|
|
|
Recent Posts in Transmutations Category
| May 23, 2011 |
| FORM OF TITLE Trumps COMMUNITY PROPERTY PRESUMPTION Where Life Insurance Is An Asset in DIVORCE |
| Posted By Thurman Arnold, CFLS |
 |
Marriage of Valli, B222435
PLEASE NOTE - The California Supreme Court granted review of this decision on 8/24/11 and as a result the opinion reviewed below has been vacated.
8/26/11
TWA
The California Second Appellate District issued its ruling in Marriage of Valli on May 18, 2011, reversing a Los Angeles trial court that had found that a $3.75 million insurance policy purchased during marriage was the parties' community property. Instead Justice Stanley Mosk declared that the 'super-presumption' contained in Evidence Code section 662 trumps the more general presumption per
Family Code section 760 that property acquired during marriage is jointly owned. Interestingly, this was true even in the absence of direct evidence of the title to the policy itself; it was sufficient that the insurance agent who sold the policy testified the policy was issued in the name of the Wife and that he'd been told it was being purchased for the protection of the family.
At issue was who owned a 'blended universal life insurance contract' on Husband's life (this is THE singer Frankie Valli) bought some eighteen months before separation that had a cash surrender value of $365,032 by time of trial. Husband argued that since the policy was acquired during marriage and paid for with community funds, it belonged to the community and each party was therefore entitled to one-half. Wife contended that Husband had told her from the inception of the policy that she was to be the owner of the policy and its sole beneficiary, and this was not disputed. She introduced testimonial evidence that the policy listed her as its owner. The trial court sided with the Husband. The decision turns on legal and not factual issues, and I think it deserves mentioning that this appears to be a case that was ethically litigated - Mr. Valli was wholesomely honest and resisted the temptation to assert a version of what happened that included allegations of "pillowtalk" or other reassurances, for instance, from Wife that she had admitted the policy was joint because these did not occur (nor would they have been helpful) - something that is otherwise common in the "liar's contests" that many dissolutions devolve into.
Family Code section 2550 assigns trial courts a mandatory duty to value and divide equally the parties' community property estate. But what is community property? Generally, factors determinative of whether property is separate or community are the time of acquisition; operation of various presumptions, particularly those concerning the form of title; and whether the spouses have transmuted or converted the property from separate to community or vice versa ...." (In re Marriage of Haines (1995) 33 Cal.App.4th 277, 291).
Family Code section 760 states "[e]xcept as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property." This is the "time of acquisition" rule, and it creates a rebuttable presumption in favor of the creation of CP. That presumption can be overcome by a "preponderance of the evidence" - that is by evidence that shows by a 51% likelihood that it is separate property. FC section 760 is the starting point for any analysis of assets and debts acquired during marriage for purposes of defining the marital balance sheet.
Evidence Code section 662 is an evidentiary presumption, found outside the California Family Code. It states "[t]he owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof." The "clear and convincing" standard of proof is considered to be a "super-presumption" exactly because of what it takes to overcome it. The public policy basis for this evidentiary presumption is to ensure the stability of titles to property and within the insurance context it is important that insurance companies have the ability to rely on their information of who holds title to a policy in paying out death benefits, and in not exposing themselves to multiple claims (and paying the wrong person or heir) upon death.
Hence, under some circumstances, when the general CP presumption and the form of title presumptions collide the form of title presumption trumps the more general presumption.
Here the evidence at trial was largely undisputed. A year before the parties separated crooner Valli was experiencing medical problems and told Wife that he wanted to buy a policy on his own life to make sure he took care of his family in the event he might die. He wanted to ensure the kids could go to college and that "there would be enough money for everybody." At that time the parties had no plans to split up.
Accordingly, he bought the policy from his insurance agent. Husband's business manager told Wife that they intended to make her the owner, and Husband himself testified that he "put everything in [Wife's] name, figuring she would take care and give to the kids what they might having coming." His insurance agent testified at trial the policy was issued in Wife's name. Of interest, however, the policy itself was never introduced into evidence.
Hence, on appeal Wife urged that "the act of taking title to property in the name of one spouse during marriage with the consent of the other spouse effectively removes that property from the general community property presumption. In that situation, the property is presumably the separate property of the spouse in whose name title is taken." Since Husband had failed to introduce "clear and convincing" proof that overcame the title presumption, the equity in the policy belonged to her. Nothing required that proof of the form of title be through documentary evidence where there was sufficient indirect testimony that the policy was titled in Wife's name.
The Second Appellate District Court agreed. "Frankie did not present evidence of an agreement or understanding with Randy [the Wife] that when the policy was placed solely in Randys name as owner, they intended title to the policy to be other than Randy's separate property. (In re Marriage of Brooks, supra, 169 Cal.App.4th at p. 189.) Likewise, Frankie did not present evidence that he was unaware that title to the policy was taken solely in Randys name. That Frankie knew the policy was taken solely in Randy's name is supported by substantial evidence. Frankie testified that he
put everything in Randy's name, and Randy testified that Frankie and Siegel told her that
they were going to make [her] the owner' of the policy."
Husband also unsuccessfully argued that Family Code section 721 creates an additional presumption of undue influence where one party by taking title in their name solely gains an advantage over the other, and that given that presumption the EC section 662 super-presumption could not come into play. However, 721 applies in interspousal transactions and this was not a transaction between the two married persons but between one of them and the insurance agent. "Randy could not have owed a fiduciary duty to Frankie in a transaction in which she did not participate." Moreover, even if the presumption of undue influence did arise there was sufficient proof rebutting Husband's clear intention to make Wife the owner; Wife had no role in the transaction whatever.
Moreover, the justices noted that there was no evidence that the cash surrender value of the life insurance policy was intended to be a "savings device." Instead, Husband's intent at the policy inception was clear that it was for the benefit of the Wife.
Finally, they dismissed Husband's argument that there had not been a valid transmutation of the policy from community to Wife's separate property. "A 'transmutation' is an interspousal transaction or agreement that works to change the character of property the parties already own. By contrast, the initial acquisition of property from a third person does not constitute a transmutation and thus is not subject to the [Family Code section 852, subdivision (a)] transmutation requirements." Keep in mind that Husband had purchased the policy only 18 months before the parties separated. They had had a 20 year marriage. In order to amass $365,032 in policy equity over such a short period, the community had to have made quite substantial premium payments to fund it. Mr. Valli was 69 when he acquired the coverage, and the cost of the policy had to be exorbitant.
Normally one might reasonably think that the claim that the cash surrender value was now Wife's separate property would require proof of a transmutation from the community to separate property - this is what the trial court assumed to be the case when it found in favor of the Husband. However, Wife's counsel never claimed a transmutation, a wise strategic move.
While this outcome might, at least for Husband, seem unfair it illustrates that in the realm of community verses separate property, when form of title presumptions come into play, as a matter of public policy favoring the stability of financial transactions with third parties (and not just between the spouses alone), the manner in which title is taken controls unless rebutted by extremely compelling evidence. This is not intuitively or even rationally obvious. In California matrimonial law certain fictions may dictate the outcome. This decision is important for any lawyer or self-represented party where one asset acquired during marriage is a life insurance policy. Common sense, and even the expectations of people who are married until the day of separation comes, would seem to militate in favor of a different result.
In remanding the case to the trial court (i.e., sending it back with instructions to enter a new decision consistent with the appellate court's reasoning), the Valli opinion does "leave to the trial court any reallocation of assets or award of reimbursement in light of our holding." Presumably that reimbursement applies to premiums paid by Husband after the date of separation that increased the cash value of the life insurance policy, but does not form a basis for reimbursing what was paid before. Since the policy was acquired in 2003 but trial occurred five years later, this reimbursement is not insubstantial. Of course, Frankie is too old now to be able to acquire a new $3.75 million dollar policy and Wife will receive this money upon his passing if the policy remains in force.
Wife was represented by the divorce powerhouse Los Angeles law firm of Jaffe and Clemens and Husband's appellate team included the highly notable legal scholar Garrett C. Dailey.
Thurman W. Arnold, CFLS
|
|
| Continue reading "FORM OF TITLE Trumps COMMUNITY PROPERTY PRESUMPTION Where Life Insurance Is An Asset in DIVORCE" » |
|
Permalink | Comments(0)  |
| |
| December 19, 2010 |
| What Are TRACINGS In California DIVORCE Proceedings? Tossed Salad and Mixed Vegetables! |
| Posted By Thurman Arnold |
|
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):
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!
Thurman W. Arnold III, CFLS
All Rights Reserved
|
|
| Continue reading "What Are TRACINGS In California DIVORCE Proceedings? Tossed Salad and Mixed Vegetables!" » |
|
| Permalink | Comments(1) |
| |
| September 16, 2010 |
| How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation? |
| Posted By Thurman Arnold |
|
Q. My Wife removed all the money from our joint savings account immediately before filing for divorce. Some of that money included an inheritance from my grandmother. What are my rights to recover any of it?
A. When there is a joint bank account in the names of parties who are married, their net contributions to the account is presumed under the law to be and remain their community funds. This applies regardless whether the deposit agreement with the institution describes them as married. Probate Code section 5305(a).
Affected "accounts" mean a contract for deposit of funds between a depositor and a financial institution and includes a checking or savings account, a certificate of deposit, share account, and similar arrangements. Probate Code section 5122(a).
However, this presumption can be rebutted - as in the case of your inheritance contributions to the account if you can meet your burden of proof by either of the following:
- 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.
Thurman W. Arnold III
www.DesertFamilyMediationServices.com
|
|
| Continue reading "How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation?" » |
|
| Permalink |
| |
| June 14, 2010 |
| Is a PRENUPTIAL AGREEMENT signed without an attorney ENFORCEABLE? |
| Posted By Thurman Arnold |
|
Q. Before my wife and I married, she convinced me to sign a Prenup prepared by her brother, who is a Los Angeles divorce attorney. It says that I waive any right to property acquired with her earnings. It also says I had the opportunity to get legal advice but was choosing not to. At the time she had all the money and I couldn't afford an attorney. Besides, she told me she would be fair if we separated. Now, six years later, she says I have no rights to the house we bought soon after our honeymoon. A friend told me that since I didn't have an attorney at the time I signed it, the agreement cannot be enforced. Is this true?
A. Whether or not a Prenup - formally known as a premarital agreement - gets enforced is highly fact specific, so it is impossible for me to answer your question except in general terms. I would need more information and to look at the document carefully. I can give you some useful pointers, however.
California has adopted the UPAA (The Uniform Premarital Act) as Family Code sections 1600-1617. Prior to its adoption prenups were viewed by courts with suspicion, and they were much harder to enforce. One reason was that as a matter of public policy it was believed that prenuptial agreements undermined marriage and so promoted divorce. Today they are viewed as supportive of the marriage institution, particularly in cases of second marriages where many people won't remarry without one. Although we speak in terms of marriage, the UPAA applies equally to registered domestic partnerships.
Still, they are viewed somewhat technically and to be enforceable they must meet the requirements of the statutes. Family Code section 1612 speaks to what rights are properly altered by a Prenup. Subsection (a)(1) and (3) deal with property interests. As a starting point, there is no question but that a premarital agreement can waive interests in real property like residences.
The critical family code section dealing with enforceability is section 1615. Anybody considering a Prenup, or questioning its validity, should scan this statute. The chief defense to a Prenup is that it was not executed voluntarily. If you can prove that, it will be treated as void. If the agreement was signed as result of duress, coercion or undue influence it will likely not be enforced. The lack of an independent attorney can result in a finding that the agreement was not entered voluntarily.
If one expects a premarital agreement to be enforceable, there is simply is no safe reason for dispensing with legal counsel. Prenups should only and always be drafted by qualified attorneys, and both parties must actually be advised about their legal effect, or they may not be worth the paper they are written on.
In all cases where my office drafts a premarital agreement, we will not proceed if the other party is unrepresented. In fact, where the other party lacks sufficient financial resources to do so, we insist that person select counsel and that our client pay for it. In my opinion it is a dangerous practice to deny a less financially empowered spouse or domestic partner the ability to access legal counsel in these situations.
The importance of having independent counsel in these matters is evident from the language of FC section 1615:
"(a) A premarital agreement is not enforceable if the party against whom enforcement is sought proves either of the following:
* * *
(c) For the purposes of subdivision (a), it shall be deemed that a premarital agreement was not executed voluntarily unless the court finds in writing or on the record all of the following:
(1) The party against whom enforcement is sought was represented by independent legal counsel at the time of signing the agreement or, after being advised to seek independent legal counsel, expressly waived, in a separate writing, representation by independent legal counsel.
(2) The party against whom enforcement is sought had not less than seven calendar days between the time that party was first presented with the agreement and advised to seek independent legal counsel and the time the agreement was signed.
(3) The party against whom enforcement is sought, if unrepresented by legal counsel, was fully informed of the terms and basic effect of the agreement as well as the rights and obligations he or she was giving up by signing the agreement, and was proficient in the language in which the explanation of the party's rights was conducted and in which the agreement was written. The explanation of the rights and obligations relinquished shall be memorialized in writing and delivered to the party prior to signing the agreement. The unrepresented party shall, on or before the signing of the premarital agreement, execute a document declaring that he or she received the information required by this paragraph and indicating who provided that information...."
Notice how these provisions are almost shouting 'independent legal counsel.' It is rare to see a phrase repeated so often within the same code section.
So examine whether your agreement, and the required separate writing, seem to address these requirements. Also, check to see whether the other conditions for enforceability are met. There may be other reasons why your Prenup will not be enforced, as where undue influence was exerted to obtain your signature (notice the seven day waiting period, which is intended to overcome the social pressures where a wedding date is looming). But you would be ill-advised to embark upon a challenge to the agreement without legal counsel this time around; don't compound the problem.
A final comment: Setting aside the prenuptial agreement may only have a limited affect upon the status of the house. For instance, the rules relating to transmutations and reimbursements still apply. I have written about those elsewhere in this Blog, but if the house was acquired by your wife as her separate property independently of the Prenup it remains her separate property even if the agreement is voided. However, if there was a mortgage and it was paid down with her earnings during marriage the cancelation of the Prenup may benefit you because the community will thereby gain a Moore Marsden reimbursement right in the principal pay down and appreciation.
Again, seek out an experienced family law attorney. And, I always urge that people consider mediating these types of family law disputes.
T.W. Arnold
http://www.ThurmanArnold.com
|
|
| Continue reading "Is a PRENUPTIAL AGREEMENT signed without an attorney ENFORCEABLE?" » |
|
| Permalink | Comments(0) |
| |
| June 12, 2010 |
| Does MOORE MARSDEN appy to IMPROVEMENTS we made to our RESIDENCE during marriage? |
| Posted By Thurman Arnold |
|
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.
Thurman Arnold
http://www.ThurmanArnold.com
|
|
| Continue reading "Does MOORE MARSDEN appy to IMPROVEMENTS we made to our RESIDENCE during marriage?" » |
|
| Permalink |
| |
| May 24, 2010 |
| What METHODS are used for VALUING BUSINESSES in divorce? |
| Posted By Thurman Arnold |
|
Q. I own a business that I began shortly after marriage. Now I am getting divorced. Is this community property even though my partner never worked the business, and if it is what methods might be used to value it?
A. With certain exceptions where, for instance, there has been a transmutation of a community property interest in a business to your separate property per Family Code section 852 (which requires a writing signed by the party adversely affect showing an intent change the character of property from community to separate), all property acquired during marriage through the time, skill and efforts of either spouse is community property. Family Code section 760.
A business begun by one spouse after the date of marriage and before physical separation will need to be divided in a dissolution or legal separation proceeding, and if you and your spouse cannot agree on its value it may need to be evaluated by an expert. This is usually accomplished under the provisions of Evidence Code section 730.
There are a number of methods that can be used to value a business, and depending upon whether the business sells services or products different valuation methods may be more appropriate than others. As a general overview, these include:
- Evaluating sales proceeds
When a business is actually being sold in an arm's length transaction to a third party, the price that a willing buyer will pay and a willing seller accept determines value. This is rare in the case of business valuations, but more common with respect to real property.
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.
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).
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.
This is performed through a forensic audit. Usually it is performed on a cash basis, and accounts receivable and much more must be analyzed.
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.
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
|
|
| Continue reading "What METHODS are used for VALUING BUSINESSES in divorce?" » |
|
| Permalink | Comments(0) |
| |
| January 17, 2010 |
| What are interspousal FIDUCIARY DUTIES? |
| Posted By Thurman Arnold |
|
Q. I keep hearing the phrase "interspousal fiduciary duties". What does it mean?
A. Few areas of California divorce and family law is changing as rapidly, or is having as great an impact upon property division and support obligations, as is interspousal fiduciary duties.
Until the mid-1970s lesser "good faith" standards were imposed upon married persons which had consequences to usually only in extreme situations of self-dealing by one spouse or domestic partner. These standards have since morphed into much higher level "confidential duty" and "fiduciary duty" standards.
On January 1, 1994 Family Code section 721 became operative. That was revolutionary, but widely not understand, for the next 10 years. Section 721 has since been revised, extended, and expanded by statutory amendments and judicial decisions, and this continues.
The penalties for violating a fiduciary duty can be severe. Many attorneys, and some judges, are behind the curve in understanding the nuances of the obligations imposed by FC section 721 and related statutes. This ignorance places clients at financial risk in the course of dissolution or legal separation litigation. Indeed, it opens the door to the litigation continuing or re-emerging long after Judgment if breaches of fiduciary duty are discovered or alleged downstream. Having a lawyer who understands this developing area of the law will make or break some litigants, today and for years to come.
Fiduciary duty rules help to balance economic power in marriage and divorce. One reason people roll our eyes when the topic of "divorce" comes up is who doesn't know someone who out cheated, or got cheated by the other spouse, in matters of support or property division? There are lawyers who pander to clients who want to cheat their spouse or domestic partner. Americans share a cultural mythology that these attorneys charge the highest fees and if they can out-cheat the other spouse and their attorney, they deserve them.
The accountability that the law of fiduciary duties add to the dissolution mix is a useful tool for combating marriage fraud by the other spouse. If society favors the party with more money or power over the weaker party, it will become increasingly unglued.
Fiduciary Duties Described
In financial and property transactions with third parties and each other, spouses owe one another important statutory duties that create huge responsibilities and pitfalls. As between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other. "This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other." Family Code section 721(b).
The essence of the "fiduciary relationship" is that the parties are treated under the law as though they do not deal with each other on equal terms because one person (typically the managing spouse) in whom trust and confidence is reposed and who accepts the trust and confidence is in a superior position to exert influence over the dependent party. A presumption of undue influence arises whenever either party benefits from the transaction over the other, however innocuous the circumstances may seem. Breach of fiduciary duty is to some extent a strict liability offense, meaning if it occurs consequences may be set in motion that run the course to an expensive end.
In 2002 Family Code section 721 was amended to expand this confidential fiduciary relationship and impose the same rights and duties as applies to nonmarital business partners under the California Corporations Code, and includes but is not limited to:
(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying;
(2) Rendering upon request true and full information of all things affecting any transaction which concerns the community property.
(3) Accounting to the spouse, and holding as trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse which concerns the community property (i.e., all property acquired by a married person during the marriage).
While Section 721 does not mention Registered Domestic Partners, it applies to them as well.
One major consequence is that transactions which benefit only one spouse may be set aside by the other, either before or during a divorce proceedings.
As a practical matter for divorcing couples, this means:
a) If one party has benefited over the other in a transaction involving money or property and thereby gained an advantage during the course of the marriage, the law presumes the advantage was gained through undue influence exerted on the part of the benefited party, and the transaction is presumed invalid and can be set-aside;
b) The burden of convincing a Court that a set-aside should not occur then shifts to the advantaged spouse;
c) All this can occur without regard to good or bad intent on the part of the advantaged spouse (i.e., actually intending to defraud as opposed to merely being sloppy). Either way the law declares the transaction to be the result of "constructive fraud". Once the Court finds constructive fraud the transactions can be set aside, the benefited party can be ordered to pay restitution to the other and to disgorge any profits they alone received, title may be reformed to include both parties' names, or the property may be held in trust for both on a present and go-forward basis rather than in the name of the one alone. If there is an actual fraudulent intent, the remedies to the injured spouse are more severe.
The fact that parties have separated or that a dissolution or legal separation is pending does not end the parties' fiduciary responsibilities. Family Code section 1100(e) continues those same duties "until such time as the assets and liabilities have been divided by the parties or by a court."
Remedies for breach of the fiduciary duty as described in Family Code section 721, and section 1100, include an amount equal to one-half of the value of any asset undisclosed or transferred in breach of fiduciary duty, plus attorneys fees. This includes inadvertent or unintentional violations. Family Code section 1101(g). Where a court comes to believe a spouse acted intentionally to defraud the other spouse, the Court "shall" award 100% of the value of what should have been disclosed, or what should not have been transferred, to the innocent spouse! FC section 1101(h).
If you have a business, or investments in real estate or simply a family residence, and certain transactions have occurred, you may have a problem. If you are a dependent spouse, regardless whether the other party intended to cheat you, you may have important entitlements and remedies.
This is one of the most complicated, emerging areas of California family law. Do not go it alone! In every dissolution and legal separation case, regardless whether either party has an attorney, each party must exchange a Preliminary Declaration of Disclosure, and unless expressly waived, a Final Declaration of Disclosure. If these documents contain errors, misinformation, or are incomplete the consequences can be financially devastating because an entire settlement or judgment may later be set aside. These documents sit as leverage tools and landmines for years to come.
TWA
http://www.ThurmanArnold.com
|
|
| Continue reading "What are interspousal FIDUCIARY DUTIES?" » |
|
| Permalink | Comments(0) |
| |
| January 07, 2010 |
| My wife she used her INHERITANCE to buy our home. We are getting divorced. |
| Posted By Thurman Arnold, III |
|
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?
A. Because I need more information and the answer to some questions and then to follow up questions, I can only give you a generalized response.
So long as your wife can trace the portion of her downpayment contribution to the inheritance, she is entitled to a Family Code section 2640 reimbursement in the amount that she proves by this tracing. She is not entitled to interest on grandma's gift to her, however, but only the principal. However, this assumes that the downpayment contribution always remained separate from any other money or bank assets that you had an interest in, or that the community had an interest in: If the inheritance monies were commingled with joint monies or your separate funds between the date she received them and the date they were used as part of the purchase price for the home, then a further tracing is required to establish that what money in the account at that time was her separate and what amount was something else.
Here is Blog that discusses tracing principles in more detail.
You don't report whether you were on title to the residence when escrow closed or at any later time. Whether or not you were on title when the property was purchased, it is presumed to be community property UNLESS you (a) deeded off when escrow closed or deeded off since that time or (b) consented to or are deemed to have consented to your Wife being the sole record title holder if at the close of escrow title issued in her name.
If you were on title at close of escrow and to the present day, the answer is easy - your Wife gets her traced inheritance money first, off the top, from any equity in the home. She does not get interest on the money. The remaining net equity, without other facts, belongs to the community so that each of you is entitled to one-half of what remains.
If you were not on title when escrow closed, and if you cannot rebut by clear and convincing evidence the legal presumption set forth in Evidence Code section 662 (based upon form of taking title in her name alone) that you consented to that outcome, then (a) your Wife still gets her downpayment back and (b) the community estate is entitled to be reimbursed for carrying the mortgage all those years and reducing the principal balance due the mortgage holder. It doesn't matter who paid the mortgage, so long as it was paid from community earnings during the marriage.
There is a very important reimbursement concept under California Law known as Moore-Marsden apportionment. It applies to a common situation where a home is acquired before marriage (or during marriage as separate property), title is in the name of the acquiring spouse alone, and during the marriage and up to separation or divorce and there is or was a mortgage that was paid during the marriage.
Where this occurs the community estate acquires a legal, reimbursable, interest in what would be otherwise be entirely the separate property of the titled spouse IF community funds (earnings of either spouse, for instance, or both) are used to make the mortgage payments. The idea is that joint funds are being used to benefit a separate property interest, i.e., the separate property equity. Many legal scholars consider this to be a breach of fiduciary duty - that whenever one or the other spouse's separate property interests are increased with community funds, or community time, skill, and efforts of either spouse during the marriage, the community is disadvantaged and that this disadvantage violates the statutory duties of the parties that place the party's joint interests above their separate interests.
The formula for apportionment is that the community acquires a pro tanto (dollar for dollar) interest in the ratio that principal payments on the purchase price made with community property bear to payments made with separate property. Hence, any increase in value (appreciation) must be apportioned accordingly between the separate property and the community property estates upon separation or dissolution.
Note that this only applies to separate property owned prior to marriage with a mortgage that was paid during marriage where an equity position has been increased. For instance, if a mortgage exists but it is an interest only, payments during marriage do not reduce principal. Therefore, the separate interest of the owner spouse is not improved because the debt remains exactly the same. As a general rule, the amounts paid for interest, taxes, and insurance on the house are disregarded since that portion does not to contribute to the capital investment.
Also, it assumes that the mortgage was paid with joint (community) funds, or that the funds used were so commingled that the "separatizer" is unable to trace them to a separate property source (meaning they don't have records showing where each payment was made or are unable to provide a recapitalization of the source of the funds). If your husband reduced the mortgage throughout the marriage but he did it with an account that was his separate property then the community would not have this reimbursement right.
The Moore Marsden formula requires a number of bits of information at important points in time to be properly calculated. These include: a) what was the original purchase price; b) what was the original mortgage and downpayment; c) what was the property worth at the date of marriage (DOM); d) what was owed to the lender at that time; e) what was the property worth at the date of separation; f) what was owed at that time; g) what is the property worth on the date of the calculation (i.e., the trial date); h) and what is the principal pay-off at that time?
This is agood example of why family law and divorce cases can become quite expensive. Obtaining these records, particularly if you are the 'out spouse' can be difficult, and sometimes a forensic accountant is the best option for calculating these apportionments. Find a local CPA with family law experience to help you trace the funds. You need an experienced family law attorney for these types of matters as well.
In your case, with a lengthy marriage and little owing, you have significant Moore Marsden entitlements.
T.W. Arnold |
|
| Continue reading "My wife she used her INHERITANCE to buy our home. We are getting divorced." » |
|
| Permalink | Comments(0) |
| |
|
|
|
|