Recent Posts in Community Property Category

Advice for Couples in 2012, Including How to Balance Power in Your Marriage! 

It has been my repeated experience that, in anticipation of a divorce action, an unethical or abusive spouse will take strategic steps to hide assets and obfuscate the methods used to hide them. The ramifications to the non-managing spouse can include not only an unfair disbursement of community assets upon resolution of the case, but also manifest into reduced calculations of temporary and permanent spousal support and child support. 

California family law attempts to minimize the potential for financial fraud during the life of a divorce action. For example, it creates rules for mandatory disclosures of assets. It creates fiduciary duties for managing spouses. It creates methods for discovery of financial and asset information (but only in the context of a legal action, after the relationship has broken down). It creates pre-judgment and post-judgment penalties for non-disclosure. 

In a perfect world such legal tools alone would fully prevent the potential for financial dishonestly between separating spouses. But the reality is that the law routinely fails to protect the financial interests of the non-managing spouse in this regard, and the root cause of that failure occurs because non-managing spouses don't take steps to equalize the playing field when it comes to information about family finances during the course of the marriage. Stated another way, individual non-managing spouses are often unable to utilize the tools that the law provides to ensure they receive a just and equitable share of the fruits of the community's efforts during the course of the marriage because they lack the information necessary to have their lawyer fully protect their interests.  Too many non-managing spouses wait until the time of separation to learn about the family finances.  By then, non-managing spouses and their attorney are playing catch up, and not always winning. As such, it is of paramount importance that a non-managing spouse be proactive in learning as much information about the family finances as possible, and do so not only on the eve of a divorce, but also during the entire course of the marriage itself.   In this day and age, knowledge is the coin of the realm.

Economists recognize that one source of market failure (i.e. inefficient allocation of resources) is caused by a phenomenon called asymmetric information. Asymmetric information affects decisions in transactions where one party has more or better information than the other. In adverse selection models, the ignorant party lacks information while negotiating a contract to the transaction. Common examples of information asymmetry include 'insider' trading in the stock market, or buying a 'lemon' used car. Understanding and combating asymmetric information is crucial to economists because market failure leads to net losses for society as a whole. Understanding and combating asymmetric information should be equally important to the non-managing spouse and his/her attorney because of its strong potential to lead to inequitable settlements or trial results.  In the economic sense, asymmetric information between spouses about the family finances is a form of market failure. To be sure, if you are contemplating or undergoing a divorce action, you will (in most cases) effectively be negotiating a transaction that will bind you and impact your financial future.

The best way overall way to combat a managing spouse 's tendency to commit acts of misfeasance or non-disclosure regarding financial interests is to equalize the flow of financial information from the very outset of the marriage, with information parity being a non-managing spouse's goal.

Hand-in-hand with the goal of information parity is a mindset that fosters such parity being present throughout the marriage. That mindset is, simply stated, one of equality and mutual appreciation. Two people will divide labor in a marriage so as to maximize their relative strengths and weaknesses, and in so doing the synergy benefits the martial community as a whole to a greater extent than either person could do individually. Economists refer to this phenomenon as comparative advantage, and recognize that such a situation is optimal in the context of maximizing social utility. So too is comparative advantage optimal for managing a household. 

As a simple 'traditional' example, assume Chris and Pat are married. Chris has a greater income earning potential due to holding a doctorate degree and having a good network of people to whom Chris is favorably known in the locale. Pat has greater domestic abilities due to having a bachelors degree in nutrition a work background in home decor. Based on these comparative strengths, Chris and Pat decide that Chris will work full-time and Pat will take care of the home full-time. Pat's excellent meals keep Chris energized and in good health.  Pat's superior aesthetic tastes keep Chris in style with cool cloths. Chris's boss comes over for dinner and is impressed by the feng shui of the domicile. Over time Chris gets promoted and raises. Chris uses the additional income to make financial investments, go on vacations with Pat, and purchase a better home. By Chris and Pat each doing what they are relatively strong at, they, both individually and as a whole, are made economically better off. But more to the point, it is their interdependence that necessarily caused the mutual gain. The law recognizes this fundamental principal in the context of divorce by creating the concept of community property; that regardless of whether it was Chris's paycheck that allowed for the growth of assets, Pat's contributions to Chris's earned income are equally important and therefore necessitate equal division should Pat and Chris's relationship end. So as to a non-managing spouse's mindset, I strongly encourage all such people who are contemplating marriage, married, contemplating divorce, or involved in a divorce have one that recognizes their contributions to the community and requires takes a role.

On the practical side of things, here is a list of information parity objectives that I believe healthy marital relationships should achieve:

• Spouses should store copies of written financial documents in a safe place and where the other spouse doesn't have access.
• Spouses should have all depository, investment, retirement, and debt account numbers written down in an asset ledger. Annual inventories of all assets with a value over $500.00 should be maintained and signed off on by spouses and kept in the asset ledger.
• Spouses should keep copies of income information, including payroll stubs and other documents showing income such as rental checks from investment property or brokerage statements from securities dealers. 
• Spouses should copy and store all financial account information from banks savings and loans, credit unions, particularly monthly statements. Spouses should also copy and store other banking information such as passbooks, check registers, and deposit slips. 
• Spouses should agreed to have all financial information statements should be sent to each spouse individually, directly from the applicable financial institution, and be received only at that spouses primary residential address (and not, for example, at a business). If one spouse insists on receiving their financial information from home or stops receiving financial information mail at the residence, it is often a red flag. 
• Spouses should maintain copies of tax documents, including personal tax returns and business tax returns, and attached forms, for the preceding five years.
• Spouses should receive and keep business financial statements, including net worth and income statements, in the case of a small business.
• Spouses should keep copies of all wills and trusts, and attachments thereto (such as a grant deed that has been recorded in favor of a trust for the benefit of the spouses).
• Spouses should keep copies of all life insurance policies.
• Spouses should keep copies of all outstanding debts incurred during the marriage that are in either spouses name.
• Spouses should keep a list of all personal and real property owned prior to the marriage.
• Spouses should keep a list of all safe deposit boxes and their contents.

Other tips you should know about and red flags you should watch out for to protect you from an unscrupulous spouse:

• Don't wait until things are going badly in the relationship to achieve financial information parity. Work towards that goal from the outset.
• Conduct asset searches of your spouse's biographical information by professional third-parties on an annual basis.
• Be aware that there is a statistically higher incidence of spouses hiding money in their second, third, or later marriages.
• Its best to have only a certified public accountant prepare the spouses' tax returns (as opposed to 'bookkeepers' of other unlicensed persons acting as pseudo-accountants), as they are subject to professional  conflict of interest rules. Do not sign any document seeking your informed consent to waive any conflict of interest rules with respect to accountants without consulting an attorney.   
• Particularly in the case of a small business, become knowledgeable about the business's employees, its normal income, its normal expenses, and how it accounts for them. A small business in particular is breeding grounds for accounting tricks to make it appear less valuable. I have seen this occur by the managing spouse: favor/incentivize cash payments from customers, funnel personal expenses as payments from the business, creating and paying fake employees (including the spouses' own children) and then voiding the uncashed checks after the divorce is final, or delaying new long-term business opportunities (i.e. taking new customer orders, signing new clients, or receiving transfers from escrow-like accounts such as paypal.com). It's important to be familiar with the inner-workings of a small business so you can note when something is amiss. Carefully review and copy customer/client payment agreements and accounts where a small business operates on a largely cash basis.
• Review financial statements on a regular basis. It is easier to access and digest three months of recent transactions than five years of relatively distant transactions. Look out for large or out-of-the ordinary deposits or withdrawals, and try to trace the source/end-point of the transaction to the best of your ability.
• Be aware that municipal bonds and certain savings bonds, because they are tax-free, are not reported to the IRS and therefore can be a vehicle for asset hiding because they do not need to be disclosed on tax returns. Look out for large investments in these assets.
• Non-managing spouses should be careful about signing joint tax returns that claim large deductions for various expenses, particularly in the case where a small business is involved. Although it might mean a larger tax burden in a particular year, in the context of a divorce it often results in lower spousal support and a lower business valuation, with attestation proof presented to a judge in the form of your signature.
• Big changes to the administration of finances can be a red flag: applying for large new loans, the closing of a bank account or change to an investment portfolio, particularly without the input of the non-managing spouse, might give opportunity to hide money.
• Know your spouse's boss well, and make sure they like you. I have experienced collusion between employers and employee so as to show short-run decreases (bonus or raise deferral) to income agreed on increases after the divorce is complete.  If you separate from your spouse, let your spouse's boss know that event has occurred in writing. 
• Do not sign deeds or other papers concerning real estate papers without consulting an attorney.
• Watch out for bank accounts opened in the name of spouse's children, as they do not get listed on that spouse's tax statements they can be a method of hiding community assets.
• Also watch out for overpayments on taxes. A managing spouse may try to receive a tax return later after the divorce is final by overpayment now, or alternatively filing amended taxes.
• Avoid 'loans' to friends or family.           
• Be a Missourian, i.e. don't take your spouse's word. Have the managing spouse show you with the documents that corroborate what they tell you about the family finances. 
• Don't allow fear of ruining the relationship, cultural values, or laziness prevent your pro-activity in becoming astute in the family finances. Defensive responses to your inquiries and requirements for financial information parity by the managing spouse may indicate diversion of community assets.  
• Always remember that the burden of proof rests on the accuser, not the accused, to prove diverted assets to a court. Take all actions to protect your interests with this rule in mind.

These are my thoughts at the end of 2011 - I wish each of you, and each of us, a Happy New Year in 2012, and I hope that we all strive to be transparent and ethical during the coming year!

Marriage of Margulis, Part 2 - Duties of Managing Spouses

Part One

Marriage of Greenberg (April 28, 2011) 194 Cal.App.4th 1095

Marriage of Ruiz (Opinion Published 4/14/11) E049310

In the recently published Fourth Appellate case of Marriage of Ruiz out of Riverside County, the parties' marriage lasted 32 years - married in 1973 (not the summer of love), they separated in March, 2005. A major bone of contention was how to characterize Wife's lump-sum worker's comp settlement of $250,000 received several years before the breakup, which netted $172,364 after attorney fees and costs. Wife believed it was all hers in the absence of proof by Husband of what portion of the money she received should be allocated between compensation for loss of past income verses what portion was intended to compensate her for loss of future earning capacity. Not surprisingly if Husband indeed had the burden of proof on this issue, he was never going to meet it - worker's compensation awards and financial settlements relating to personal injuries are simply gross numbers that some insurance bean counter crunches and then offers a gross settlement to resolve. No one in Wife's work compensation team was thinking about a fixed amount that was intended to resolve temporary compensation benefits as opposed to wife's lifetime loss of income producing ability - these claims just don't get settled in that fashion. Hence, if Husband had the burden of proving an imaginary apportionment he would never be able to do so and Wife would take all.

This case illustrates what can happen where one party or another has the "burden of proof" on a particular issue - often this is a short hand way of saying "you lose."

Four years later their divorce proceedings resulted in a discretionary trial court finding that $103,033 of the award was CP, with a balance of $71,311 being Wife's separate property. This finding was upheld on appeal as a reasonable exercise of discretion by Judge Irma Poole Asberry.

Wife argued that despite the statutory community presumption per Family Code section 760 that property acquired during marriage belongs to the community, existing caselaw (Raphael v. Bloomfield) (2003) 113 Cal.App.4th 617) required a conclusion that the award is community property only to the extent that it is intended to compensate for the injured spouse's reduced income during the marriage and before separation, and for injury-related expenses that were paid with community funds. She urged that the remainder of an injured spouse's recovery is intended to compensate her for their diminished earning capacity and/or medical expenses which continue after the DOS.

Therefore, the Wife here argued that Raphael carved an exception to the rebuttable presumption that all property acquired during marriage is community property, instead creating a presumption that the award is the injured spouse's separate property. If true, this would impose the burden of proof as to allocation upon the noninjured spouse. Hence, she argued, if neither party could show evidence of how the award was calculated the party with the burden of proof would lose. The record on appeal was clear that neither party produced any evidence one way or the other because - frankly - there was and could be none.

Judge Asberry correctly declined to find that the general overriding FC § 760 presumption could be trumped by this supposed exception. Since Wife evidently concluded her best litigation strategy was not to offer any compromise solution for determining the competing community verses separate property interests, the court applied a formula suggested by Husband for apportioning the award as between CP and SP. Wife took and all or nothing position that was a high stakes gamble, and she lost. Interestingly, the decision is clear that had she suggested some other valuation method the trial court could have found that was more equitable than Husband's proposal instead, and it would not have been reversed.

Play hard ball, get slammed.

The rule reiterated by the Ruiz court is simple, fair, and obvious. It is already established that period disability retirement payments which are received during marriage are community property, in that they are intended to compensate the community for loss of income that the injured spouse would otherwise have earned. Periodic disability payments received after separation are the separate property of the injured spouse alone for his or her diminished earning capacity. Citing the California Supreme Court in Marriage of Jones (1975) 13 Cal.3d 457, the Riverside justices stated "[s]o long as the marriage subsists, the [injured spouse's] reduced earnings worked a loss to the community. But such community loss does not continue after dissolution; at that point the earnings or accumulations of each party are the separate property" of each.  "[O]nly such payments as are received during marriage are community property."

But within the context of worker's compensation permanent disability awards, as was presented here, Raphael had concluded that the timing of the award (i.e., whether received before or after separation) should not dictate the outcome - instead the inquiry was what portion was intended to compensate the injured spouse for his/her reduced earnings during the marriage, which would be CP. Again, a question that is not likely to be answered by the non-injured spouse because they have no access to such information assuming it even was part of the settlement calculation; yet, this perhaps reasonably did suggest to Wife's attorney he might successfully argue that the burden of proof was hence placed upon the Husband.

The Ruiz Court decided that neither party had a burden of proof that would create a rebuttable presumption in the favor of one or the other because the trial court properly concluded that the award was part community and part separate property of Wife. The issue was then for the trial court to decide in terms of equitable apportionment of the competing interests. "In doing so, the court may use any method which fairly apportions the assets or its value between community and separate property interests. Because it is the court's obligation to make an equitable apportionment, neither party has the burden of proof in the sense that a failure of proof will result in an award of the asset in its entirety to the other party."

Thus, in equitable apportionment cases involving disability awards, which includes all hybrid mixes of community/separate attributes, a disadvantaged party (here the Husband who could not marshal much less control the evidence of what the worker's comp carrier intended when it settled Wife's case) does not lose simply because of a failure of their access to proof. Instead trial courts are free to fashion any result which works substantial justice. This was fair because nothing indicated that Wife had received any temporary disability benefits during the marriage that got banked - this lump sum settlement was all that she apparently received for the total loss occasioned to her, and to the community, for the injuries she suffered.

To the extent that the Wife argued the trial court's division of the CP amounts vs. the SP amounts was arbitrary, she had no right to complain because she never suggested any other measure that the trial court might use in supporting a different allocation scheme.

So, the lesson is this: Play hardball, get slammed..... (mediate your disputes instead, and don't disconnect from reasonableness - one never knows how a court might rule!)

Thurman W. Arnold, III, C.F.L.S

Q.  My attorney has used the word "tracings" several times, and I really don't understand how this works.  Can you give me a simple explanation?

A.  Unlikely (sorry!).

Tracings may be required by California law in a number of settings in order to find out what each spouse's share of the community property is. They generally show up in several recurring situations, but unfortunately for simplicity's sake there are numerous permutations of where tracings come into play. Chief among them is where cash or assets that was used to purchase property was "commingled" (think tossed salad with separate property lettuce leaves and community property mixed vegetables) at the time it was contributed. Please use the search engine at the upper right to see my Blog Articles for the definitions of community and separate property.

These include:

• Determining the community verses separate property attributes of an asset that was acquired with funds contributed during marriage that were a combination of each (CP and SP). This is called "characterization" - does the asset belong in whole or in part to the community estate, or to one party's separate estate, or both in different degrees? The community component is sometimes earnings that were used to pay down secured debt each month when, for instance, a mortgage principal payment is made for a separate property asset (a Moore-Marsden situation). It can include one time downpayments from joint bank accounts that contain community income or earnings (or separate property accounts that may have been commingled with joint funds or not or community property accounts that include separate property components) further complicated in the case of a refinance, and more.

• It is extremely common that a community property asset (acquired during marriage, possibly but not necessarily in joint names), or improvements to it, traces partly or 100% to a separate property source. Many parents 'gift' their child part or all of  the downpayment for the couple's first home. Or, a separate property asset (acquired during marriage but titled in one spouse's name alone - usually seen with real estate) may be purchased using joint funds.  In either event there is a tracing right of reimbursement per Family Code section 2640 to the respective community or separate property interests that bought it, in the event of a dissolution or legal separation. FC §2640 is in the top five of all California property division statutes and is critical for an understanding of what your legal interests are if either spouse has any colorable claims to separate property used during marriage. Many middle income and high asset property division cases are a puzzle map of assets that are not what they seem at first glance.

• There are a number of situations where reimbursement claims arise from the payment of joint or separate debts using money that the other spouse had an interest in (whether community funds or separate). Under limited situations there may be a right for the community, or the other spouse's separate property, to be reimbursed, but you will be required to trace these funds to claim them.

• Often intended or unintended transmutations have occurred. Family Code section 852 is the chief transmutation statute, and another of the top five California dissolution property statutes. Transmutations involve a change in the character of property, from community to separate or from separate to community or separate to the other party's separate property. These commonly require tracings in order to establish the FC § 2640 interest. For instance, husband and wife own a residence together in joint names. It was purchased during marriage. But there is need for a refinance, and one spouse's credit is bad. The parties agree that husband will borrow the money, and the lender requires that wife sign a quitclaim deed before escrow can close. Husband assures wife 'not to worry.' Wife signs the transfer deed and doesn't seek legal advice. She has unwittingly transmuted her community interest to husband's separate property. Years later the property has appreciated. What is Wife's interest? (Breach of fiduciary duty questions have to be the subject of a separate Blog but, again, please try our search engine for more information!)

Did I say I would give a simple answer?  No?  Good!

In order to unwind transactions during marriage where monies and property with separate and community property attributes have been mixed together, the "separatizer" (the party seeking to establish their separate property contributions to the community or separate property of the other spouse or partner) has the burden of proof to present reliable tracing evidence to the Court. In order to settle even mildly complex dissolutions as between the parties without going to trial, this information must be provided and laid out in a concrete manner to convince the other side that you have the ability to meet your burden.

Here are some of the rules that apply the mechanics of tracings in dissolution actions and legal separations.

If the commingled funds are used to purchase property, the party who deposited the separate funds may attempt to trace the source of the funds used to purchase the property to establish that it is separate because separate funds were used to purchase it. This may overcome the presumption that property acquired during marriage is community. Marriage of Mix (1975) 14 Cal.3d 604.

If separate and community property or funds are commingled in such a manner that it is impossible to trace the source of the property or funds, the whole must be treated as community property. Marriage of Mix, supra.

If the title to the property was taken jointly, tracing cannot be used to overcome the presumption from the form of title. Marriage of Lucas (1980) 27 Cal.3d 808, 813–814.

Direct tracing and tracing through family expenses are two independent methods of tracing to establish that property purchased with commingled funds is separate property.

Direct Tracing

Separate funds do not lose their separate character when commingled with community funds in a bank account so long as the amount of separate funds can be ascertained and at no time period were the funds spent down below the balance of SP claimed unless replenished with SP instead of CP. Marriage of Mix (1975) 14 Cal.3d 604.

If money is withdrawn to purchase specific property, questions of fact that must be determined include (Marriage of Mix, supra):

• Whether separate funds continue to be on deposit; and

• Whether the drawer intended to withdraw separate funds.

The party seeking to establish a separate interest in presumptive community property must keep adequate records. The party must show the exact amount of money allocable to separate property and the exact amount of money allocable to community property before it can be said that the money allocable to separate property is not so commingled that all funds in the account are community property. Marriage of Frick (1986) 181 Cal.App.3d 997. If the payments claimed to be separate were made periodically, each payment must have been made when separate property funds were in the account and must have been accompanied by an intent to use those funds rather than community funds. Marriage of Higinbotham (1988) 203 Cal.App.3d 322, 329.

Tracing Through Family Expenses

The second method of tracing to establish that property purchased with commingled funds is separate property requires a consideration of family expenses. This tracing method is based on the presumption that family expenses are paid from community funds.

If at the time the property is acquired it can be shown that all community cash and income in a commingled account was exhausted by family expenses, then all funds remaining in the account at the time the property was purchased were necessarily separate funds. Marriage of Mix, supra.

This method can be used only when, through no fault of the spouse claiming separate property, it is not possible to ascertain the balance of income and expenditures at the time property was acquired. See v See (1966) 64 Cal.2d 778, 784.

The spouse claiming separate property must keep adequate records to overcome the presumption that property acquired during marriage is community property. See v See, supra.  Most people don't.

The take-away:  If you are contemplating a divorce and have tracing issues, protect your records now so that they do not 'disappear.'  It can be very expensive to obtain bank statements and canceled checks dating back years, and with all of the bank failures and mergers today these records may become impossible to obtain.  If you cannot meet your tracing burden of proof, you lose on the particular reimbursement issue.

As you probably have guessed, tracings are quite expensive and typically involve the assistance of a forensic accountant. Moreover, not just any attorney will know what to do with this information!

    "(a) At a hearing on any order to show cause or notice of motion brought pursuant to this code, absent a stipulation of the parties or a finding of good cause pursuant to subdivision (b), the court shall receive any live, competent testimony that is relevant and within the scope of the hearing and the court may ask questions of the parties.

    (b) In appropriate cases, a court may make a finding of good cause to refuse to receive live testimony and shall state its reasons for the finding on the record or in writing. The Judicial Council shall, by January 1, 2012, adopt a statewide rule of court regarding the factors a court shall consider in making a finding of good cause.

    (c) A party seeking to present live testimony from witnesses other than the parties shall, prior to the hearing, file and serve a witness list with a brief description of the anticipated testimony.

If the witness list is not served prior to the hearing, the court may, on request, grant a brief continuance and may make appropriate temporary orders pending the continued hearing."

Family Code section 217 will cause a sea-change in day to day family court proceedings across our state, unless family court judicial officers ignore it to the limited extent possible by court rules.  It will likely have immense financial and resource consequences upon not only the courts but upon parties to family court proceedings.  It will force the state government in coming years to study whole new paradigms for resolving divorce and domestic partnership dissolution outside the adversary template, including those currently practiced in New Zealand and southern Australia. 

It will also pressure parties to consider mediation, and collaborative processes which occur outside congested courthouses, much more carefully.  The costs of adversary litigation are about to sky-rocket, making mediation even more appealing from a financial perspective (I have written extensively about the emotional and psychological benefits here an elsewhere).  There simply is no governmental money available to absorb the coming Elkins Onslaught. For more information about an alternative method for resolving family disputes, please visit us at www.DesertFamilyMediationServices.com.
  
At the same time, at least in the short run taken together with some of the other revisions that become effective next month, it may encourage more people to litigate more stubbornly and so make mediation seem less attractive than it did before the changes (just the reverse will be true).  Some folks will mistakenly assume that this invites the use of court hearings as a live-testimony forum for sharing unresolved complaints relating to their marriage or domestic partnership dissolution with the other party in open court.  Instead, judges will sustain objections to such irrelevant material and parties who seek to use Family Court as a platform to air relationship grievances will find themselves alienating the trier of fact in ways that will have adverse consequences to them beyond just the time and expense of the exercise. 

The purpose of today's Blog is to introduce you to section 217 and the new changes.  I will follow up with more articles in coming weeks.  Without a doubt the new rules will make all the information I provide on my websites more relevant and timely for my readers. 

• Request for Joinder
• Pleading on Joinder
• Summons on Joinder

It is important to name the plan correctly.  The plan is a separate entity from the employer.  Next, they do need to be properly served per FC section 2062.

Within 30 days the plan must respond by a Notice of Appearance.  However, they rarely do.  If they fail to, the clerk must enter their default.  As a practical matter, the Plan will likely accept the order of the court or any settlement you reach thereafter so long as it meets the plan administrator's requirements.

Thurman W. Arnold III, CFLS

www.ThurmanArnold.com

Stock options that are earned during the marriage, but vest afterwards, generally belong to the community. They are treated as deferred compensation, like certain types of pensions. Usually an employee is granted the right to buy stock, now or in the future, at a fixed price. They may be forced to sell that stock back to the company if they leave. What controls whether the options are characterized as community or separate is when they are granted and when they vest. If they do not vest at all, as where a minimum number of years of service by the employee are required which is not met (even where the employee-spouse quits after separation and so blows them up), they are neither separate or community property - instead, they are not viewed as a property interest at all.  In those cases they were a "mere expectancy" that never matured.

In cases where an employee must work for the company for a fixed number of years to be eligible, but the spouses or RDP's separate before those years have been served, the options have both community and SP attributes. To the extent that they result from post-separation efforts too, they must be apportioned between CP and SP. As with how interests in pensions are commonly evaluated, courts tend to follow a "time-rule". The time rule looks like this:

DOG to DOS
__________  X  # of Shares Exercisable = C/P shares
DOG to DOV
    
        DOG = Date of Grant
        DOS = Date of Separation 
        DOV = Date of Vesting

Stock options that are granted after the DOS are usually treated as the separate property of the recipient, even where some of the employee's contributions occurred before. This is because of the importance of what the employer intended to the analysis.

This Blog is intended just to give you some sense of the law over these potentially complex questions. As with everything, different facts can lead to different outcomes and stock options are complicated financial devices. 

Also, stock option disputes sometimes involve claims of fraud - as where a small closely held company or family business tries to funnel or manipulate how when the options are granted or vest in an effort to favor one spouse over another. 

Perhaps the only practical way that a former spouse or partner may learn that stock options exist or when they vest or are exercised is by the self-disclosure of the employee. The law is clear that spouses and domestic partners are required by their fiduciary obligations to make these disclosures. Refusals to disclose can have severe consequences under Family Code section 1101.

T. W. Arnold III
http://www.MindfulDivorces.com

Q.  I am considering filing for divorce, and am beginning to pencil out what the division of our assets and debts might look like.  What is a good way to go about this?

• Use net value numbers, i.e., equity in homes and automobiles.  Secured debt is subtracted from fair market value - it is not divided as unsecured debt would be.  If you take the house, you take 100% of the mortgage.

• Be sure to use realistic fair market value numbers.  Don't make your final decisions based on Zillow.  If your assumptions are flawed, your balance sheet analysis will be of limited use.

• Use wholesale Kelly Blue Book values for cars or at least make sure whatever yardstick you use is consistent for both parties.

• Obtain accurate and current pay-off information as to debts.  Typically that will be the value of the debts on the date they are assigned, as adjusted for Epstein Credits. 

• Don't treat apples and oranges as apples.  For instance, list pension assets as a class separate from other assets - the present value of IRA's, 401k's, and other defined contribution plans is always different than the present value of a bank account.  These pension accounts are not valued in real dollars but must be discounted, and that may require a pension forensic or CPA.

• Don't include separate property (the other spouse may dispute that characterization).  Pure SP doesn't go on the marital balance sheet. 

• Assign the debts, placing those numbers in parentheses to ensure they are subtracted and not added in your running total.  Remember that it doesn't matter in whose name a credit card is parked.  If a debt was incurred during marriage the general rule as between spouses is that each owes 50-50.

• Separate property debts don't go onto the balance sheet because they don't get evenly divided and if they were listed you may inadvertently charge yourself for half.

• Use total values rather than 1/2 community values.  These numbers get divided as one of the last steps.

• Don't include support or support arrears.

• Include Epstein credits.

• Calculate and note Watts' and Jeffries' claims

• List professional practices and businesses but realize you probably have no practical way to put a number on them, would be entirely guessing as to their value, and would probably be wrong anyway.  Understand that business are worth more than the sum of their balance sheets or book values.

• If you share this document with your spouse, be sure to write "Confidential Evidence Code section 1152 Materials" on it, which makes them inadmissible as evidence against you.  Otherwise you may find yourself stuck with your preliminary numbers when that is not what you intended.

• Realize that if you share this document, no matter how preliminary it is, with your spouse you will be creating in them expectations concerning value or division that they may become stuck on.

• Be careful how you treat negative equity on property.  For instance, if you own a car that is worth $15,000 but you owe $25,000 and want that vehicle awarded to you, the other party will not be charged for one-half of the $10,000 in negative equity.  

• Leased vehicles should be identified but have no value.  I believe it is a good idea to list everything that you own or owe whether or not it has a value or can be valued at that time, since this list becomes an important road map for you and your lawyer.

• Make a note of alleged breach of fiduciary duty claims, but don't value them.

• Don't include your separate property.  Include their separate property if you claim it to be all or partly community, but understand those aren't real numbers until a judge rules.  

• Don't leave the document lying around where someone else might find it.

• If property is held in one spouse's name alone but a mortgage or taxes were paid during marriage, or if it was improved or refinanced during marriage, understand that the community probably has some Moore-Marsden interest in that property but that you will have great difficulty figuring out what that is without expert assistance.

• Similarly, if one spouse owned property (i.e, real estate) prior to marriage and the other was placed on title during the marriage, note to yourself that the property has community and separate property attributes and understand you will need more information or help to value those competing interests.

• Make a note of all separate property contributions you made for the acquisition or improvement of any property.  These are called Family Code section 2640 credits.

• List all other reimbursements due to the community.  For instance, there are many situations where the community property is used to pay one party's separate obligations (i.e., child support from a previous marriage) and if you know to assert the claim the community may be entitled to a reimbursement.

• List consumer goods like furniture at garage sale prices unless there is something truly special about the items.  Nothing is valued at its purchase price or even its replacement cost new.

• Be sure to include loans from parents, work, or family members that were made during the marriage and assign those that relate to your family or work to you.

• Make a note of any gifts to one or the other of you alone that were used to purchase or improve community property, whether they were received before or during the marriage. 

• Look at your bank balances at the date of separation and assign those balances appropriately.  If your husband emptied the savings account the day before he walked out, list the amount he took under his column.

This is just a starting point and is valuable as a roadmap to get you thinking about what needs to be done to conclude the divorce.  Once you discipline yourself to begin to overcome any paralysis you might feel, the marital balance sheet will speak to you about what is important for you, what the issues are, and will give you some idea of what important paperwork you need to obtain to evaluate your interests now or in the future.  Get that paperwork at once.  You are going to have to do this exercise anyway once a legal actin is filed. 

This the some of the information that you must provide in your Declarations of Disclosure.  It is an efficient idea to use those forms from the beginning.  These California Judicial Council Forms include:

• The Fl-142 Schedule of Assets and Debts
• The FL-150 Income and Expense Statement
• The FL-160 Property Declaration

Getting started on this early will make any meeting with a family attorney cheaper and far more useful then if you've not even thought about these things.

To the extent you can determine values or ranges of values, add up the net equity in your column for the community property you want or get, and subtract 100% of the debts that are to be assigned to you.  Again, chances are there will be categories where you can't put a number on the items.  But if you had the numbers, then after totalling the total net to the other party, subtract the two net numbers.  One of you will show a higher number.  This number will reflect the over-credit amount to that person which needs to be equalized between you.  Divide this number by 2, and the person who netted more owes that resulting number to the one who received less.  This amount is called an "equalization payment."

This is just one way to do a marital balance sheet.  Often times there is no money to pay the equalization payment because all or most of the community is held in the form of personal and real property.  An equalization payment is no good to you unless you can collect it.  Perhaps you can get a promissory note secured by a deed of trust on the family residence that is awarded to the wife.  That is usually a bad idea - you don't want to become a bank, with all the attendant risks of default and depreciation.

Another option once you have these numbers are pencilled out is to go back and rethink how the property was divided.  Maybe you should take those Peter Max lithographs after all.  Maybe the residence or that vacant lot must be sold to raise money for the equalization payment.  It is frequently seen in Stipulated Judgments or Marital Termination Agreements.  It is not common in litigated judgments because courts generally must equalize the division at the time of trial, not in the future.  This is why property may be ordered sold to ensure an equal, current division of the estate.

If defined contribution pension plans exist these are a good place to find the money to assure the equalization payment is actually honored.  But a 401k with a net asset value of $100,000 might only be worth $80,000 after penalties and ordinary income taxes are charged on it.  Pensions can be divided without tax consequences (QDRO's) but if you are owed a $100,000 equalization, creating a new pension in your name and transferring $100,000 from the other party's interest in it is like being handed a check for $80,000. 

• Epstein Credits
• Watts Credits
• Jeffries Credits

This particular Blog addresses your question in terms of Epsteins - the next blog deals specificially with Watts and Jeffries credits. 

Epstein Credits

I have described Epstein Reimbursements in another Blog.  "Epstein credits" is a doctrine derived from the case of Marriage of Epstein (1979) 24 Cal.3d 76, 84-85.  It holds that as a general rule, courts must reimburse one spouse out of the community property who uses earnings or other separate funds after separation to pay pre-existing community obligations.  This commonly occurs with credit cards where there was a balance remaining when the parties separated that one or the other pays after that date.  Epsteins only apply to payments on the portion of a debt that existed at date of separation, and not new debt on an old card that was incurred afterwards.  The rule is not limited to credit cards but can apply to almost any class of debts.

Courts are required not to order this reimbursement if under the circumstances it would be unreasonable for the paying spouse to have expected reimbursement.  If there was an agreement that a party would not be reimbursed, if the paying spouse intended the payment as a gift, or when the payment is made on account of a debt for an asset that the paying spouse was or is using and the amount was not substantially in excess of the value of the use, the Court may decline to order reimbursement.  This idea of the value of use of some property acquired through debt that continues to exist after separation underlies the concepts of Watts credits and Jeffries credits, and is obviously implicated in your question since you occupy the house for which you seek credits and reimbursements.

So, Epsteins are almost always granted as to post-separation payments for expenses, or goods and services, that didn't leave a tangible asset behind that is now being exclusively enjoyed by only one of the two spouses. 

As an example of how this works if there is $15,000 owing Visa for that trip to Hawaii, some groceries, and a child's school tuition at the time of separation and one party pays it off or makes monthly installments on the debt with their earnings or other separate property after that date, a benefit has been conferred upon the community because a joint obligation has been extinguished or reduced.  That benefit must be equalized by a payment to the payor of one-half the amount paid or a credit or set-off against other property that gets divided.  One-half is paid because the paying spouse owed their half anyway.  Any portion paid before the DOS (date of separation) ordinarily will not be reimbursed. 

This is generally true even if only one of the parties actually took the trip to Hawaii, unless that trip was in breach of a marital or fiduciary duty (if the husband snuck off with his paramour to Hawaii, an argument exists that he should not be reimbursed for paying that portion of the debt over the wife's objection).  Family Code section 2625 directs courts to award a debt incurred by one spouse to them alone if debt was not "incurred for the benefit of the community."  Family Code section 2602 empowers courts to "award ... the amount the court determines to have been deliberately misappropriated by the party to the exclusion of the interest to any other party in the community estate."  FC section 2625 is a powerful and much underused statute (many attorneys seem to be unaware of it or try to bluff as though it didn't exist).

Compare this with a situation where a credit card was used to buy a dishwasher that the paying spouse possesses or receives in the divorce - since they are retaining a tangible asset it may not be fair to allow them to both keep the asset and get reimbursed for one-half its costs.  Applying Epsteins can become fairly fact specific.

In situations involving use of a family residence or other tangible assets that continue to exist after separation and which are used and enjoyed by only one of the spouses, an Epstein analysis provides only a part of the answer to the reimbursement question.  In effect first the amount of the Epstein reimbursements are determined, and then the question requires a Watts analysis to determine under equitable principles whether it is fair to actually order reimbursement and, if so, in what amount.

Hence, to resolve your issue you would begin by adding up the costs of everything related to the house that is spent to preserve or protect the asset.  Property taxes are included, but utilities are not.  The utilities you used after the physical separation are your obligation anyway, because they were not incurred during 'the marriage.'  (Please see the Blog Category "Physical Separation.")  Mortgage payments and insurance are considered, and probably the poolman or gardner as well.

Please continue on to the next blog for detailed infomation concerning Watts credits.

Epstein Credits and Fiduciary Duty Issues

Sometimes a spouse or domestic partner will raid the credit cards and take cash advances or buy a new wardrobe, or fix a car, during the weeks prior to separating.  If it later appears that their intention was to stick the other spouse for one-half of this expense, the presumption that this is a community debt (because incurred during marriage) may be overcome and so it may be assigned to the one spouse alone.  It is not fair to hold both parties responsible for debts incurred in anticipation of separation.

However, when one partner incurs a debt frivolously as opposed to recklessly before separation, in a situation not amounting to a breach of fiduciary duty - even over the prior objection of the other spouse - it is likely to be equally divided and Epstein reimbursements ordered.  Both spouses have, under California law, equal rights of management and control of the community property and community credit.

Courts in my experience are reluctant to find breaches of fiduciary duty in Esptein situations unless the behavior was fairly eggregious.  Charging 10 pairs of shoes at Macy's a month before separation may not be viewed as a big deal.  If the debt was incurred in pursuit of an illegal activity like supporting a drug habit or sex addiction, many judges are less reluctant to declare a breach. 

To illustrate another twist, if the credit card was used to pay the spouse's tuition expense instead a child's schooling as in my example above, it may also be unfair to charge the non-schooled parent with one-half the tuition portion of the credit card balance.  A court is likely to look at whether this schooling benefited the community in some way before splitting that debt betwen the parties - i.e., because of the schooling did the student spouse earn more money which was then contributed to the community standard of living and so confer a benefit on both?  Pure student loans are usually awarded to the party who incurred the debt as their separate property obligation. 

• If some or all of the funds on deposit you contend are your separate property can be traced from separate property (i.e., the inheritance) they will be confirmed to you unless your wife can establish you made a written agreement that expressed a clear intent that those sums would become community property (a transmutation)

• If the two of you made a written agreement, separate from the deposit agreement itself, that expressly provided that the deposited sums that are claimed not to be community property were in fact not to be community property then you will not be reimbursed.

Hence, you need the paper trail for the receipt of the inheritance monies into this joint account in order to establish they still belong to you as separate property.  As long as you do trace these funds, your wife's argument that you gifted the monies to her or the both of you by verbal agreement or by your conduct will not succeed. 

However, when monies are commingled over time this tracing becomes more difficult. Particularly in checking accounts, money comes in from other sources (like community earnings) and goes out (often to pay community expenses).  The question becomes which money is applied to what outflows?  
  
The law presumes that money that goes out of a commingled account is spent first on the community needs and expenses, meaning that what remains is more likely to be considered separate.  The law expects the community to pay community expenses, not that you first use your separate property - as long as their are sufficient community funds on hand.  If these community funds become exhausted then withdrawals of what is your separate remaining monies may be lost to the community.

In your situation you have a reimbursement claim for what she took and you should receive a credit on the marital balance sheet.  She may owe you 100% of the inheritance and 50% of the balance.  Your worst case is that she owes you half of what she took. Immediately begin to collect the needed bank and inheritance records to prove your claims.

Maintaining records during and after marriage is the most important thing you can do to preserve and protect your interests.  Unfortunately, few people realize this until after the horse has left the barn.

• The parties expressly agreed in writing to the contrary [FC §2641(e)]; or
• The contributions were for ordinary living expenses that would be incurred regardless of whether the spouse attended school, stayed home, or worked [Marriage of Watt (1989) 214 CA3d 340, 354].

If the loan is still outstanding at the time of dissolution, the balance is not divided but is instead assigned to the party who was educated or trained, except when the parties expressly agreed in writing to the contrary. [FC §2641(b)(2) (e).]

Nonetheless, the Court may reduce or modify the reimbursement and assignment of educational loans to the extent circumstances render such a disposition unjust, including the following [FC §2641(c)]:

• When the community substantially benefited from the education, training, or loan incurred for the education or training of the party. There is a rebuttable presumption affecting the burden of proof that the community has not substantially benefited from community contributions to the education or training made fewer than 10 years before the commencement of the proceeding. On the other hand, it is presumed that the community substantially benefited from community contributions to the education or training made more than 10 years before the commencement of the proceeding.
• The education or training received by the party is offset by the education or training received by the other party for which community contributions have been made.
• The education or training enables the party receiving the education or training to engage in gainful employment that substantially reduces the need of the party for support that would otherwise be required.

Professional licenses and education are not "property" that can be divided in divorce or legal separation in California.  Reimbursement for community contributions and assignment of loans under FC §2641 is the exclusive remedy of the community or a party for education or training costs and any resulting enhancement of a person's earning capacity.

However, importantly, the Court should consider the effect of the education, training, or enhancement, or the amount reimbursed, on the circumstances of the parties in ordering permanent spousal support pursuant to Family Code section 4320(b). [FC §2641(d).]

Q.  How are defined contribution plans divided in California dissolutions?

A.  A defined contribution pension plan is a plan in which the employer's obligation is based only on its annual contribution. The benefit for the employee on retirement depends on the value of the employee's account at that time. There is no need for expert testimony to determine the present value of a defined contribution plan at dissolution because its value equals [Marriage of Bergman (1985) 168 CA3d 742, 748-749 n4]:

1. The amount of contributions made between the marriage and separation, plus accruals; plus

    2.   Accruals between the date of separation and trial of the issue.

• Highest income level achieved,
• Years of service at retirement, and
• Age at retirement.

To determine the present value of such a plan, it is necessary that expert testimony, normally from an actuary, be presented. This testimony includes the expert's opinion as to present value, and what economic, health, and other factors the expert considered in reaching the opinion. [Marriage of Bergman, supra.]

The valuation of a participant's interest in a defined benefit retirement plan is calculated by [Marriage of Stephenson (1984) 162 CA3d 1057, 1083]:

1. Determining the value of the pension measured at the future retirement date, then
2. Discounting that value back to the present date of valuation.

    * In-Kind Division: Each party takes one-half of assets such as bank accounts and stock in a corporation, and/or one-half of the debts.

    * Trade-off Division: You may stipulate to settle your property disputes, without regard to value, by agreeing one of yoiu will take certain items of property, e.g., the furniture, and the other will take other items, e.g., the car.

    * Piece-of-Cake Division: This method gets its name from the common situation where two children have a piece of cake to be cut in half. To avoid the argument over who gets the "bigger" half, it is agreed that one will cut the cake and the other gets to choose which piece he or she will receive. In the marital property context, one party makes up two lists of the property in question that he or she believes are equal, and the other party chooses which list of items she or he will take. (You may want to agree not to break up sets, e.g., a dining room set, a set of dishes, matching art works, etc.) The piece-of-cake method is particularly useful for dividing furniture and furnishing that usually have a real value to the parties far in excess of their fair market value. The method is also useful in short-term marriages for dividing wedding gifts.

    * One Values, the Other Chooses: One of you places a value on each item of community property in dispute and the other party chooses those items he or she will take at the stated value up to one-half the total value. Alternatively, the party choosing may choose any, all, or none of the items, with any items not chosen going at the stated value to the one who set the value. An equalization payment can be required. In dividing furniture and furnishings, an alternative to piece-by-piece choice is to list furniture and furnishings room-by-room, and each party chooses by room.

    * You Take It or I Will Take It: One party places a value on an asset at which that party is willing to let the other party be awarded the asset, or else the former will be awarded the asset at that value.

    * Appraisal and Alternate Selection: An appraiser is selected by stipulation to value each of the items in question. The parties then choose items alternately until all items are taken. The one to make the first choice can be designated by the flip of a coin. Another approach is to let one party go first and the other party then gets two selections, after which choices are made alternately. It is usually preferable to agree that sets not be broken up. It might be agreed that if a party takes a set it counts as that many choices, e.g., a dining room table and four matching chairs counts as five choices, and the other party then makes the next five choices.

    * Sale: The parties agree that the items in question be sold at a public sale or to a particular buyer with the proceeds divided equally, or in whatever other proportion is necessary to accomplish a satisfactory or equal division, considering the other marital assets or obligations each is receiving. For modest furniture or furnishings, the sale may be a garage sale.

    * Sealed Bid: Each of the parties submits a sealed bid on each item of property in dispute, using the same list. The bids are opened simultaneously and the one bidding the highest amount for an item gets that item valued at the figure he or she bid, with an equalizing payment to be made, if necessary. This method can also be used for disposition of the family home, other real property, or a family business that both parties have operated, where each seeks to have it awarded to him or her.

    * Interspousal Auction: This is a straight auction between the parties, usually with an agreed minimum incremental increase over the last bid being required. The high bidder gets the asset at the amount of his or her bid with an equalizing payment being made, if necessary. To the extent a major asset is involved such as a family business or real estate, the stipulation might provide that each of the parties have an advisor present during the bidding.

    * Arbitration: The valuation and division of the community property in question is determined by an arbitrator selected by the parties. The parties should understand that the arbitrator is not required to follow the law, and his or her decision, for all practical purposes, is final and not subject to appeal. Because arbitration usually takes much less time than a court trial, the parties might consider stipulating with your consent that you hear the case as an arbitrator.

    * Mediation: Mediation is greatly underutilized in family law cases. It can be a very effective and satisfying way for the parties to reach agreement on the value and division of their marital property.

    * Real Property: If both parties want community real property, one of the foregoing methods of resolution can be used. If neither wants it, it can be listed for sale with a broker stipulated to by the parties, at a listing price recommended by the broker. If one wants the property but the other feels that he or she is offering too little, the latter can list it for sale with a broker of his or her choosing. If the property does not sell within a specified period of time, the listing price will be periodically reduced until it reaches the figure where the net proceeds would be equal to what the other party offered. The property then goes to the offering party for the amount of the offer.

    * Combination: When more than one marital asset is in dispute, one of the foregoing methods might be used for one asset, while one or more other methods might be used for other assets.

Q.  I understand that Moore Marsden has something to do with reimbursing the community estate for the mortgage payments we made on the house my wife owned prior to our marriage, but we spent some the monies we saved during our marriage on improvements to the house.  Do I get any of this back?

A.  The Moore Marsden formula typically deals with what happens to the equity in property owned in the name of one spouse alone - in this case a house - where during marriage community property (i.e., either spouse's earnings) is used to make mortgage payments.  Where these mortgage payments are a combination of principal and interest, and not interest only, their net effect is to increase equity by reducing principal.  Over many years the amount of principal reduction can be substantial.  In effect the spouse who solely owns that residence is benefiting by the community's contribution.  This is potentially a kind of breach of fiduciary duty, giving rise to reimbursement rights.  Over time this right of reimbursement to the community grows, but it only applies to increases in equity.  There is no right to be reimbursed for interest, taxes and insurance payments.  I have given an example of how these Moore Marsden interests are calculated here.

Sometimes during marriage after a period of community payments on the separate property mortgage of one spouse, spouses or domestic partners transfer title to the property into joint names (often where there is a refinance and the lender requires it) so that now both spouses are on title to what was previously one spouse's separate property.  This is called a transmutation.  Under Family Code section 2581 the property is deemed "acquired" during marriage and so the house now presumptively becomes community property.  Use our search engine to find more information about transmutations.  Later, upon dissolution or legal separation these interests need to be separated out and accounted for.  In such cases several levels must be analyzed:

First, a transmutation (adding a spouse to title to what was previously separate property) must be free and voluntary, and there is a presumption that the spouse who comes onto title did so through some form of undue influence.  This may or may not at all be true, but it is the burden of the later titled spouse to establish the absence of undue influence.  If there was undue influence, then the title change can be set aside and the property remains separate.  If the title change is set aside, Moore Marsden applies because the property will be deemed to have always been the separate property of the first spouse but the community will still be entitled to a ratio of equity reimbursements. 

If there has been a valid transmutation, then the first spouse is still entitled to be reimbursed for the value of their separate property contribution to the community (absent an express written waiver of this right of reimbursement).  This is determined as of the date of the transmutation, and is governed by Family Code section 2640.  Moore Marsden may still apply to determining the amount of this 2640 reimbursement.  For example, say on the date of marriage Wife owned the property in her name and the mortgage owing is $100,000.  Assume at the date Husband is added to title the mortgage has been paid down to $80,000.   Also assume the value of the property remains the same at $200,000.  Here there has been an increase of $20,000 in equity and the community must be reimbursed. On the date Husband goes on title $100,000 of the equity is Wife's pure separate property - the house was worth $200,000 and the mortgage was then $100,000.  Wife is entitled to a 2640 reimbursement of $100,000.  However, both H and W have a community interest in that $20,000 of principal reduction.  Moore Marsden will be used to determine the value of each of their shares (often there has been a change of value between the two dates - assuming the house appreciated, then they also share in different proportions in the equity increase).  Wife's $100,000 2640 reimbursement will be increased by her share of the community increase.  If there has been appreciation, a ratio is determined that fixes the amount of community reimbursement due.

In contrast, if the mortgage had been interest only up to the date of the transfer (with no capital improvements), then as of the date of this transfer the community would have no Moore Marsden reimbursement and Wife's 2640 claim would be 100% of the home equity on that date.

Once both parties jointly own the property, Moore Marsden will not apply to the increases or contributions that occur thereafter (unless there is a future transmutation back to one party or the other alone) although it may later be used as illustrated above to determine 2640 credits on the date the other spouse goes on the deed.  This is because the formula is only used to value reimbursements to the community where community money improves or increases the value of one spouse's separate property - once parties are on title, the residence becomes community property subject to a separate property reimbursement instead of separate property subject to a community reimbursement.

A common situation occurs when one spouse holds property in their name alone but the spouses together, or the other spouse, contributes monies to remodels or improvements.  The value of those improvements may need to be reimbursed - either to the community (where the improvements were paid by both from earnings and accumulations during marriage) or to other spouse (where the untitled spouse pays for the improvements from their own separate property, i.e., premarital savings).

Whether or not there is an actual right of reimbursement to the community improvements depends first on whether those improvements actually increased the value of the home. If community funds are used to buy a solid gold toilet, that toilet may have little impact on the value of the home per se (the toilet is still worth whatever it is worth).  Some improvements don't increase value.  Another example might be an improvement that loses value over time, like new carpeting.  This is to be compared with adding more square footage by enlarging the house. Expert testimony may be required to prove the improvements increased value and to what extent.

But the reimbursement for capital improvements is not dollar for dollar.  Instead a modified Moore Marsden analysis must be performed which determines the community property interest in the equity appreciation during marriage, taking into consideration the extent to which the improvements increased value.

Incidentally, when there is a 2640 reimbursement to the first spouse, this comes off the top from any equity in the house - which means there is there no equity remaining after this reimbursement, there is not community equity left to reimburse.

Complicated?  You bet.  There are so many possible scenarios and it is hard to speak to these concepts except in generalities.  Often a forensic accountant with Moore Marsden experience will need to be engaged.  Since the fair market value of property may need to be determined at various points of time (for instance, the date of marriage, the date the new spouse comes on title, and the date of division), expert opinions of value of the real estate may also be required.  It may be problematic to value property as of some long ago date.

My hope is here is to introduce you to the concepts so that you may be somewhat conversant with them.  Find an experienced family lawyer to assist you!  They will know local experts who can help with the analysis.

• Evaluating sales proceeds

• Comparables

         The specific asset is valued based upon the actual sales of similar assets or properties with actual sales that can be tracked.  With professional practices, this is common with dental businesses which are commonly bought and sold, and so numbers from the sales of other dental practices may be persuasive to a court.  Whether this method is useful depends very much on the nature of the business - sometimes there is nothing comparable or little published information about comparable sales.   Comparables are also considering in setting the value of real estate. 

• Liquidation value

Sometimes businesses will be cut up into parts that are sold separately.  Sometimes the business is valued in terms of what these parts would sell for.  It is rarely used except when the parties intend to actually liquidate the company.  Liquidation value does not generally include valuing goodwill (because the assumption is there will be no on-going concern).  Goodwill is the nightmare component to valuing businesses.  Many people in divorce who manage the business believe strongly this is how businesses should be valued (in part because in the absence of an actual sale, it is a fiction to say what a buyer might pay when no such buyers as a practical matter exist).

• Book Value

This relies upon the company records to determine what 'retained value' is.  It is rarely used, because it is more a statement of how the company perceives itself, or structured (or even 'cooked') its books, than any objective indication of value.

• Adjusted book value

This is performed through a forensic audit.  Usually it is performed on a cash basis, and accounts receivable and much more must be analyzed.

• Going concern value

This describes a method that includes valuing the business as greater than the sum of its parts.  There are a number of factors that are used.

• Capitalized earnings

This is the most common method for valuing businesses used in California because courts find it to be most reliable.  If you hope to use a different method, you will need to justify why that method is fairer to the out-spouse. This method requires expensive forensics. 



It is not uncommon to bifurcate the question of business valuations to try them separately because often this is the thorniest issue to be decided in a dissolution or legal separation proceeding.  



The law of business valuations is extremely complex and even contradictory.  The purpose of this blog is merely to introduce the concepts.  I will develop these themes in more detail in additional family law blogs. 


Thurman W. Arnold III 

http://www.ThurmanArnold.com

Q.     If I marry is it possible to avoid any of my fiance's debt liability?

A.  Yes.  First, your separate property doesn't become liable for a spouse's premarital debt simply by marrying.  But community property as it comes into being does. 

Secondly, to the extent you or your spouse will incur debt during marriage, prior to marriage both can agree to eliminate or restrict the creation of community property as between you. This is accomplished through a prenuptial or premarital agreement.  Essentially you agree to restrict or eliminate the creation of community property in the first instance, since that will remain liable for debts incurred prior to (with some exceptions) and during the marriage, and so you can ensure that your separate property remains protected. 

None of this applies to debts you jointly incur - the joint credit card, the jointly purchased car, or the jointly refinanced home.  This is why creditors try to insist that both spouses sign loans. 

But you can modify your behavior in order to protect yourself by not signing. It is possible to enter a post-nuptial agreement which achieves substantially the same thing, although it won't necessarily change the character of debt incurred prior to its signing but it may nonetheless eliminate future community debt by eliminating community property.  Remember, as between the two of you, you cannot affect third party's rights who are not parties to your post marital agreement, and to do so may be considered a fraud upon creditors which means the agreement may be set aside and voided.

Q.  Am I liable for my husband's nursing  home bills?

A.  Yes, under most circumstances.

Community and both spouse's separate property is liable for the other spouse's "necessaries of life" while the spouses are living together, and even when they are living separately - unless they are living separately by agreement within the meaning of Family Code section 4302.  If this occurs at a time when there is no community property but the other spouse does have separate property, there is a right of reimbursement for a period of time (i.e., if the other spouse dies there is a time limit on seeking reimbursement). 

Note that spouses each owe a duty to support the other out of their own separate property if there is no community property.  Family Code section 4301.

"Necessaries of life" include food, shelter, clothing, and the expenses of a final illness.

Q.     My husband won't stop gambling. Am I liable for his gambling debts?

A.  The community property that the two of you own is liable as to satisfy his gambling obligations, assuming there is any left.   Whether you are liable to the Indian Casino or Las Vegas hotel beyond your share of the community depends upon whether you have an independent contractual relationship with them - i.e., a line of credit in your name. 

As between you and your husband, unless you consented to his gambling he may owe you (if your separate property is somehow attached to satisfy the debt) or to the community estate a reimbursement or indemnification right.   

If he is a professional gambler and this is his "work" the outcome would be different.  The outcome may also depend on whether the community benefited from the gambling, i.e., if winnings were used to support the community, then a court may deem it fair to share the obligation as to "losings".  

This right of reimbursement would similarly exist if he squandered money on drugs, or prostitutes, and so on - assuming you can prove it and trace the money!  The question is whether you consented and ripens when you can establish that his conduct violated fiduciary duties owing you.  One never knows, however, how a judge will treat this on a case by case basis but the law if moving towards greater accountability.

If his gambling does amount to a breach of fiduciary duties owing you as a result of your marriage or domestic partnership, you have substantial remedies.  Try our search at the top right of the page to learn about those topics.

Thurman W. Arnold III

Q.     Are my earnings liable for my spouse's debts incurred before marriage?

Q.      If my Husband and I divorce, am I stuck with any of his student loan?

Q.     Am I liable for myspouse's pre-marital debt?

Q.     Is there a time limit on exercising my reimbursement rights?

Q.   What is meant by separation in California?

Q.    I keep hearing the phrase "interspousal fiduciary duties".  What does it mean?

Fiduciary Duties Described

Q.  My wife and I separated in June 2009. When we purchased our home in March of 1998 (married December 1994), she used part of an inheritance from her grandmother to help with the down payment. I have been paying the mortgage since we bought it. Will she get her inheritance back in our divorce? What would I get?

Q.  My Husband is receiving a large settlement for an auto accident he was in.  If we divorce, am I entitled to 1/2 of the settlement?

(a) "Community estate personal injury damages" as used in this section means all money or other property received or to be received by a person in satisfaction of a judgment for damages for the person's personal injuries or pursuant to an agreement for the settlement or compromise of a claim for the damages, if the cause of action for the damages arose during the marriage but is not separate property as described in Section 781, unless the money or other property has been commingled with other assets of the community estate.

(b) Community estate personal injury damages shall be assigned to the party who suffered the injuries unless the court, after taking into account the economic condition and needs of each party, the time that has elapsed since the recovery of the damages or the accrual of the cause of action, and all other facts of the case, determines that the interests of justice require another disposition. In such a case, the community estate personal injury damages shall be assigned to the respective parties in such proportions as the court determines to be just, except that at least one-half of the damages shall be assigned to the party who suffered the injuries.

Q.  How are Social Securities Benefits Divided in Divorce?

A.  The Social Security Act of 1935, which as been amended numerous times over the years, is governed solely by the federal law.  States are powerless to effect changes in its rules and procedures.  Social Security benefits are not actually divided in divorce, and California courts do not divide social security rights.  They are not the subject of divorce settlements.  Social security benefits are considered the separate the property of the contributing spouse.  This is odd, since all other retirement plans are considered as part of the marital estate.  Government employees do not contribute to Social Security.  It is wasteful because, as discussed below, multiple former spouses can collect benefits on the same worker's history.  It is unfair because gays and lesbians who are domestic partners under state law gain no rights in the other's work history.

A spouse of a retired or disabled worker is entitled to derivative social security benefits IF the marriage was at least 10 years in duration.  This is defined as the period between the date of marriage and the date of termination of marital status.  It has nothing to do with periods of physical separation, and is not affected by a decree of legal separation.  It has nothing to do with the filing of a divorce itself.

The Social Security Act originally only covered certain job categories which reinforced traditional stereotyped views of family systems. Women generally qualified for insurance only through their husbands or children.  Amendments in 1939 added women, who became eligible to collect on their own earnings' record and became entitled to collect that or 50% of their husband's.  It was not until 1950 that benefits were extended to former spouses with children.  In 1965, former spouses without children were added but they had to have been married at least 20  years.  In 1977 this time period was reduced to 10 years.

Former spouses married for at least 10 years are now entitled to receive 50% of the Social Security beneficiary's benefits (as either derivative or dependent benefits) without reducing the worker's 100% benefit - in order words, in divorce the working spouse who contributed does not divide or share their retirement benefits and so the derivative benefits for former spouses do not cost either spouse.  They certainly, however, cost the taxpayers.  If the worker spouse dies, a former spouse(s) receives 100% of the benefits of the worker as a surviving former spouse.

This has many strange consequences.  One is that since spouses and state courts cannot divide the benefits, and it costs the working former spouse nothing to allow the other spouse to claim these benefits.  Imagine what hardship this might cause to a spouse whose marriage is terminated 9 years, 11 months, and 355 days after the date of marriage.  They would receive no derivative benefits, period.  It would cost the worker spouse nothing to delay dissolving the marriage one more day.  Many spouses who anticipate a future divorce strategically hold off filing until they are assured this time has passed or will pass, for good reason.  In California marital status cannot be terminated earlier than 6 months after the dissolution is filed and served.  I always alert clients to this area of the law, and have many times recommended patience; it would be attorney malpractice not to.  Sometimes raging working spouses want an earlier divorce just to deprive the other of this benefit.  This can be most unfortunate and downright ugly.  There is a procedure in California for dissolving marital status before a divorce case is completely finished (e.g., where property rights have not been determined) called bifurcation of marital status.  Sometimes a spouse wishes to get divorced immediately so that they can remarry, and this can interrupt the 10 years if the Court approves it.  Courts can order that the bifurcating party indemnify the other out of their own pocket for the loss of benefits, but as a practical matter there is no way for this indemnification to occur.  

Another consequence illustrates a major waste within the Social Security system.  Imagine that Fred marries Nancy the homemaker when they are 19.  After 10 years, they divorce. and Fred marries Jennifer.  After 10 years he moves on, dissolving that marriage and marrying Diane next.  He is now 49 years of age.  With his record, he still may have a couple of more marriages in him.  At this point, assuming that none of these three women have remarried or that they remarry after age 60 (a new marriage before age 60 terminates the right to derivative benefits), each of them are eligible to receive 50% of Fred's benefits while he continues to be entitled to 100%.  This means that 250% worth of benefits will be paid upon Fred's earning history alone.  Even better, if Fred dies before them, each ex-wife is thereupon entitled to receive Fred's 100% - which means 300% will be paid out and, since Fred is a serial monogamist, he will probably leave a widow (Tara) who likewise receives 100%.

Also, note the risks to the women.  If Nancy or Jennifer remarry before age 60 they lose any claims to the benefits generated by Fred and the count begins at zero with their new spouse and are based on the new spouse's earnings record with Social Security (assuming this person is not a government worker).  If their new marriage does not make the 10 year mark, they receive nothing from Social Security from either spouse.  This makes you want to reconsider a second marriage doesn't it - at least if you are a non wage earning wife!  Of course, few people ever think about this because they don't know about it; this is one goal of my website as an informational tool.

California has two state pension plans for government workers which exist outside of Social Security.  These are the Public Employees' Retirement System (PERS) and the California State Teachers' Retirement System (CalSTRS).  There are a number of city and county pension plans.  California teachers, state public safety officers (police and firefighters), and other workers who don't pay into the retirement portion of the Federal Insurance Contributions Act (FICA), do not receive social security benefits once they retire. 

They only may be eligible for some SS benefits based upon their spouse's record or their own earnings from private sector jobs.  However, even these benefits may be reduced under the Windful Elimination Provision (WEP) or the Government Pension Offset (GPO).  These are complicated rules and formulas which are beyond the scope of this answer. 

Q.  Can you please help.  I understand a Moore-Marsden analysis needs to be performed on my house in my pending divorce, but I don't understand what it is my attorney is telling me. 

Frederic:

Here is an illustration of how the calculation works. Please see my FAQ on Moore Marsden generally. As you can see, it is complicated. You will need a forensic accountant and you may want a real estate expert because fair market values need to be fixed at various dates. Your situation is even more complicated because you placed her on title. The simplest Moore-Marsden situation deals with a property owned in the name of one spouse throughout the marriage, where marital earnings are used to pay the mortgage down - the fundamental concept is that the community should get some reimbursement for this, which comes back as a share in the appreciation and reduced principal obligation. 
 
You will need to get:

• the mortgage payoff balances on the date of marriage;
• the mortgage payoff balance on date of the transmutation (when your wife went on title)
• the payoff balance at date of separation
• and you will need a mortgage balance near the date of your trial

I want to mention that all transmutations that favor one spouse and disadvantage the other, like putting her on the deed on 1/1/02, are subject to a claim that they should be set aside. This is because there is a presumption that your Wife exerted undue influence upon you - please research my fiduciary duty blog articles using the on-site search engine if this interests you.

Therefore, one scenario is:

Assuming                                                                $   54,875     dowppayment
and                                                                                6,836     (paydown before M) 
(you will need the mortgage statements)                        25,125     appreciation before M 
and                                                                             (20,197)    principal reduction  during M

then:                                                                           $54,875 [DP] PLUS $89,803
[SP Loan of $110,000 minus $20,197 CP payments] 
 = $144,678 DIVIDED BY $164,875 [purchase price]
= 's a 87.75 SP Interest

and                                                

$20,197 divided by $164,875 =' a 12.25% CP interest