California Family Law Attorney
18 entries found. Viewing page 1 of 1.  
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 when talking about how to figure out my community interest in property in my divorce, and I really don't understand how this works. Can you give me a simple explanation?


A. Simple - unlikely. But here's a thorough explanation!

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

These include:

  • Determining the community verses separate property attributes of an asset that was acquired with funds contributed during marriage that were a combination of each (CP and SP). This is called "characterization" - does the asset belong in whole or in part to the community estate, or to one party's separate estate, or both in different degrees? The community component is sometimes earnings that were used to pay down secured debt each month when, for instance, a mortgage principal payment is made for a separate property asset (a Moore-Marsden situation). It can include one time downpayments from joint bank accounts that contain community income or earnings (or separate property accounts that may have been commingled with joint funds or not or community property accounts that include separate property components) further complicated in the case of a refinance, and more.
  • It is extremely common that a community property asset (acquired during marriage, possibly but not necessarily in joint names), or improvements to it, traces partly or 100% to a separate property source. Many parents 'gift' their child part or all of the downpayment for the couple's first home. Or, a separate property asset (acquired during marriage but titled in one spouse's name alone - usually seen with real estate) may be purchased using joint funds. In either event there is a tracing right of reimbursement per Family Code section 2640 to the respective community or separate property interests that bought it, in the event of a dissolution or legal separation. FC §2640 is in the top five of all California property division statutes and is critical for an understanding of what your legal interests are if either spouse has any colorable claims to separate property used during marriage. Many middle income and high asset property division cases are a puzzle map of assets that are not what they seem at first glance.
  • There are a number of situations where reimbursement claims arise from the payment of joint or separate debts using money that the other spouse had an interest in (whether community funds or separate). Under limited situations there may be a right for the community, or the other spouse's separate property, to be reimbursed, but you will be required to trace these funds to claim them.
  • Often intended or unintended transmutations have occurred. Family Code section 852 is the chief transmutation statute, and another of the top five California dissolution property statutes. Transmutations involve a change in the character of property, from community to separate or from separate to community or separate to the other party's separate property. These commonly require tracings in order to establish the FC § 2640 interest. For instance, husband and wife own a residence together in joint names. It was purchased during marriage. But there is need for a refinance, and one spouse's credit is bad. The parties agree that husband will borrow the money, and the lender requires that wife sign a quitclaim deed before escrow can close. Husband assures wife 'not to worry.' Wife signs the transfer deed and doesn't seek legal advice. She has unwittingly transmuted her community interest to husband's separate property. Years later the property has appreciated. What is Wife's interest? (Breach of fiduciary duty questions have to be the subject of a separate Blog but, again, please try our search engine for more information!)

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

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

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

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

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

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

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

Direct Tracing

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

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

  • Whether separate funds continue to be on deposit; and

  • Whether the drawer intended to withdraw separate funds.

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

Tracing Through Family Expenses

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

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

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

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

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

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



Thurman W. Arnold, III


Continue reading "What Are TRACINGS In California DIVORCE Proceedings? Tossed Salad and Mixed Vegetables!" »

Permalink  | Comments()
 
October 28, 2010
  What Do I Do to Protect My Community Interest In PERS and STRS RETIREMENT PLANS?
Posted By Thurman Arnold

Q. What should I consider to ensure that I have a claim in my husband's teacher's retirement plan once he files for divorce?


A. CalPERS (PERS) is the California Public Employee's Retirement System. California Government Code sections 20000 to 21703 describe it. This includes all kinds of California state employees including police officers, firefighters, emergency services employees, and other public safety employees as well as university teachers, professors, and other professionals.

CalSTRS (STRS) is the State Teachers' Retirement System, which is governed by California Education Code sections 22000-25115.

Both require a joinder pursuant to Family Code section 2060 as a condition to complying with an order against the plan, and they are generally cooperative in facilitating this. Likewise, most other municipal plans require joinder and cooperate with parties who are attempting to accomplish it.

In order to protect your rights, we recommend that you not only serve the Joinder Summons and related pleadings (see our Family Law Forms Library page) but that you also give written notice, by certified mail, on the Plan per Family Code section 755.

The joinder process for those California employee benefits that you can join is easy. The forms you need are the

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

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

Thurman W. Arnold III, CFLS

Continue reading "What Do I Do to Protect My Community Interest In PERS and STRS RETIREMENT PLANS?" »

Permalink 
 
October 22, 2010
  How Can I STOP My Spouse From LIQUIDATING OUR COMMUNITY PENSION?
Posted By Thurman Arnold

Q. I am afraid my husband may liquidate our 401k and IRA's that are in his name. Is there anything I can to do freeze the accounts or make sure he can't empty them out before I can hire a lawyer or file for dissolution?


There is always the risk that one party will loot the community estate in anticipation of a family law proceeding, or that they may even act innocently but still wind up depriving the other spouse of their community interest in a pension asset.

If the spouse in whose name an IRA, 401k, or other pension device is held wants to access these monies and you object, or just want to make it impossible for them to do so without first securing your agreement, there are important steps that will work so long as you undertake them in time.

Two situations with pension plans or retirement assets are common: 1) a retired or disabled spouse is already drawing upon them on a monthly or other basis and 2) or they may want to liquidate the account entirely. The latter situation is especially common, in my experience, with plans valued under $50,000.

Lets assume your husband has a Roth IRA for $50,000. It was opened during marriage when all contributions were made, and half therefore belongs to you. He instructs Fidelity Investments to cash it out. Since this is an early withdrawal (presumably), there is a both a 15% penalty to the IRS (unless the money is rolled into a new IRA within 60 days, or the withdrawal occurs within 60 days from the date of entry of a Divorce Judgment dividing the assets) and the monies he receives will be taxed as ordinary income at rates that depend upon his bracket.

If there is sufficient other property in the community estate to ensure that you will get your half from some other source down the road, this may not be a problem for you. However, down the road has a habit of never arriving and in this economy other assets from which you expected a reimbursement might evaporate.

Perhaps, this is not okay with you from a number of angles. For instance, an exception to the automatic restraining orders contained in the California Dissolution Summons regarding the prohibition from invading accounts allows parties to do so to generate the monies to hire their lawyers. These "ATRO's" will not likely protect you from this type of withdrawal after the fact - however, it may protect you as a preemptive strike. As always I urge you to act fairly and not to abuse power or be manipulative in your divorce.

You have a couple of options for protecting your interests, including joining the pension plan into the family law proceedings.

But the most important and immediate device you can use is a notice to the Plan Administrator pursuant to Family Code section 755(b). Essentially this written demand tells them that you are claiming an adverse interest in the pension assets and its legal effect is to put the Plan on the hook for any payments they make after receiving the notice. They will not release any money once you properly draft and serve it.

Serve it either personally through a process server (which may be difficult and expensive if they are in another town or state), or by registered or certified mail, return receipt requested.

Keep in mind that joinder of certain types of pensions - like federal public entity plans - cannot be achieved through a California joinder pursuant to Family Code section 2060. Thus, this §755 Notice is really important to freeze the status quo pending an ultimate QDRO.

By the way, this will also work to freeze other forms of payments - for instance from insurance companies.

T.W. ARNOLD

"We provide you cutting edge, insider information about the law"


Continue reading "How Can I STOP My Spouse From LIQUIDATING OUR COMMUNITY PENSION?" »

Permalink 
 
October 22, 2010
  Are STOCK OPTIONS COMMUNITY PROPERTY?
Posted By Thurman Arnold, CFLS

Q. How are stock options treated if I decide to dissolve my marriage?


A. Stock options are commonly used to attract or retain key employees with incentives outside the basic salary structure. Whether you are dissolving a marriage or a RDP (registered domestic partnership), valuing and dividing stock options can be tricky.

The simplest situation is where the stock options were earned before separation. In such cases they are clearly CP. But often there is a question of when these benefits were in fact "earned" because employee services that generate them are sometimes contributed over long periods. These may include a pre-marriage period (when time, skill, and efforts of either party are always SP) and they may extend for some time past the date of physical separation (and so be SP). The question when stock options were earned becomes quite fact specific and depends a lot on what the employer intended and what kind of options they are. In re Marriage of Hug (1984) 154 Cal.App.3d 780, 201 Cal.Rptr. 676.

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

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

DOG to DOS
__________ X / of Shares Exercisable = C/P shares
DOG to DOV

DOG = Date of Grant
DOS = Date of Separation
DOV = Date of Vesting

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

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

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

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



T.W. Arnold

Continue reading "Are STOCK OPTIONS COMMUNITY PROPERTY?" »

Permalink 
 
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.


T.W. Arnold

Continue reading "How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation?" »

Permalink 
 
September 13, 2010
  How are DEFINED CONTRIBUTION PLANS divided in California DIVORCE?
Posted By Thurman Arnold

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


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

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

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

Continue reading "How are DEFINED CONTRIBUTION PLANS divided in California DIVORCE?" »

Permalink  | Comments()
 
September 13, 2010
  How Are DEFINED BENEFIT PLANS divided in California Divorce?
Posted By Thurman Arnold

Q. How are defined benefit plans divided under California law?


A. In a defined benefit pension plan, the benefit does not depend on the dollars contributed by employee or employer, but is based on a combination of factors, including the following [Marriage of Bergman (1985) 168 CA3d 742, 748 n4]:

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

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

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

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

Family Code section 2610 is the most important statute on pension benefits and rights in dissolution, but federal law governs many pension rights and obligations.

T.W. Arnold


Continue reading "How Are DEFINED BENEFIT PLANS divided in California Divorce?" »

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.

  • Comparables

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

  • Liquidation value

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

  • Book Value

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

  • Adjusted book value

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

  • Going concern value

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

  • Capitalized earnings

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

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

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

Need more information about dividing businesses in California divorces?

Need information about dividing professional practices?

How about a Facebook Like for the gipper?

T.W. Arnold


Continue reading "What METHODS are used for VALUING BUSINESSES in divorce?" »

Permalink  | Comments()
 
May 19, 2010
  When are ASSETS VALUED for purposes of DIVISION in a California DISSOLUTION?
Posted By Thurman Arnold

Q. My wife and I separated two years ago and we have decided to divorce. We don't agree on the date we should use to value some of our property, like the home where she's been living in with the kids. She wants it to be now while prices are down, but when I left our deal was that she got that value. I don't think this is fair. What is a judge going to do?


It is always my hope that spouses 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, like this issue.

Still, valuing real property is not difficult. 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.

This is a major issue in dividing businesses or professional practices, where you are many months down the road from your separation. All post date of separation time, skill and efforts belong to each spouse and not to them jointly - as was the case before separation. All that blood, sweat, and tears after separating may have dramatically increased the value of the business; or the spouse in control may have trashed the business intentionally to avoid a higher buy-out.

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. 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.

For more articles about date of valuation in California divorce, visit us here!

For more information about bifurcations generally, click here!

And, PLEASE give us a Facebook like on the way out if this was at all useful.

Thurman W. Arnold III

Continue reading "When are ASSETS VALUED for purposes of DIVISION in a California DISSOLUTION?" »

Permalink  | Comments()
 
April 07, 2010
  When I get MARRIED, how do I avoid my husband's DEBT?
Posted By Thurman Arnold

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


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

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

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

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

Thurman W. Arnold III
Continue reading "When I get MARRIED, how do I avoid my husband's DEBT?" »

Permalink  | Comments()
 
April 07, 2010
  Am I LIABLE for my husband's GAMBLING DEBTS?
Posted By Thurman Arnold

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

Janet, Lake Havasu, AZ


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

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

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

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

If his gambling does amount to a breach of fiduciary duties owing you as a result of your marriage or domestic partnership, you have substantial remedies.

To learn more about breach of fiduciary duties and what they may mean for you, click here!

Thurman W. Arnold III
Continue reading "Am I LIABLE for my husband's GAMBLING DEBTS?" »

Permalink  | Comments()
 
January 18, 2010
  Am I LIABLE for my husband's CHILD SUPPORT ARREARS from his first marriage?
Posted By Thurman Arnold

Q. Can the property I owned before marriage be taken to pay for my husband's unpaid child support from his first marriage?

Latisha, Goleta, CA


A. No matter when child support, or spousal support from a prior marriage for that matter, is ordered or modified your separate property is not liable for the debt and you are entitled to be reimbursed if it comes to be used to pay such debts without your consent. Family Code section 915. Community property, on the other hand, is liable for support debts.

However, there may be a right to reimbursement by the community (of which you own half) as against the other spouse's separate property if any of their separate property existed and was therefore available to pay the debt at the time the community paid the obligation.

Author: TW Arnold

Continue reading "Am I LIABLE for my husband's CHILD SUPPORT ARREARS from his first marriage? " »

Permalink 
 
January 18, 2010
  Am I liable for my husband's BUSINESS DEBTS?
Posted By Thurman Arnold

Q. My Husband is being sued for a business debt. I am not named in the lawsuit. Am I still liable?

Cindy, Morro Bay, CA


A. You do not need to be named in a lawsuit against your husband to collect a debt incurred by him prior to separation in order to be liable at least to the extent of your interest in the remaining community property. This debt includes any type of claims against him (e.g., a contractor being sued for defective workmanship or a lawyer being sued for malpractice).

However, your separate property cannot be held liable for such a debt, or even for "necessaries of life", unless you are named and joined in the proceedings. You may have reimbursement rights against your Husband or the community in such event.

Please see other blog answers under the "Debt" category for more information.


Author: Thurman W. Arnold III


Continue reading "Am I liable for my husband's BUSINESS DEBTS?" »

Permalink  | Comments()
 
January 18, 2010
  Must I pay any of my husband's STUDENT LOAN if we DIVORCE?
Posted By Thurman Arnold

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

Jean, Carlsbad, CA


A. Hi Jean - used to surf in your neighborhood as a youngster

Most likely not.

Upon separation and dissolution of marriage, a spouse's separate loan is assigned pursuant to Family Code section 2627 and 2641. Subject to certain exceptions, the general rule is "[a] loan incurred during marriage for the education or training or a party shall not be included among the liabilities of the community for the purposes of division but shall be assigned for payment by the party."

The exception is the Court's power to divide the education debt differently if it would "unjust" not to, as where the community has "substantially benefited" from the education or the loan. A presumption exists that no such benefit is derived if the is less than 10 years old at the time the divorce is filed but that the community has substantially benefited if the loan is more than 10 years!

If the student loan money was really used to pay for groceries and rent, for instance, the court may equitably divide the it.

Author: Thurman Arnold, III


Continue reading "Must I pay any of my husband's STUDENT LOAN if we DIVORCE?" »

Permalink  | Comments()
 
January 18, 2010
  Am I LIABLE for my spouse's PREMARITAL DEBT?
Posted By Thurman Arnold

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


A. Yes, and no. Whether you are liable for debts of your spouse depends on what kind of property exists and is available to satisfy a debt. Community property is liable and therefore available to pay a debt either spouse incurs before marriage and during marriage, regardless which spouse controls that property. Family Code section 910. Community property is all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in California. Family Code section 760.

Your separate property is generally not liable for a debt incurred by the other spouse before or during the marriage (your separate property is always liable for your own debts, regardless when incurred). Family Code section 913(b)(1). Separate property is all property you own before marriage and all property you acquire during marriage by gift or inheritance. Family Code section 770. Separate property also includes the rents, profits, and issues from your separate property (i.e., passive separate property increases) and "earnings and accumulations" while you are living apart. An exception to this rule limiting your separate property liability concerns "necessaries of life". Your separate property is liable for these necessaries (food, clothing, shelter, medical) for your spouse even if you are living apart, unless you are living apart under a written agreement that includes a provision for support.

It sometimes happens that a creditor manages to levy against the nondebtor spouse's separate property; if that occurs, the innocent spouse has a reimbursement claim against the community property estate, or, if there is no such estate then against the other spouse's separate property. This reimbursement right must be asserted, as mentioned below, or it evaporates. Also, if you consent to the payment from your separate property you may have made a gift of it for the benefit of the other spouse. Consent would include writing or signing the check to pay the debt from your separate property account. We are not talking here about using separate assets to acquire community property (as in making a mortgage payment); a difficult set of rules apply where property is being "acquired during marriage" which include reimbursement rights.

In order to be mostly protected you need to keep your separate property separate. If you commingle it with the other party's separate property, or with the community, a creditor cannot be expected to know what is yours verses what is both of yours. This separation of finances is always a good idea, and not just for debt purposes. As between you and your spouse if you commingle monies then you may have a right of reimbursement if you can trace the flow of funds.
The rules and consequences differ depending on whether we are talking about you versus a creditor, or you versus the spouse.

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

A. You have to seek reimbursement on the earlier date of (a) within 3 years of when you actually know your property was applied to satisfy the other spouse's debt or (b) during a pending dissolution or legal separation proceeding. Family Code section 920(c). Otherwise, reimbursement under these code sections is waived. Depending upon the facts, you may still have a breach of fiduciary duty claim against your spouse that survives up to the point of the dissolution.


Author: Thurman W. Arnold III

Continue reading "Am I LIABLE for my spouse's PREMARITAL DEBT?" »

Permalink  | Comments()
 
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?

Howard, Seal Beach, CA


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.

Family Code Section 2640

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. However, she has the burden of proof and problems arise for her if the monies were commingled into a joint account. Does she have the necessary records? If this is a lengthy marriage, I'd bet not.

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 a Blog article 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.


Moore-Marsden Apportionments

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 a good 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.

Author: T.W. Arnold, III, CFLS


Continue reading "My wife she used her INHERITANCE to buy our home. We are getting divorced." »

Permalink  | Comments()
 
January 06, 2010
  My Husband Is Receiving A PERSONAL INJURY SETTLEMENT. Am I Entitled To Any of It?
Posted By Thurman Arnold

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

Allice - Rancho Cucamonga, CA


Probably not, but maybe.

Personal injury awards in California are community property if the injury occurs before separation no matter when the settlement comes in. Family Code section 780. However, Family Code section 2603 states:

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

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

Hence, the court has discretion to divide community personal injury damages by assigning it all to the injured party. As a practical matter, this is usually what does happen. Still, Family Code section 781 provides certain reimbursement rights to the community for payments made from the community.

Lesson: Don't avoid settling your case just because you think you should get 1/2 of what your spouse recovered. You might get something, but the expense outweighs the risks. Judges are inclined to award PI damages to the injured spouse.

By the way, if the other spouse (here, you) caused the injuries, a different outcome might result. Also, different rules can apply to worker's compensation recoveries.

Author: T.W. Arnold, III


Continue reading "My Husband Is Receiving A PERSONAL INJURY SETTLEMENT. Am I Entitled To Any of It?" »

Permalink 
 
August 20, 2009
  Can you give me a MOORE MARSDEN Analysis on My SEPARATE PROPERTY HOME?
Posted By Thurman Arnold

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

These are the facts. On 1/1/02 I put my wife on the title to the property. This is what happened.

Purchase price 6/92 before marriage

$164,875

Date of Marriage 5/15/94 Market value

$190,000

Market Value 1/1/2002 when Wife goes on Title

$245,000

Market value 4/7/2008

$612,000

Initial 6/92 Down payment

$54,875

Principal Payment from separate prop. after separation

$6,836

FMV today (decreased since DOS) $500,000


Frederic, in San Dimas


Sample Moore Marsden Analysis

Here is an illustration of how the calculation works. You are attempting to determine two things: a) the amount of principal reduction on the real estate during marriage, and assuming the property is titled in only one spouse's name (or as of the date of transmutation, where both spouses go on title down the road, if applicable); and b) the percentage share by the community in the appreciation, if any, during the period in question.

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

You will need to get:

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

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

Therefore, one scenario is:

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

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

and

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



NEXT $ 54,875 [DP]
$6,836
(plus post DOS loan payments which I don't
see broken out so assume zero here) 61,711 PLUS 25,125 (premarital appreciation) PLUS 315,900 [87.75% of post-DOM appreciation to present assuming FMV $550,000 today equals $550,000 less $164,875 less $25,125 = "$360,000]" - appreciation percentage of H's SP interest = $402,736 (H's SP share)

COMMUNITY INTEREST IS: $20,197 plus 12.25% of 360,000 = $44,100"
plus $20,197 = "$64,297"
Wife' hare is this number divided by 2 = $32,148 equalization to W

I recognize that this may seem imcomprehensible. I will endeavor to write some simpler blogs on this topic, because this is a very common area for questions. Yikes!

Author: Thurman W. Arnold



Continue reading "Can you give me a MOORE MARSDEN Analysis on My SEPARATE PROPERTY HOME?" »

Permalink  | Comments()
 
18 entries found. Viewing page 1 of 1.