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Recent Posts in Marital Settlement Agreements Category
| September 08, 2010 |
| What do I do if my spouse or domestic partner does not complete their DECLARATION OF DISCLOSURE? |
| Posted By Thurman Arnold |
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Q. What do I do if the other party to a divorce or dissolution of domestic partnership proceeding refuses to file their Preliminary Declaration of Disclosure?
A. Declarations of Disclosure must be exchanged in all California proceedings for dissolution of marriage or domestic partnership, for legal separations, and for annulments. They do not need to be served in any other form of family law proceeding.
There are two forms of Declarations of Disclosure: Preliminary Declarations of Disclosure (PDD's) and Final Declarations of Disclosure (FDD's). PDD's are governed by Family Code section 2103 and FC section 2104. FDD's are governed by Family Code section 2105. While parties to a dissolution or legal separation action can waive the exchange of the FDD in writing (although it is not a good idea to do so for reasons discussed in my blogs about fiduciary duties), they cannot waive exchanging the Preliminary Declarations with one exception: Where a dissolution or legal separation judgment is obtained by default, the defaulting party need not provide the PDD to the other party. Family Code section 2110.
Note that I used the words "exchange" and "serve." This is because the forms themselves are not required to be filed with the Court itself - instead, the proof of service upon the other party to the proceeding is what is to be filed. Judicial Council Form FL-141 is what you file with the clerk's office. In practice many people do file the actual schedules with the clerk, which can be a good idea because whether these forms were really exchanged and their contents can have a big impact on future set aside motions.
Here is the California Judicial Council Form FL-140 cover sheet that accompanies the PDD or the FDD. As you can see, it is the same form but different boxes are checked for each. A form FL-150 Income and Expense Declaration must accompany both, in addition to the FL-142 Schedule of Assets and Debts and the FL-160 Property Declaration.
The FDD is supposed to have much more detailed information, including supporting attachments, then is expected in the PDD.
Where the proceedings do not conclude by way of a default Judgment, the problem you have where the other party fails or refuses to exchange at least their PDD and thereupon to file the FL-141 proof of service is that the clerk cannot (a) set the matter for trial or (b) cannot accept for submittal to a judge and later filing a Stipulated Judgment or Marital Termination Agreement. This can make it impossible to conclude a case even by way of settlement where both parties are in perfect agreement, or to obtain a trial date where they are not. One party can hold up the entire process, and it is true that this often happens intentionally.
There is no set time for when parties must complete and exchange their preliminary declarations. Family Code section 2104 states in part that "after or concurrently with service of the petition for dissolution or nullity of marriage or legal separation of the parties, each party shall serve on the other party a preliminary declaration of disclosure...." The problem with this language is the word "after." The expectation is that this will be done within a reasonable time not usually exceeding 60 days from the date a party appears in the action by filing a Petition or a Response, but the statute does not explicitly say that.
The only remedy you have is file a notice of motion (or OSC application) pursuant to Family Code section 2107 asking that the court order the other party to serve their PDD and file the proof of service within a given number of days, not usually exceeding thirty. That motion should request an order that the other party's Petition or Response be stricken if they then fail to do so in a timely manner, so that your matter may effectively proceed by default hearing.
Expect the Court to give the other side one or two opportunities to get themselves into compliance with their fiduciary obligations to provide this exchange.
Thurman W. Arnold III
http://www.DesertDivorceandFamilyLawyer.com
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| June 11, 2010 |
| What should I know if I want to LIMIT or TERMINATE SPOUSAL SUPPORT in the future? |
| Posted By Thurman Arnold |
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Q. My wife and I were married for 14 years. We have two children, aged 11 and 13. We are both in our early 40's. My wife has a college degree, but quit working shortly before our first child was born. I am a doctor, and she was a nurse at the local hospital before she quit. Our divorce is not final. I think she should be able to support herself once she gets some updated training, although I don't object to supporting our children. She says she won't work until until our youngest child finishes high school. What should I ask the judge to do and what should I expect to limit my spousal support exposure?
A. There are a number of things you need to know.
First, you have a long term marriage within the meaning of Family Code section 4336. Start with the expectation that you will be paying alimony for at least half the length of the marriage.
Second, Family Code section 4320 sets forth the most important factors that a court is required to consider in issuing a spousal support award; it is also the decisive section for determining whether spousal support should be modified, reduced, or terminated in the future. As to later modifications, this means that whatever the court decides as to the 4320 factors (or depending upon what facts are recited in your Marital Termination Agreement) may have a huge impact on how much you pay and for how long. The 4320 factors only come into play when a final judgment enters: Although courts are supposed to consider them in dealing with temporary spousal support issues, they typically do not.
Third, it is essential that you convince the Court to give your former spouse a Gavron warning. I have separately blogged this concept. In essence its effect is to give a supported spouse something of a free pass to rehabilitate themselves and enter the work force until and unless they've been given advance notice of that expectation. If you settle your case without going to trial, as I sincerely hope you do, make sure that a Gavron Admonition is included in your settlement agreement. It starts the clock ticking on your former wife's obligation to become self-sufficient. However, you need to realize that her ability to do so will be impacted by her child rearing responsibilities to whatever extent they exist, and most courts will consider this. It becomes less relevant with older children. Given the length of your marriage (14 years) your youngest child will be finishing high school right about the time that you reach half the length of the marriage.
Fourth, consider trying to get what is called a Richmond Order. Essentially this is an order or an agreement to terminate spousal support jurisdiction on a specified date unless, prior to the fixed termination date, the supported spouse files a motion showing good cause to modify the amount of support or its duration. Unlike most orders which are open-ended, a Richmond Order discourages delay and supports the goal of California that an ex-spouse receive support only so long as is reasonably necessary to get back on their own two feet. They are generally not appropriate in extremely lengthy marriages, or in situations where health or age makes it unreasonable to believe the other party can become self-supporting.
Age is a factor in your case because there is still time for your Wife to develop financial independence.
The effect of the Richmond Order is to place the burden upon the supported spouse to justify continuing support because of unforseen future events. Most judges prefer Richmond orders, but you won't get it unless you request it. Attorneys representing supported spouses are less likely to agree to them in Marital Settlement Agreements at first blush. There may be good reasons, however, that be persuasive if you persevere.
Fifth, consider a request for step down spousal support orders where support is reduced in increments into the future; this may make perfect sense depending upon the length of marriage, whether there are children, and the supported spouse's age.
Sixth, consider a Family Code section 4331
Vocational Training Examination. Even if the Court concludes that it is not reasonable for your wife to work now, this may create an important benchmark which will be useful to you in the future. Downstream if she does not obtain employment she arguably might have, the Court may be convinced it should impute income to her that might have otherwise earned.
At this stage of the proceedings you are setting the stage for a future reduction. That requires smart advance preparation. Find a competent spousal support attorney in your area!
By the way, this is exactly why you should want mediation rather than a court judgment. IMHO. Mediation takes the future into consideration, and creates a safe container for the parties to talk about it!
Thurman Arnold
http://www.DesertDivorceandFamilyLawyer.com
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| June 11, 2010 |
| What is a GAVRON WARNING and how does it affect my right to SPOUSAL SUPPORT? |
| Posted By Thurman Arnold |
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Q. I was at our first court hearing last week requesting child and spousal support, and my husband's attorney asked the judge to give me a "Gavron Warning". The judge said he would consider giving it to me at a future hearing and didn't go along with the lawyer, but I don't understand what this meant. The judge did order my husband to pay child and spousal support. What do I do if this comes up again?
A. Gavron warnings deal with the question of when a supported spouse may be expected to become partially or totally self-sufficient, so that they can no longer be expected to rely on a former spouse for economic support. At some point the entitlement to be supported usually ends.
Where the court intends that party to become self-supporting by a given date, it generally must first give that person advance warning. Marriage of Gavron (1988) 203 Cal.App.3d 705 is a relatively recent case which first articulated this policy. This advance notice is now called the Gavron Warning. It does not impact child support.
This represents a trend in the law away from a rule which once entitled a spouse (typically women) to lifelong alimony to a right to receive spousal support for only so long as necessary to become self-supporting. It applies equally to men and women, and to domestic partners. There is no question that this trend has gained legislative acceptance, and in 2000 Family Code section 4330 was enacted. It provides in part:
"(b) When making an order for spousal support, the court may advise the recipient of support that he or she should make reasonable efforts to assist in providing for his or her support needs, taking into account the particular circumstances considered by the court pursuant to Section 4320, unless, in the case of a marriage of long duration as provided for in Section 4336, the court decides this warning is inadvisable."
Note that this statute states the court "may advise" the support recipient to make reasonable efforts to assist in supporting themselves. This means it is up to a judge to decide at any given stage oin any given case when and whether or not to give the warning. One of the factors that the court must consider is the length of the marriage.
Family Code section 4336 defines a marriage of long duration as 10 years or more. There are cases that have decided that this 10 year rule is not inflexible, and that marriages of less than ten years may qualify for this protection where the facts warrant it (i.e., disability, domestic violence, the parties' respective ages).
The effect of the Gavron decision is to require that fair advance notice in fact be given before a court can properly terminate or reduce spousal support as of a specified future date. The idea is that a supported spouse should not be punished for failing to meet the court's unrevealed expectation that they would become self-sufficient - absent this required advance notice it is judicial error to abruptly terminate an alimony order because of a failure to make good faith efforts to become self-supporting.
However, that notice need not be express - although it usually is. For instance, your husband's attorney was competently (but aggressively) representing your husband by asking the court early on to give you an express warning. He or she will probably ask again at every future hearing until the judge finally does give you the Gavron admonition. That warning need not be in any magic formula: It merely needs to clearly tell the supported spouse that they are expected to become self-supporting. The classic language is contained in the FL-180 Judgment of Annulment, Legal Separation or Dissolution form and reads: "It is the goal of this state that each party will make reasonable good faith efforts to become selfsupporting as provided for in Family Code section 4320. The failure to make reasonable good faith efforts maybe one of the factors considered by the court as a basis for modifying or terminating spousal or partner support."
Except in short marriages of less than 10 years, most judges will not issue Gavron warnings early on because during the early divorce process it is not reasonable that suddenly a homemaker should become self-supporting. At the time a Judgment of Dissolution or Legal Separation is entered, however, and possibly except in cases of very lengthy marriages lasting 20 years or more (or where the parties are too old to be expected to retrain), most judges will give the Gavron Warning.
Additionally, Gavron language is often found in Marital Termination Agreements (also known as MSA's for 'marital settlement agreements'). Whether the language is included in the settlement agreements is a matter of negotiation between the parties. As a recipient you want to resist it. As a payor spouse, you want to insist upon it. The longer the marriage, the less reasonable it is to include such language. For instance, when I represent women over the age of 50 with marriages in excess of 10-15 years, I counsel my client not to permit it. On the other hand, if I am representing the high earner spouse, I always argue for its inclusion. This is one of those subtle areas where having the right attorney for you can make a huge difference in your future security. However, as you may have noted above the language has become so standard now that it is included in the FL-180 Judgment form and be used for or against you even if you never read that piece of paper (one you don't sign).
In answer to your question what to do when this comes up again, urge the court that this is too soon and too early, and not reasonable given that you have devoted your married life to child-rearing and to helping your client develop the career that you both once believed would support the family until retirement and ultimately death.
This is just an overview of the Gavron effect. I will give more education on the topic in future blogs.
T.W. Arnold III
http://www.DesertDivorceandFamilyLawyer.com
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| May 26, 2010 |
| What is FAMILY SUPPORT? |
| Posted By Thurman Arnold |
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Q. My lawyer mentioned something called "family support" as a way to possibly get more money from my ex-husband for child and spousal support. What exactly is family support and does it work?
A. Family Support is mentioned in two California Family Statutes - section 92 and section 4066.
In theory family support allows parties, by agreement, to characterize both child support and spousal support together. The spousal and child support components are unallocated, and the total sum is a combined number.
The purpose of family support is to create a deductibility for child support for federal and state income tax purposes that otherwise does not exist. One hundred percent of family support is potentially deductible by the payee and must be picked up as taxable income by the recipient. However, as mentioned at the bottom of this blog, there is some uncertainty whether the IRS will in fact allow this deduction.
While this may seem to be a bad deal for the supported spouse, this is not at all true in certain circumstances. If the supported spouse has no other taxable income, depending upon what the family support number is that person may pay little or no taxes on the combined sum while the payor obtains the benefits of total deductibility. If there are little adverse tax consequences to the party receiving family support but the party paying is substantially better off net after taxes, then family support is something divorcing spouses might want to horsetrade. Since the payor is receiving a benefit, they may well be willing to pay to the supported spouse a higher combined family support award than they would if it was broken down into deductible spousal support and non-deductible child support.
In this way, more money becomes available for both families - and particularly for children - and less money goes to the government.
One caveat - family support is clearly deductible for purposes of the California State Taxes. However, at least one federal tax court decision has invalidated a family support order in terms of its deductibility (Wells v. Commissioner). In that case mistakes were made in the drafting of the family support provision in that it was not stated that support would terminate upon the death of the payee (a requirement for deductible spousal support) and, more important, the cessation of payments was contingent upon events which were associated with the parties' children (i.e., turning 18 or graduating high school) - another major no-no for securing deductible alimony. I have separately blogged deductibility of spousal support.
Hence, before agreeing to family support (particularily if you are the payor, since if you are the payee you may find you actually had no tax liability after all and so the recipient may not be hurt while the payor is) you need to ask your lawyer or a tax accountant for their opinion on the current deductibility of family support, and you need to be sure the agreement is carefully drafted - including a provision that allows the parties some remedy if, for instance, the recipient fails to report the family support as income or if the deduction comes to be disallowed.
Since family support is a dicey proposition, it probably should not be considered until the IRS has given clearer directions that protect you.
Thurman W. Arnold
http://www.ThurmanArnold.com |
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| May 20, 2010 |
| What are the TAX CONSEQUENCES of CHILD SUPPORT and SPOUSAL SUPPORT? |
| Posted By Thurman Arnold |
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Q. My husband and I have separated, and pretty much agreed to work everything out without going to Court. But I would like some information about how any support we agree upon is taxed.
A. Child support is not taxable to the recipient, nor is it deductible by the payor.
Spousal support, or "alimony" as it is known in some states, is taxable to the recipient and deductible to the payor as long as certain Internal Revenue Code requirements are met. It is important that you obtain a professional explanation and review of these requirements in terms of what you write up in the settlement agreement (the agreement should be filed with the Court), because in some situations people have the highly unpleasant surprise of believing their support agreement passes muster only to find years later that it violated one of the provisions of the IRC - if that happens, the paying spouse may be forced to recapture the deductions in such a way that they are denied by the IRS, which now means not only that the payor owes monies for increased taxes, but they also owe substantial penalties.
To be deductible spousal support must meet the requirements of IRC section 71. These are known as DRTRA (pronounced "durtra"). The general requirements are that the spousal support obligation must be set forth in a written instrument (i.e., a Marital Termination Agreement), the payments must terminate at death, the payments must be in cash (and not as a swap of property, although it is possible to structure a property settlement in periodic payments of spousal support if done properly), and the parties must reside in separate households.
A common mistake includes "front-loading" or concentrating spousal support in the period immediately after divorce. Spousal support awards that decrease by no more than $10,000 per consecutive years are usually safe, but if you are contemplating a progressive decrease in spousal support over some years, you must have this agreement examined by a qualified professional in order to assure you are protected - this could be an accountant.
A common inadvertent mistake is to terminate spousal support on a date coinciding with a child's age of majority (turning 18). The IRS views this as an attempt to classify or hide what is really child support as deductible spousal support, and when this occurs the IRS may declare these payments that you believed were alimony for tax purposes all to have been child support - regardless of your true intentions - and so disallow the deductions from the time of the agreement forward. This will mean that the receiving spousal who has declared them as income may then be entitled to file an amended return to recover the taxes he or she paid. (Incidentally, the way this problem is often brought to the IRS's attention is where the recipient spouse doesn't declare the income, but you declare the deduction). There should be at least a six month differential between the timing of the termination of spousal support and a child's 18th birthday.
These issues can create a real shock, and totally undermine parties' expectations. Please have your settlement agreement reviewed by a competent attorney, and seek advice beyond the scope of this Blog in order to safeguard your interests!
Thurman W. Arnold III
http://www.ThurmanArnold.com
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| May 19, 2010 |
| When are ASSETS VALUED for purposes of DIVISION in a California DISSOLUTION? |
| Posted By Thurman Arnold |
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Q. My wife and I separated two years ago and we have decided to file for divorce. We don't agree on what date we should be setting the value of some of our property, like the residence where she has been living with the kids all this time. She wants it valued today, since prices are down, but when I left we agreed that she would take it at its value then. That value was substantially higher than today, and I don't think it is fair that I have suffer the decrease in real estate prices. What would a Court do?
A. First, it is always my hope that you and your spouse can agree on as many issues as possible, without court intervention. One never knows for sure what a Court will do, and my experience is that people are far better off working through their disagreements by way of Mediation. One reason why is to ensure you are in charge of your life, not a stranger. It is possible to mediate parts of your divorce.
Still, valuing real property is not a difficult legal issue. Family Code section 2552(a) directs the court to "value assets and liabilities as near as practicable to the time of trial." Time of trial is also the equivalent of the time of settlement - in order words, if you cannot settle your divorce and you take it to a judge, that will be the time of trial so the same rule for the date of valuation should apply to your settlement negotiations.
Family Code section 2552(b), however, gives the court discretion to pick another date before trial for the valuation of property "for good cause" in order to "accomplish an equal division of the community estate ... in an equitable manner." This concept is called an "alternate valuation date." It is often applied in cases of business valuations, which is a complex topic I will separately address, but the basic reasons for the potential different treatment includes the fact that business values can be intentionally depressed by the spouse who controls the assets (and so it may not be fair to apply a lower value) or because the "in-spouse" has contributed substantial value to the company since separation and it is not necessarily fair that the other spouse share those benefits.
Here you might argue that you and your spouse reached a verbal agreement to divide all your assets two years ago if that is in fact what you did, in order to hold to those values. But verbal agreements are difficult to prove if they are not admitted by the other party, absent witnesses and she will continue have various defenses where she was not independently advised before reaching agreement.
Most courts are going to value passive assets like houses or investments or pensions at the time of trial. That does not mean that post-separation increases in value, like increased equity by paying down principal on a mortgage, or contributions to a pension after the date of separation, will not be reimbursed to one or the other of you to compensate the separate property (post-separation) contributions.
If you do seek an alternate valuation date, you need to file a Notice of Motion to Bifurcate the issue (FL-315), along with the accompanying declaration establishing why this is more fair and appropriate than the basic rule. These forms appear in our Family Law Form Library.
A bifurcation is essentially a request of the court to carve off one or more issues in the divorce for separate trial or adjudication. It is often used where a call needs to be made on one issue that, once decided, will assist in resolving other aspects of the case.
Thurman W. Arnold III
http://www.thurmanarnold.com |
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| May 17, 2010 |
| My husband was HOSPITALIZED after we SEPARATED; am I liable for the bill? |
| Posted By Thurman Arnold |
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Q. After my husband and I separated, he was hospitalized and incurred $28,000 in medical bills. The creditor is threatening to sue me. Am I liable? Is there anything I should do?
A. In a recent appellate decision out of San Diego County (CMRE Financial Services, Inc. v. Parton), the wife called police after an incident of domestic violence and shortly thereafter filed for DV restraining orders. A week later the parties separated, and the husband was admitted to Tri-City Medical Center for treatment for a severe emotional illness. He incurred substantial medical bills.
The wife filed a dissolution action three months after that. In her Schedule of Assets and Debts she listed the debt as owed by her husband. A judgment for dissolution came to be entered several months later, and it did not assign the hospital obligation to the wife. It appears to have been a default judgment against the husband.
CMRE, the assignee of Tri-City Hospital, sued both the husband and wife to collect the money for husband's treatment; by then husband had disappeared and was never served with the lawsuit. Wife responded by denying liability, and with a cross-complaint that alleged that by sending her collection notices CMRE had violated the provisions of the Fair Debt Collection Practices Act (Title 15, United States Code section 1692 et seq.), and that she should obtain damages against them.
CMRE filed a motion to toss out the cross-complaint, relying on the language of Family Code section 914(a)(2), which states that spouses are liable for debts incurred by the other when separated if these are for "necessaries of life."
The trial court agreed with CMRE, and the matter proceeded to a judgment against the wife for the full amount plus interest. Wife appealed.
The appellate court ruled in favor of wife, and reversed the trial court. Wife would have been liable for these medical costs IF a dissolution including property division had not been granted, or if the dissolution judgment had assigned the debt to her, or if she had agreed to support her estranged husband while they were separated. For instance, if the parties had reconciled and if CMRE had sued the wife and obtained a money judgment against her, she would have been on the hook. But once a dissolution judgment was entered that did not assign the debt to the wife she was protected. Family Code section 916.
The appellate court also noted that an independent basis for holding wife free of the debt included Family Code section 4302 which states that a person is not liable for the support of their spouse when the person is living separate from the spouse by agreement, unless the agreement calls for support. The court reasoned that while the starting point is that spouses are liable for the other's necessaries while living separately that rule will not apply where they are separated by agreement (apparently the agreement can be verbal or implied from conduct), unless the agreement includes a promise to support the other.
This appellate decision seems confusing because the language of the statutes themselves conflict. The court continued by noting that the legislature has declared that one spouse's liability for the other spouse's post-separation necessaries is entirely derivative of the fact of marriage and not the same as a debt personally incurred by the supporting spouse. This means that "the liability imposed by section 914 can be avoided by the simple expedient of entering into a separation agreement which does not provide for support."
The only exception might be where a creditor alleges a marital settlement agreement violates the Uniform Fraudulent Transfer Act. CMRE did not allege any fraud between these spouses.
This is landmark case because up to this point most lawyers and judges believed that spouses were liable for the necessaries of life of the other, even after separating, and that this was a special exception to the general rule that once spouses separate liability for debt ends.
Now we know that you have at least two ways to avoid this debt: (1) Obtain a Judgment for Dissolution before the creditor obtains a civil judgment against you, but be sure that the debt is assigned to the other spouse; and (2) be sure that you don't have an agreement to support the other spouse in place, at least at the time the debt is incurred. The judgment can be based upon a marital termination agreement.
If you pretend to separate, or separate just to avoid the debt, and if the creditor claims you did this fraudulently to avoid liability, the outcome might be different.
One additional point of information: Under the circumstances of this case, CMRE was found to have in fact violated the federal Fair Debt Collection Practices Act just by sending threatening letters, and of course by filing suit. Knowledge of this case can be used to back off creditors who are harassing you.
Thurman W. Arnold III
http://www.thurmanarnold.com
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| May 14, 2010 |
| What do I do about SPOUSAL SUPPORT if my ex-spouse is COHABITING with another man? |
| Posted By Thurman Arnold |
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Q. My ex-wife is living with another guy. I am paying her spousal support per our settlement agreement. I have remarried, and this really upsets my present wife. Besides, I don't think it is fair. What can I do?
A. Where it can be negotiated, most lawyers who represent "payor" spouses attempt to write in a provision within the Marital Settlement Settlement Agreement that says cohabitation will terminate spousal support. If your agreement so provides, you have additional leverage to modify or terminate spousal support.
But even if your agreement, or the Judgment, doesn't say this Family Code section 4232 must be considered by the Court upon your application to modify or terminate spousal support. That section tracks the public policy of this state that you should not be underwriting your ex-wife's new household, or that you should not be made to pay her spousal support, where her expenses are being covered by a new romantic partner.
§ 4323 creates a rebuttable presumption for a decreased need for alimony once you convince the Court that your ex-wife is living with a person of the opposite sex, who is actually contributing to her expenses. This does not include persons who are simply opposite sex roommates. Look to establishing the length of their joint living circumstances, consider utilizing discovery to establish whether they have joint credit cards or household accounts, and be patient and don't file for relief too early. An ex partner may take on a roommate for purely financial reasons - that is not by itself cohabitation. On the other hand, even if you are not successful terminating support the first time, if they continue to live together you will have an improved chance at success a year or more later.
Don't expect to ever learn what that person earns. California law is pretty clear that you won't ever get that information. Look instead to what that person contributes to joint expenses, or to your ex-wife's expenses.
I do not recommend that you hire a private investigator to peek into their bedroom to establish that they have an intimate relationship. But what course you take may depend upon how she characterizes the relationship. For instance, if she claims there is not an intimate relation, then proving there is may be useful to you.
Additionally, even if your ex spouse is receiving financial benefits from her boyfriend or girlfriend, that does not mean that the Court will terminate as opposed to reduce her support - if the marital standard of living that the two of you enjoyed was high, and she is shacking up with a tennis coach, the Court might choose to reduce her support by imputing income to her commensurate with the benefits she is receiving rather than cutting her off entirely. Don't think that just because you feel violated that the Court will view it in the same way.
Finally, California law on cohabitation only speaks in terms of living with a person of the opposite sex. However, if the fact is that your exspouse is living in a romantic relationship with a same sex person, it is hard to imagine that a courageous judge will not act to reduce your exposure. We have no appellate decisions on this question yet, but we will soon.
Thurman W. Arnold III
http://www.thurmanarnold.com
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| May 11, 2010 |
| What are EPSTEIN REIMBURSEMENTS? |
| Posted By Thurman Arnold |
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Q. My soon to be ex wife and I are getting our divorce with the assistance of a paralegal. That person has prepared a Marital Settlement Agreement. The paralegal says she cannot give us legal advice. There is a phrase in the agreement that says something about each of us waiving Epstein
reimbursements. I have no idea what this means.
A. "Epstein reimbursements" deal with the question: "How do we divide debts that we incurred during the marriage, where one of us made payments after we separated and up to the time of divorce?"
A common situation is that parties have credit card debt that needs to be divided in the divorce. Say there was a balance of $10,000 owing to American Express on December 31st, the day before your wife drank too much at the office New Year's celebration and had an unfortunate tryst with her boss - this isn't the first time this has happened, and your New Year's resolution is to move out (sorry, I am just trying to be colorful), and so you do move out the next day. Her reaction is to file for divorce, because her boss looks way more interesting to her than you do these days.
Under this example January 1 is your date of separation. From the date of separation on, the earnings of either spouse are no longer community property, or joint earnings, but instead these earnings belong to each of you separately. Family Code § 771.
Often where a credit card is in the name of one person alone, the other spouse or domestic partner doesn't contribute to the payments after separation - sometimes because they won't and sometimes because they can't. But as between the two of you, the $10,000 is jointly owed to American Express, even if the other spouse did not sign the credit card application or is not named on the card, or on the statement. This is also true whether or not both parties directly benefitted from the use of the credit card - for instance, maybe the $10,000 was charged by your wife to buy shoes over the course of the past year to help make herself feel better about the fact that you never have intimate conversations with her any more (or for any other reason), or perhaps you charged the card to add more chrome to your Harley Davidson FatBoy because your hairline is receding.
If the card is not paid, American Express can pursue collection either against the spouse who is the account holder, or against the community property of both spouses. Family Code § 910. If the credit card is in your name alone, it will be your credit that might be ruined if the monthly installments are missed.
Now again, as between you and your wife, the general rule is that each of you owe one-half of the credit card debt which means that all other things being equal, in a property settlement or if a Judge is forced to divide your property and estate, if one party is assigned 100% of the debt the other owes a reimbursement of $5,000. Lawyers and Judges speak of assigning the debt to one party or the other on the "marital balance sheet" which implies a corresponding credit or right of setoff against the division of some other item of property.
There are, of course, exceptions. These exceptions frequently include (a) situations where a debt was incurred in breach of a fiduciary obligation owing the community estate or to the other spouse and (b) where one party retains the benefit of the property that the credit card was used to acquire (believe it or not, I am frequently asked about breast augmentations or other cosmetic surgeries - except in extreme cases, courts do not charge one party for these). For example, if when you learned of your wife's affair your reaction included flying to Las Vegas and having a wild weekend and you recklessly charged the $10,000 at the casino, this might be considered a breach of fiduciary duty and result in the entire $10,000 being your responsibility even though the two of you had yet to physically separate. Or, if instead you spent the $10,000 buying more chrome for your Harley and you expect to keep it in the divorce, then even though the $10,000 was otherwise a community obligation equitable considerations may result in the debt being assigned to you. If in the divorce the two of you decide to sell the Harley but the chrome you spent $10,000 buying adds only $2,000 in value to the sale's price, in that case the $10,000 remains a joint obligation because you neither breached a fiduciary duty nor retained a sufficient benefit that the law would charge you for it and the asset is being divided. Another common situation is where one spouse retains the furniture or refrigerator charged at Lowe's - in that case more of the debt may be assigned to that party.
Assuming you continue to make monthly payments of principal and interest on the credit card up to the point of dividing the debt in a marital settlement agreement (MSA), or if a judge makes the call for you both after a trial, as a general proposition your wife owes you one-half of all those payments. These are called Epstein credits or Epstein reimbursements in California, and many other community property states have similar rules. These are also called equitable reimbursements, meaning that the right to be reimbursed is not absolute and certain but that the court has wide discretion to grant the reimbursement or not depending upon fairness. Typically California family law courts do grant the reimbursement so long as the parties benefited equally (or the money was equally wasted).
The principle in California was first set forth in the case of Marriage of Epstein (1979) 24 Cal.3d 76. It is to be distinguished from the rule that the debt itself, if community, must be divided equally between parties in divorce. Family Code § 2550. It covers reimbursements rights that accrue between physical separation and the date of ultimate division of the liability.
So, the agreement the paralegal has prepared includes an agreement each of you is giving up any right to be reimbursed for debt related payments made after separation. You are not being asked to waive your credit for $5,000 if the $10,000 debt is assigned to you (unless there is a separate provision assigning the credit card balance to you completely). You are being asked to waive all the debt maintenance up to this point. It is not an unusual clause in an MSA, but it may or may not be in your best interests to agree to it.
Epstein credits take a variety of forms, and are not limited to credit card debt. The Epstein case itself involved a husband who voluntarily made the mortgage, insurance, and tax payments on the family residence during the separation period. Wife and their son occupied the home. Up to that point the law was that if one party used separate property (earnings after separation) to pay community debt (the mortgage, etc., on the residence), there was a presumption that this was intended to be a gift to the community unless an agreement could be proved that it was not to be a gift.
Each party may have separate Epstein claims as to different items of debt.
Upon separating, it is a smart idea to get and keep copies of credit card statements and statements for all liability accounts as of the date of separation. From an accounting point of view, the date of separation is a critical snapshot of a point in time. It is essential that the parties maintain these records as proof of what the numbers were, and of what payments were made afterwards.
Whether or not you should waive the Epstein reimbursements that might be owing you is part of the give and take of negotiating a divorce settlement. These are usually simple accounting issues, but not always.
If your Wife gets an attorney that attorney might try to convince you to waive the Espteins, or hope that you don't understand the concept or have it independently explained to you. In my experience where we are speaking in terms of vanilla debt (meaning there is no questionable conduct and the charges were incurred in the normal course), your wife's lawyer would also agree that you are entitled to these reimbursements without a fight if you know enough to insist.
There is an important flipside and hybrid of the Epstein reimbursement concept - that of Watts charges and credits. The deal generally with who pays for the beneficial use of community property (i.e., the home) during the separation period, once the divorce is finalized.
I will address those separately.
Thurman W. Arnold III
http://www.ThurmanArnold.com
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