Colorado law provides that all property acquired
by either spouse during the course of the marriage is presumed to be
marital property. A party claiming a separate interest in property
has both the burden of proof and the burden of going forward to
establish the separate character of property.
Under Colorado’s Uniform Dissolution of Marriage Act, separate assets
are not subject to equitable distribution. Thus if a spouse can
establish to the satisfaction of the Court that assets are separate,
then they can keep them off the “marital table”. The challenge is
to prove that assets existing now are the same as what existed at the
time of the marriage, or were acquired in exchange for property acquired
before the marriage or in exchange for property acquired by gift,
bequest, devise or descent. (The other two forms of separate property
are 1) property acquired after a decree of legal separation and 2)
property excluded by valid agreement of the parties.)
Under C.R.S. 14-10-113(4), appreciation of separate property as
defined above is considered marital, and thus if the value of the
separate property increases in value during the marriage, the increase
becomes marital. For example, Husband claims separate property of
$300,000, which is the value of his brokerage account. At the time of
the marriage, however, the value was $100,000. Thus, unless there was
other separate property received and deposited into this account during
the marriage, then the maximum valid separate property claim would be
$100,000.
Colorado has relevant case law that addresses the concept of
separate property. The Court of Appeals In re Marriage of Burford
addressed the concept of needing to analyze each individual asset in
making a determination as to the amount of separate property:
"… in carrying out the division of the
marital estate in accordance with 14-10-113, the dissolution court
should first add to the marital estate the amount of increase during
the course of the marriage, if any, in each asset that was owned by
each party before the marriage. For this purpose, any asset
suffering a decrease in value should be disregarded. Section
14-10-113(4), requires that the increased value of each asset be
added to the marital estate; the net overall increase or decrease in
value of all of the spouse’s separate property is not to be
considered for this purpose."
The Court in Burford went on to draw the
distinction between analyzing a bundle of assets together (“netting”)
versus analyzing each individual asset separately:
“… the dissolution court determined the
increase in value of 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 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
14-10-113(4)."
The Court opined that each individual asset
must be analyzed separately. That is to say, the increase in value
during the marriage of each separate property asset should be added to
the marital estate. The decrease (“aka diminution”) in value of each
separate property asset is to be set aside and not considered as a
direct offset to the increases in the value of other separate property
assets.
For example, assume that husband while he is married inherits from his
father two publicly traded stocks, both valued at $10,000, for a total
of $20,000. During the marriage, the first stock increases to $20,000
while the second stock decreases in value to $0. Husband and wife
divorce and there is a determination of separate property. Burford tells
us that the marital estate includes the increase in value of $10,000 for
the first stock. The marital estate is not diminished by the decrease in
value of the second stock. One does not “net” the $10,000 increase in
value against the $10,000 decrease in value. Thus, the separate property
would be $10,000.
Decreases in value can occur from distributions or withdrawals,
depreciation in value, commingling with marital property, and
transmutation (changing the character of the property through agreement,
being retitled, interspousal gift or use.)
Separate property tracings can be quite complicated, particularly
when there is commingling of separate and marital property. On brokerage
accounts, each stock and transaction must be traced so that a
determination can be made of the proportion of the account at the time
of marriage which is separate vs marital. Consider a gift of commercial
real estate in which there are 1031 exchanges, mortgages, and
improvements funded from both marital funds and inheritances. How much
of the value of the property is marital v. separate?
Consideration by the attorney and accountant needs to be given to the
potential cost of the tracing compared to the benefit to the client of
proving or disproving a separate property claim.
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