extensive data entry, everything that can reduce this time is helpful. I usually ask for electronic copies of bank records because they can be processed in a way that reduces manual data input. If a client offers to do the data entry, I am more than happy to provide templates and guidance. Outsourcing data entry can sometimes be another possibility, although this option requires careful consideration by the client, given the character of the documents.

Copyright: Irina Anissimova, CPA, CFF, 2015