Ryan Kalamaya (3s):
Hey everyone. I'm Ryan Kalamaya and I am Amy. Gosha welcome to the divorce at altitude, a podcast on Colorado family law. The forest is not easy. It really sucks. Trust me. I know besides being an experienced divorce attorney, I'm also a divorce client, whether you are someone considering divorce or a fellow family law attorney listening for weekly tips and insight into topics related to divorce co-parenting and separation in Colorado. Welcome to another episode of divorce altitude. I'm your cohost Ryan calamansi. This week, we're going to talk about separate property and tracing with Andy BOM, who is at Harper Hofer and associates.

Ryan Kalamaya (50s):
He is a certified public accountant, but he spends most of his time with litigation support with Preston Hofer. And we've worked on a number of cases together. He went to the university of Texas, so he is a proud Longhorn. He spent some time out in California. We'll talk about that and how he got into specifically expert witness work for separate property and divorces. So Andy, welcome to the show.

Andy Baum (1m 15s):
Thank you. Thank you for having me.

Ryan Kalamaya (1m 17s):
So What prompted you to get into divorce and expert work with Divorces?

Andy Baum (1m 23s):
I was following the more traditional accounting work, the accounting route. I graduated from school. I worked at a, an audit at a big four accounting firm and then went on to work in the internal accounting department at a private equity firm. And it was just a little bit too cyclical for me, was looking for something a little bit different than something, a little bit more gray rather than black or white, which is harder to find in accounting. And I stumbled upon a job posting for a firm in Los Angeles called Guernsey Schneider and Guernsey. Schneider has a department of 70 plus accountants, maybe now bigger that focuses on nothing but valuation and litigation support in high net worth divorce matters in Southern California.

Andy Baum (2m 7s):
And it was a really great starting point for me to get into the field that I am now in because when you're in college and you're in a accounting major, there's no track for a family law, forensic accounting, it's kind of something you just have to get into or fall into.

Ryan Kalamaya (2m 24s):
And how did you end up in Denver with Harper Huffer and associates?

Andy Baum (2m 28s):
You know, I would say we were a little bit of a cost of living refugee, my wife and I, our cost of living refugees from the LA area. My wife is a Colorado native I'm originally from Texas, but I like to say I came with a native and, you know, we just thought it would be a good place to live and raise a family. And somebody at my firm in California had left right when I was starting at that firm to work in Denver and she had worked with Preston. And so I called her up and she said, let me put you in touch. If you're going to be working in forensic accounting, family law, focus in Denver, Colorado, press and hold for is the guy. So that's how I got put in touch with her.

Ryan Kalamaya (3m 5s):
Well, We're here to talk about separate property and tracing and you and I have talked about the differences between California and Colorado. I'm always interested to see or hear about financial experts in their familiarity with the law. So, you know, for our listeners, what's your understanding of, of separate property in, in marital property and we'll get into kind of what you exactly do.

Andy Baum (3m 27s):
Okay. And kind of you brought up the comparison of Colorado and California and at the firm I was at in California, they had a dedicated tracing department. It was about six or seven people that did nothing but separate property. Tracy's we also had our own proprietary tracing software. You would enter all the transactions in and you could run it under different scenarios. And I worked for three years in California, but my understanding is that through statute and case law, the rules of separate property tracing, especially when you get into more of the details was a lot more defined in California than it is in Colorado. I get out to Colorado and Preston kind of says, well, you know, it's kind of, as far as separate property tracing, Colorado is a little bit the wild west.

Andy Baum (4m 14s):
The statute provides some very, very basic guidance as far as what separate property. And there is some case law, nothing that is, I would say too definitive, especially when you get into the minutia of all the different nooks and crannies that you come into with separate property tracings. But the general statute is section 14, 10, 1 13. And the takeaways from that are, this is funny because if the court determines that something is your separate property, then it's my understanding is that it's not subject to division by the court. But what's funny is the court is the one who ultimately determines whether something meets the threshold of qualifying as separate property.

Andy Baum (4m 55s):
And so the, one of the big differences between California and Colorado is that in Colorado increases in the value of a separate property asset are marital and backing up a little bit is how do you have a separate property assets? Several property assets are generally acquired by one of two ways it's assets that one party brings owns when the marriage begins. So it's something you own at the marriage, something that you acquired before, before you got married and then also assets that you received generally as a gift or inheritance in your name only during the marriage. Generally, that's the only two ways that you can begin with suffer property.

Andy Baum (5m 37s):
And that set probably can increase during the marriage only through receipt of additional separate property through gift or inheritance because you can't, they can't grow in value, which is something very important. Absolutely.

Ryan Kalamaya (5m 48s):
And we previously had an episode on trust with Kim Willoughby, who I'm sure you've worked with a fair amount. And Kim, I, you know, she observed that Colorado has a liberal approach to classifying, you know, marital property and it's presumed everything that's acquired after the date of marriage is presumed to be a marital. And I think it's fascinating. You and I have talked about, we'll get into a hypothetical to tease out in terms of the differences with California and Colorado. I think you are absolutely right in terms of Colorado being the wild west it's east of California, but it certainly is wide open as far as, you know, characterization of separate property and tracing. So we'll get into what tracing means and what that all entails.

Ryan Kalamaya (6m 29s):
But I think it's helpful to have look to set the stage. And as listeners of the podcast know, we only will use a hypothetical Eric Wolf. And, you know, we refer to that in our upset one, it's on our website, but let's say the Eric Wolf, you know, he's going through a divorce with Melanie and he owned both a business and a fairly significant stock portfolio in California and Melanie and him get married in California. And then they become, you know, costs of living refugees are transplants like your wife and humanity. And they moved to Colorado. Let's say they go to Boulder, Denver. And you know, they live here for a period of time and then they go through a divorce.

Ryan Kalamaya (7m 10s):
So what does it mean to trace, you know, first of all, I guess before we get into the tracing that business in that stock portfolio, that is separate property because it was owned when Eric and Melanie got married. Right? Correct. So when we talk about tracing, what are we talking about with respect to separate property in Eric Wolf's stock portfolio and his business?

Andy Baum (7m 37s):
So the key to tracing is that you have to trace the asset, the separate property asset from when it first entered the real of separate property, either affidavit of marriage, because it existed then, or when it was received as a data gift, you have to trace it from that point in time. And that specific asset to where it exists today, because it's really only relevant because you're trying to claim something. Or one of the parties is trying to claim something that exists today as their separate property, if it was separate property and it was spent, and we can get into that later on in the episode. But if it doesn't exist right now, it's not really relevant because if you're talking about what exists now and what portion of what exists now, you can claim as your separate property.

Andy Baum (8m 25s):
But if it's a, you know, a stock, you have to say, okay, this is the value of the stock at, let's say the date of marriage. And I have shown where that value has been all throughout the marriage and where it is today. And I can show you the whole chain of transactions, that show where the stock was when I originally received it, or when we got married and where it is today, let's say, you know, you had a stock and you sold it, you bought a different stock, and then you sold it and you bought a different stock and then you sold it, you bought a car, and then you sold that car to you bought a different car that that's a tracing of following that value from where it was then to where it is. Now,

Ryan Kalamaya (9m 0s):
If we kind of separate out the, the Eric Wolf's business, when he owned it in California from the dark portfolio. So the business, if he owned a software business in California, it was worth $10 million. When they got married. Now it's worth $15 million. When they got married, you can clearly trace it's the same software company that it was before, right? So there's the tracings pretty easy. There's really no tracing because it's still the same company. It's just a matter of what was it worth at the date of marriage

Andy Baum (9m 31s):
Versus what it's worth now? That's exactly right. That is the interest in the business is your separate property assets. So you say, okay, what was the separate property asset in this case? The business interests worth when I got married and what's it worth now? And you're right, just like you said, the increase would be marital property, but what that would require is us doing a, what we call a retrospective valuation. What was Eric Wolf's interest in the business worth at the date of marriage and what is it worth now? So that would require two separate business valuations potentially. Okay, well,

Ryan Kalamaya (10m 4s):
Let's talk about the stock portfolio because that's when the aspects of tracing really become apparent, kind of, we talked about the wild west and you said California had very specific provisions with regard to tracing. So when we're getting into the stock portfolio and we're tracing the stocks from, you know, from one to the other, where are the cases in Colorado that are guiding us because 14, 10, 1 13, does he specifically outline what you as a financial expert are supposed to do on tracing? So we're kind of left to case law telling you how to do your job. So what are the cases that you're referencing when you're doing this work?

Andy Baum (10m 42s):
There's kind of two approaches to how you, you look at the stock portfolio. And then there are cases that attorneys frequently used to justify those approaches. And those two approaches are called the aggregate approach and the strict entity approach. And I'll, I'll give an example here. Just a very simple example. But the real question is, is, is, is statute says increase in an asset is marital property. But the question is which case law and a court rulings to my knowledge, don't really clarify is what is an asset is an asset, an individual stock, or is an asset, the account that you hold multiple stocks.

Andy Baum (11m 25s):
And here's why that matters. Let's say you have a brokerage account with two stocks in it, and then you've got IBM and you've got Microsoft and you get married. And that the date of marriage, both of those stocks are worth $50. And then the IBM stock goes down to $25 and the Microsoft stock goes up in value to $75. Well, the account and that's that's at the date of, you know, permanent order separation. The account in total is, was worth a hundred dollars at the date of marriage and it's worth a hundred dollars now. So if you're looking at the account as the asset, the account hasn't gone up in value, and the separate property holder of that account would say, count was worth a hundred dollars.

Andy Baum (12m 7s):
Then it's worth a hundred dollars. Now it's all my separate property. But if you consider the asset to not be the account, but each stock held within the account, you would say, no, no, no. The Microsoft stock has gone up in value by $25. So that share is actually $25 marital property. And the rest is separate property. And then because the IBM share went down in value, it's all separate property. So under that approach, the account would be $25 marital property and $75 separate property instead of entirely separate property. And I've seen both of those approaches made. And the case that is used for saying that the entire account is one asset is in marriage of Powell.

Andy Baum (12m 54s):
And then the case that I've seen, where they say, you know, you need to look at each specific asset is, is in marriage, a balancing, oh, I'm sorry, let me clarify.

Ryan Kalamaya (13m 2s):
Right. And we in balancing is a case kind of involving, you know, when we dealing with stock options and some other things. So to kind of, to summarize if we had Eric Wolf and he had a, a stock portfolio, it was a hundred dollars when Melanie and him got married in California, it's worth a hundred dollars when they get divorced under Powell. And you're looking at the kind of strict entity in that. It's all just one brokerage. It would be, there's no marital property because there's no increase in value, but Burford then you're getting into which stock went up and in further confusing is if you have IBM, that has gone down in value. And then it's subsequently traded to Tesla for example, five years ago.

Ryan Kalamaya (13m 45s):
And then Tesla goes through the roof. What, in that circumstance, what, what happens?

Andy Baum (13m 49s):
So let's say it was $50. It goes down to 25. You sell it when you sell it. Those entire sales proceeds are separate property. And then you take that $25. That's separate and you follow it. And it goes into Tesla and you buy Tesla and it goes up to a hundred dollars. We'll say it's probably much more than that, but a hundred. Well then, you know, this is what I mentioned earlier. Separate property cannot increase in value. Your Tesla share. That's where the a hundred dollars is still your $25 a separate property, and then $75 of marital property. And then let's say you sell that Tesla share for a hundred dollars. Well, then those sales proceeds are still going to be $75 of marital property and then 25 of marital of suffer property.

Andy Baum (14m 35s):
And the way to kind of think about it is, is this like the game that you play with the ball. And they're like, when you go to a nuggets game and they're, they're moving the cups around and the balls in one of the cops, the ball is your $25 of separate property. And when you're tracing, you got to keep your eye on the ball and not worry so much about the other stuff, because that's really all that matters is that $25 a separate property and following it and saying, where is it going? And do you think

Ryan Kalamaya (15m 3s):
It's fair to say that that ball, that you're tracing, oh, or following at the nuggets game, it just gets smaller and smaller and smaller because of the way that the law works here in Colorado.

Andy Baum (15m 16s):
That's correct. Yes. It can only shrink. It cannot grow. That's the number one thing to remember if you see a tracing and somebody's claiming that they have more separate property, the end of the marriage, then at the beginning, that's a huge red flag. Unless of course we're talking about, you know, there were gifts received or things like that, but yes, over time, you know, especially if you hold stocks, they decrease in value. Especially if you trade a lot. If you take money out of an account for something that can't be traced. If, I mean, if you spend separate property on travel or restaurants, it's gone because it's not, it's not going into an asset that still exists. And so all those things, we call it a demonition dimunition of separate property.

Andy Baum (15m 56s):
And so, so generally the rule of thumb is the longer a marriage. And the more activity there is, as far as the assets that contain separate property, the more dimunition you're going to have. And so a lot of times press and I'll look at a case and somebody says, I want to trace some separate property over 10, 15, 20 years in this account that was being traded every day or every week. We're going to say, I mean, yeah, w we'll give it a shot. We can do it, but there's probably going to be a lot of dimunition of separate property. And it's going to cost a lot to follow, you know, to trace it through these multiple time periods and across all these transactions.

Ryan Kalamaya (16m 33s):
This episode is brought to you by our law firm. Kalamega Gosha Amy. And I describe our law firm as an innovative and ambitious trial team that pushes the boundaries to discover a new frontiers in family law, personal injuries in criminal defense in Colorado. We currently have offices in Aspen, Glenwood Springs, Edwards, Denver, and Boulder. If you want to find out more, visit our website, calamansi.law. Now back to the show, When you say it takes a lot of time, what does that work entail handy? I mean, do you, are you sitting down with each month's brokerage statement and going through every transaction?

Andy Baum (17m 15s):
That's correct. We luckily the process has become a lot more automated. We have a software that we use called ScanWriter. And what that does is you can send me your bank of America, your Merrill Lynch, brokerage statement. And I have a software that will read it and download each and every transaction. Every time you, you bought a stock, sold a stock every time there was a stock split, every time you received interest, every time you receive a dividend, all of those things impact the mix of separate and marital property in the account. So they all need to be tracked. Generally, there are exceptions, but all of those transactions impact separate property and need to be accounted for. And so what we do is we'll put that into our reader and then that goes into Excel and we kind of have to clean the data.

Andy Baum (17m 57s):
And then we have an Excel model and we can run different tracing of shrimps assumptions on that model, but it is quite, it can be a tedious and detail oriented process, for sure, especially if there's a lot of, there's a lot of transactions and it's a long time period

Ryan Kalamaya (18m 13s):
Mutual fund or a hedge fund that is trading actively trading. You own the mutual fund, but that mutual fund is Tesla, Netflix, IBM. And just churning

Andy Baum (18m 26s):
What happens in that circle, then it's not as complicated because the asset is your interest in that mutual fund. And we don't really care what, what is going on within that mutual fund, that, that wouldn't even be feasible as far as tracing. We just look at, okay, you purchased the mutual fund for X dollars. What's separate property. Let's say, that's your separate property basis. What is the one share of the mutual fund now worth today? Did it go up or down in value and the same thing with, with a private equity fund or a hedge fund, if you invested in private equity fund, you know, what you bought in at, in the private equity fund or hedge funds usually send out quarterly statements saying, Hey, this is what your interest in our fund is worth. So

Ryan Kalamaya (19m 5s):
If Eric Wolf's a hedge fund manager, it's about how much his hedge fund is worth at the date of marriage versus now it's not all the stocks that he's trading because the asset that you're defining is the hedge

Andy Baum (19m 19s):
Fund business. Yes. Yeah. I, I would clarify by saying more. So if he's a hedge fund investor, if he's a hedge fund manager, that would be a separate thing where we would value his interest, his ownership interest in the hedge fund as a manager. But if he's a hedge fund investor, it would be, yeah. Just what is his interest in the hedge fund worth at the separate property date and versus what is it worth at the date of separation? What

Ryan Kalamaya (19m 41s):
Happens Andy, if Eric says, you know, I did this all in California, California's got very specific rules. Doesn't Colorado follow those rules because I, you know, I had this stock portfolio in California, doesn't California law apply.

Andy Baum (19m 56s):
Yes. You know, that's more an argument for you to make, but, but we can and have done it both ways. You know, when I started working for Preston, I actually worked on a large case where in California increases in separate property are separate. And so the attorney for the client was making that argument that even though it was in Colorado courts, California tracing law should apply. And we did it both ways. We did it under California tracing law, and then under Colorado statute. So you can make that argument for sure. And we can provide you with the tools and the support to make that argument. And then it's just a matter of whether the trier of fact buys that. So

Ryan Kalamaya (20m 35s):
Essentially what you were asked to do, or to say that, geez, Eric, he basically lost several million dollars by moving from California to Colorado. That's unfair. And it's up to the divorce attorney to make that argument. You, as a financial expert are just arming the divorce attorney with the quantitative of mounts. So you can say, this is what have happened under California law, the dollar amount versus the dollar amount here in

Andy Baum (21m 0s):
Colorado. That's correct. Yep. We're providing them with a number to give the judge. And I mean, because Colorado is so undefined, as far as tracing approaches, we will provide, we've worked with a lot of attorneys that take different approaches as far as just how to treat separate property and withdrawals and increases and et cetera. And we, they will say, Hey, please run an under this assumption or that assumption. And we can do that to provide them with the tools so that they can tell the judge, this is why we think that this approach is most appropriate. And this is the number of separate property that you come up with using that, that approach. Okay. So let's shift

Ryan Kalamaya (21m 35s):
Gears a little bit. Eric Wolf, he's got the stock portfolio, he owns it at the data marriage. What happens if over, during the marriage, Andy, Eric is depositing money into that stock portfolio and, you know, making investments. What, what happens when you have a combination of marital property, the property deposited after the date of marriage versus what was in there before?

Andy Baum (22m 1s):
That's a good question. That becomes what we call a commingled account. It's a co-mingled account. It includes separate property and marital property. And because of the way that Colorado treats increases in separate property, almost all accounts are co-mingled accounts because they generally increase in value, which, you know, people will call the accountant's full employment act because we have to determine we have to uncover mingle the account. But yeah, there's two ways that when you have a beginning account, that includes only separate property that marital property can come in and that's when the separate property increases in value or when the, you know, when additional marital funds are put into the account. And then, so then the next question is, okay, we have a co-mingled account and money comes out of that account.

Andy Baum (22m 43s):
Is that money coming out of the account? Separate or marital or a little bit of both.

Ryan Kalamaya (22m 47s):
Right? So if Eric and Melanie moved to Boulder, buy a house at the base of flat irons Chautauqua, and he withdraws money from that stock portfolio, walk us through what you're looking for in a, and does it matter if that house is separately titled or jointly titled?

Andy Baum (23m 4s):
Okay. I would say first of all, generally, I mean, you can make arguments to the contrary and a lot of attorneys have, but generally, if he buys that account in joint title, then whatever equity he puts into that house is marital property just solely due to titling. So that's something to look at, right? So

Ryan Kalamaya (23m 22s):
He, if he withdraws a million dollars from that account, the stock portfolio keys, then doesn't matter if what the percentage is of what he withdrew, but what went into the house is now a marital property, but what what's remaining, what happens if he withdraws a million dollars from that stock portfolio, but there's still $9 million left in that portfolio.

Andy Baum (23m 46s):
So we would look at different ways to classify that million dollars that he withdrew. But as long as that stock portfolio is still titled in his name, whatever separate property hasn't withdrawn, still remains in that account. But let's say that he titles the house in his name only. So then theoretically, he can take separate property in that account and he can move it into the house and it remains his separate property. But then the question is, let's say he takes a million dollars in cash. Well, I mean cash, you can't, when you're looking at cash, you can't really tell there's no way to tell marital dollars in separate dollars. So there's a couple of different approaches. The default approach, if there's no stated intent, as far as his intent to use separate or marital money is what we call pro-rata.

Andy Baum (24m 28s):
So when you're doing a tracing and I talked about all those different transactions, like dividends and interest and sales and stuff like that, the reason you have to track all of those is because you have to know what the separate and marital mix of money in that account is at any given time, because you have to know what it is when, when money comes out of that account. And pro-rata is, let's say we know that the account is 60% separate, 40% marital under pro-rata. When a million dollars comes out, we're going to say, okay, 600,000 of those dollars is separate. And 400,000 of those is marital. The argument can also be made. And these arguments are generally supposed to be supported by the intent of the party. Let's say, Eric says, I intended to use my separate property to buy that house.

Andy Baum (25m 12s):
I titled it separately. I intended to use my separate property. I even have, this is very rare, but let's say he has an email where he sends an email to his financial advisor and says, I want to pay for the house, the down payment on the house from this account, because I want to use my separate property. Well, then, then his argument is that he intended to use his separate funds only to purchase this house so that when you pull that million dollars out of the brokerage account and put it into the house for tracing purposes, you assume that that all those million dollars is separate. And then, you know, you can also make the converse argument where he says, this is a marital house. This is what we're going to live in. And I titled that jointly with my wife, and this is a marital house we're living in there.

Andy Baum (25m 53s):
I tended to use marital funds. So in that case, you can assume that that million dollars coming out is coming only from marital funds. And I've seen all three arguments made separate first marital first, or pro-rata.

Ryan Kalamaya (26m 6s):
So in the, if Eric withdraws a million dollars separately, solely titles, the house, then he's going to be able to under a pro-rata approach say, well, 600,000 is separate property. And then of course you're dealing with the increase on the value of the house, but then you you're preserving, you're keeping your eye on the ball and that's $600,000,

Andy Baum (26m 26s):
Correct? That's correct. What other

Ryan Kalamaya (26m 28s):
Things are you trying to keep your eye on, on the ball? So to speak, to continue with that metaphor when you've got a running total of the separate property, when you're doing a trace.

Andy Baum (26m 39s):
So the running total is important, especially when you're using those two approaches. What I call a tent based approaches where you say I intended to use only separate property are intended to use only marital property. And the reason that a running total is important is because Eric can say, Hey, I intended to use separate property to fund that million dollars. But if you're doing a tracing and you are keeping a running total of how much separate and how much marital is in the account at any given time, well then let's say that there's only $300,000 of separate property in the account at the time that he took out that million dollars, would you say, great, Eric, you intended to use your separate property, but you only had $300,000 of separate property in that account at the time that you withdrew that million dollars.

Andy Baum (27m 22s):
So therefore the remaining 700,000 has to be from marital property. You know, that it can be the other way around to you. He says, I intend to use marital. And there was like 300,000 of marital. That's all there is in the account. You can make something from nothing. And so that's why it's important to keep this running total, to know how much separate and marital is in the account at any given time. What

Ryan Kalamaya (27m 41s):
Happens, Andy, if Eric uses that stock portfolio and takes out a loan to buy a house,

Andy Baum (27m 48s):
Okay, that's a good question. Loans loans can be very confusing. And w the simplest way to think about it is that alone isn't separate or marital property alone is a bridge between the asset that you buy with the loan proceeds and the money that you use to ultimately pay down that loan. So it's kind of, you don't know, let's say somebody takes out a loan and buys an asset. You don't necessarily know whether that asset is separate or marital property until you know, what money was used to pay down that loan. Because again, it's a bridge, it's a temporary holder between something you're buying and what your actual money that you're using to pay for it.

Andy Baum (28m 31s):
Right.

Ryan Kalamaya (28m 32s):
But the loan, if, and I wasn't really clear in terms of the example, but if the loan, if portfolio or separate property is used as collateral for the loan, and that loan is a marital debt, it doesn't necessarily, it doesn't convert the separate property portfolio into marital, just because it was used as a loan during the

Andy Baum (28m 55s):
Marriage. That's correct. But what somebody can argue is that because you used your separate property as collateral, that kind of shows your attention to, you know, a lot of times during the marriage, there'll be outstanding debt. And so we don't necessarily know at the date of separation, what money will be used to pay down that debt because it hasn't been paid down yet. And so the court has to make an assumption, as far as let's say, you took on debt to purchase a house. Does he intend to pay down that debt with separate property or marital property and, you know, using if he uses his separate property as collateral for that loan, that would be maybe an indicator that he intended to use his separate property to pay down that debt so mean it's confusing because you don't, you don't know what funds have because the debt has been paid down.

Andy Baum (29m 47s):
You don't know what, whether separate or marital fund is going to be used to pay down that debt and you have to make it as much,

Ryan Kalamaya (29m 52s):
Right? So if Eric and Melanie buy a house, they get a mortgage, and then they use the stock portfolio over time, Eric separate property, or a combination that co-mingled account to pay down the mortgage. Is that, what are you tracing the separate property that's going into paying down that, that mortgage,

Andy Baum (30m 10s):
Even if it's a joint mortgage, okay. Let's say it's a joint mortgage and the house is jointly titled. Okay. So every time this is kind of, again, following the ball every time that Eric uses his separate property to pay down the mortgage, he's essentially moving his separate property into a jointly titled asset, and therefore converting it to marital property as he does it, he's cutting off a piece of the ball and moving it into the house. And the ball is turning into marital pro. So it

Ryan Kalamaya (30m 38s):
Would matter if that house was solely titled in Eric's name and the mortgage was solely titled in his name. And then over time he uses the portfolio to pay down that

Andy Baum (30m 49s):
Mortgage. Correct? Yep. And wife is going to probably argue if the mortgage is still out, seeing it, the date of marriage, Hey, he actually intended to use all his separate property eventually to pay down that mortgage. So therefore you should take all the separate property that is needed to pay down the mortgage and convert that to marital property, to satisfy the mortgage where Eric would say, no, actually I probably was going to use marital funds to pay that off. And so you'd look at what he was doing too.

Ryan Kalamaya (31m 18s):
Yeah. It's a fascinating, you know, in terms of separate property, because you have both the value of the house, let's say it's a million dollar house. And I mean, we've been going through in part because of from California and elsewhere, people are moving to Colorado, especially up in the mountains. So property prices have increased. So you have that increase as an opportunity, you know, a marital property, if the house was separate, but then you also have the payment down of most people have mortgages. And so you have the payment of the debt, which increases the equity. So would you agree that there's two opportunities in real estate for marital property, both the increase in value of the real estate versus the reduction of debt against that house?

Andy Baum (32m 4s):
Correct. I guess what you're referring to is appreciation equity versus I guess I'd call it direct equity. And so appreciation equity is always going to be marital direct equity depends on whether that direct equity was funded with separate property or marital, right?

Ryan Kalamaya (32m 20s):
Because if the reduction of the mortgage over is $10,000 per payment, but that $10,000 is separate property to begin with. You're able to trace that and, you know, keep your eye on the ball. And it's that reduction in debt. It's not necessarily marital it's because you're tracing it from separate property, correct?

Andy Baum (32m 39s):
Yep. It's taking separate property from one place and moving it to a new.

Ryan Kalamaya (32m 44s):
Now let's talk about income tax considerations. What are things that you're looking at if Melanie and Eric are paying capital gains or dividends on that stock portfolio that he owned when they got married? What does that matter?

Andy Baum (32m 58s):
Generally? So income taxes are on income and income earned during the marriage is marital property income is marital property. So generally tax liabilities are marital liabilities. And if somebody uses their separate property to pay an income tax liability, generally that's a marital liability. Then I consider that generally to be a gift to the marital estate. I mean, it can be considered by the court saying, Hey, I use my separate property to pay marital liabilities. The one instance where a tax liability is a separate property liability is let's say somebody's at the date of marriage holds Tesla stock and it's worth a thousand dollars a share.

Andy Baum (33m 43s):
And they only paid a hundred dollars a share, you know, way before the marriage, but at the date of marriage, it's worth a thousand dollars a share. So you, so, so you have a share of Tesla, it's worth a thousand dollars. It's your separate property. And let's say the first year of marriage, you sell that share of Tesla. Well, you're going to, oh, you're going to owe tax on that. And then let's say you sell it for a thousand dollars. You're going to owe tax on that. And that gain was achieved before the marriage. That's a, you owe tax on a gain relating to your separate property. That debt is a, that tax liability is a separate property tax liability. And if it's paid with separate, if it's paid with marital funds and not pay with separate funds, then I would say that the, the marital or the separate estate, the separate Tiser owes a reimbursement to the marital state.

Andy Baum (34m 28s):
Got it.

Ryan Kalamaya (34m 29s):
So if there is a stock portfolio that was had a significant tax bill at the date of marriage, and then, you know, fast forward a couple of years, once that tax bill becomes due during the marriage, if the marital estate pays it all, then Eric would need to reimburse the marital estate for what he would have owed at the date of marriage. That's correct. Okay. What about stock options? And do you, like, how are those treated? I mean, the case in your marriage at Powell, it dealt significantly with stock options. What happens in that circumstance with separate property and tracing? So are you,

Andy Baum (35m 6s):
I don't recall, was that an employment related stock option or, yes. Okay. So one thing with employment is stock options in conjunction with employment are employment-related income. And if you, you know, for your efforts, you know, a, a party's efforts, if the stock options are awarded as compensation for the one party's efforts during the marriage, then they are marital property. But if they are awarded wholly or partially for efforts that they know put forth prior to the marriage, or we'll put forth after the marriage, then those are separate property. And so it gets tricky. So, you know, was the stock option awarded for your past service or is it awarded for your future service?

Andy Baum (35m 51s):
Another thing that we have to look at is there's some case law that, that looks at vesting are these stock options vested, and they're not vested and they're not necessarily property and therefore they can't be marital property. And then one other thing that we can calculate is called the time rule formula. And that looks at, you know, if the period of, you know, service that somebody is providing that in order to get these stock options, straddles the date of marriage or the date of divorce, then what we can do as a time rule, we can say, okay, 60% of this stock option relates to service that will be done during the marriage. And 40% relates to, you know, service that will be done after the marriage. So based on that, 40% of the value of this option is separate property.

Andy Baum (36m 32s):
And 60% is marital property. You,

Ryan Kalamaya (36m 36s):
Financial analysts will do the same thing with a para or defined benefit retirement plan, right? Where if someone was working, they were a teacher, Melanie was a teacher and had acquired some service before she met Eric in para, which is the defined pension plan with, for teachers in Colorado. And then they get married and then she continued being a teacher. Then you can figure out, well, her dates of service, you know, 40% were before the marriage and 60% were after the marriage. And so you can do a time role and figuring out what portion of those retirement benefits, as well as stock options are marital versus separate. That's

Andy Baum (37m 14s):
Correct. Yeah. We'll work with, we can work with para and other retirement plans, and then we can do present value calculations to figure out what was their benefit, what was the retirement benefit that they had earned when the marriage started? And what's the retirement benefit that they've earned now. And then the Delta between those two is the marital increase. Yep, that's correct. Yeah. I mean,

Ryan Kalamaya (37m 33s):
Or to explain these concepts to clients and they are frequently confused, upset specially under the Burford, when you explained to them that essentially the, you get to cherry pick, you know, the marital, the appreciation. And obviously if someone like Eric who has, you know, separate property, they are extremely upset whenever I have to explain that to them. And then they also have to be advised, or we have to tell them in terms of how much it's gonna cost, but it can be, you know, often worth it. And I think it's fascinating work, you know, what you guys do, and we could go on and on. And, but you know, Andy, thank you so much for the time. And you know, if people want to find out more divorce lawyers or other people going through a divorce that may have separate property or business valuations, where can they find you?

Andy Baum (38m 21s):
Yeah. Our, our website is Harper hofer.com, H a R P R H O F E r.com. And my email address at the firm is my last name B as in boy, a U M. And that's at Harper Hofer com

Ryan Kalamaya (38m 36s):
And Andy, what besides just tracing, just generally give our listeners what weather work do you guys do?

Andy Baum (38m 43s):
A lot of what we do is, is business valuation. And then we'll do a income analysis where we're looking at each party's income for maintenance and support purposes. And we'll also value loss of value pension plans. I'm like somebody interested in a para plan. So that's the big areas is tracing income analysis and business valuation. I

Ryan Kalamaya (39m 5s):
Mentioned, we had an episode with Kim Willoughby with trust. You, you will also value beneficiary interests in, in trust, right?

Andy Baum (39m 12s):
That's correct. Especially if they contain assets that are not necessarily, you know, easily where the value can't just be easily looked up all.

Ryan Kalamaya (39m 20s):
Andy, thanks again for joining us on divorce at altitude, lots to talk about with tracing. It can get really complex, but for people that need you, they know where to find you now, but thanks again for joining us and the time today.

Andy Baum (39m 34s):
Yeah, no problem. And like you said, sometimes there's enough money at stake to where it's worth the expense to do it. Absolutely. Well, thanks again, Annie. All right. Thank you for having me.

Ryan Kalamaya (39m 44s):
Hey everyone. This is Ryan again. Thank you for joining us on divorce at altitude. If you found our tips, insight or discussion, helpful, please tell a friend about this podcast for show notes, additional resources or links mentioned on today's episode. Visit divorce@altitude.com. Follow us on apple podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube. You can also find Amy and me@calamansi.law or 9 7 3 1 5 2 3 6 5 that's K a L a M a Y a.law.