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Tracing the money trail puzzle in a divorce can pay big dividends

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In today's complex world of finances, dividing the marital estate equitably in a divorce can be challenging. Yet, most divorce settlements will undoubtedly have significant short- and long-term financial consequences for all involved. It is therefore extremely important that couples give careful attention and evaluation to this aspect of the divorce process.

All divorcing couples are required to provide their respective legal teams with a detailed accounting of assets owned by each spouse, in addition to any outstanding debts. This is called "discovery," and is typically one of the first steps in the divorce process. Couples are asked to provide documentation of bank accounts; investment and brokerage accounts; past tax returns; proof of income; household expenses; real estate and mortgage statements; business records; loans; large asset titles -- such as automobiles, boats, etc.; investment property; partnership or corporate (business) investments; retirement and pension accounts; trusts; estate plans and more.

Quite often in a divorce, one spouse, (historically the woman, but this is changing) may be only somewhat familiar with family finances. Being confronted with investment, brokerage and retirement account statements, business and other financial records, some of which may be unknown to her, can quickly become overwhelming.

In cases like this, the less-knowledgeable spouse would be wise to engage the additional counsel of a Certified Divorce Financial Analyst to help. Attorneys are trained in the divorce laws of a state, but in most cases, they do not have the financial training required to sort out financial and tax complexities that could be "glossed over," or even hidden in the process at the expense of an unknowing spouse.

These financial experts can review and make sense of personal tax returns, financial documents, and retirement and pension plans; provide an evaluation of short- and long term tax and financial consequences of specific assets; and trace investment and other activity in a quest to get all the pertinent money facts.

For example, in the state of Texas, if one spouse inherits money, it is considered "separate" property and not to be divided as "community property" in a divorce. But if your inheritance monies get mixed in with community funds, you may hear from attorneys that the funds have been "mingled," so are now deemed "community" property. I'd say, "Not so fast."

My client, Mary, was blessed over the years by a generous mother who made annual monetary gifts to mutual fund accounts held jointly with Mary. Over her 34 years of marriage, Mary pulled funds out to support her family to supplement earnings of her husband. Hundreds of times, dividends were reinvested along with capital gains distributions. Upon Mary's mom’s death in 2011, the accounts became entirely Mary’s (and partially her husband’s).

Mary and her husband assumed that the accounts were too mingled to ever separate. However, with thousands of pages of historical statements provided by the firms where the money was invested, I was able to piece together the money trail puzzle through "tracing."

Starting in 1987 with the first gift by mom, I did “line-by-line” tracing, entering every transaction, every buy, sell, dividend, capital gain, withdrawal, etc. As the puzzle was assembled, I was able to accurately itemize the amount of community shares and separate property shares. We discovered that more than 95% of the funds were Mary’s separate property.

Why such a high percentage when so much was earned in dividends and interest? Because of a rule in Texas called “community out first." Whenever there are community shares or cash held in an account and a distribution is made, that distribution comes first from the community portion, then is supplemented by separate if needed. Due to the hundreds of thousands of dollars in distributions and liquidations, the remaining mutual funds were almost entirely hers.

For the IRAs funded by Mary’s mom, the results weren’t so one-sided. Mary hadn't withdrawn from these accounts due to penalties and taxes for early withdrawals. The continual reinvestment of community dividends into new shares and the continued capital gains divided between community and separate resulted in 24% of the account being community property. Thanks to more tracing here, Mary got an accurate picture of who owned these accounts as well.

As mentioned earlier, the financial side of divorce can be complex, but it is well worth your peace of mind to do all you can to get an accurate accounting of the marital estate assets before settlement negotiations begin. Consider hiring a Certified Divorce Financial Analyst to trace the money trail and assemble the financial puzzle in your divorce if the situation calls for it.

Join Patricia Barrett at her upcoming 2014 Leisure Learning class on Aug. 25 and Oct. 27, 6:30 – 9:00 p.m. 2900 Richmond Ave., Houston. She will also be presenting at the Guide to Good Divorce seminars in Houston on July 26 and Sept. 27, 2014. For more information on divorce financial planning or divorce mediation, visit Patricia's website, Lifetime Planning.

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