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|September 25, 2010 |
| How Do I Use a MARITAL BALANCE SHEET to Figure Out How to Best DIVIDE OUR PROPERTY? |
|Posted By Thurman Arnold|
Q. I am considering filing for divorce, and am beginning to pencil out
what the division of our assets and debts might look like. What is a good
way to go about this?
A. Prepare a Marital Balance Sheet. This will give you an idea of how your
property could be divided in a dissolution or legal separation, and to
allow you to try out different combinations of division.
Its usefulness will depend the accuracy of your assumptions. Often times
more information or outside opinions are required to do this with any
degree of correctness. Sometimes the outside opinion that is required
is the judge's decision on a disputed issue. Marital balance sheets
can range from being exquisitely simple to exceedingly complex. Remember
that it is the duty of the Court to divide the community estate equally
- this division means an equal division in dollars, not that you divide
the family residence with a chain saw.
The format itself is simple. You want two columns, one for you and one
for your partner or spouse. You will categorize, value, and assign the
community property between each of you. Some categories might be listed
on a different balance sheet, like pensions.
Here are some suggestions for drafting a Marital Balance Sheet you can
- Use net value numbers, i.e., equity in homes and automobiles. Secured debt
is subtracted from fair market value - it is not divided as unsecured
debt would be. If you take the house, you take 100% of the mortgage.
- Be sure to use realistic fair market value numbers. Don't make your
final decisions based on Zillow. If your assumptions are flawed, your
balance sheet analysis will be of limited use.
- Use wholesale Kelly Blue Book values for cars or at least make sure whatever
yardstick you use is consistent for both parties.
- Obtain accurate and current pay-off information as to debts. Typically
that will be the value of the debts on the date they are assigned, as
adjusted for Epstein Credits.
- Don't treat apples and oranges as apples. For instance, list pension
assets as a class separate from other assets - the present value of IRA's,
401k's, and other defined contribution plans is always different than
the present value of a bank account. These pension accounts are not valued
in real dollars but must be discounted, and that may require a pension
forensic or CPA.
- Don't include separate property (the other spouse may dispute that
characterization). Pure SP doesn't go on the marital balance sheet.
- Assign the debts, placing those numbers in parentheses to ensure they are
subtracted and not added in your running total. Remember that it doesn't
matter in whose name a credit card is parked. If a debt was incurred during
marriage the general rule as between spouses is that each owes 50-50.
- Separate property debts don't go onto the balance sheet because they
don't get evenly divided and if they were listed you may inadvertently
charge yourself for half.
- Use total values rather than 1/2 community values. These numbers get divided
as one of the last steps.
- Don't include support or support arrears.
- Calculate and note Watts' and Jeffries' claims
- List professional practices and businesses but realize you probably have
no practical way to put a number on them, would be entirely guessing as
to their value, and would probably be wrong anyway. Understand that business
are worth more than the sum of their balance sheets or book values.
- If you share this document with your spouse, be sure to write "Confidential
Evidence Code section 1152 Materials" on it, which makes them inadmissible
as evidence against you. Otherwise you may find yourself stuck with your
preliminary numbers when that is not what you intended.
- Realize that if you share this document, no matter how preliminary it is,
with your spouse you will be creating in them expectations concerning
value or division that they may become stuck on.
- Be careful how you treat negative equity on property. For instance, if
you own a car that is worth $15,000 but you owe $25,000 and want that
vehicle awarded to you, the other party will not be charged for one-half
of the $10,000 in negative equity.
- Leased vehicles should be identified but have no value. I believe it is
a good idea to list everything that you own or owe whether or not it has
a value or can be valued at that time, since this list becomes an important
road map for you and your lawyer.
- Make a note of alleged breach of fiduciary duty claims, but don't value them.
- Don't include your separate property. Include their separate property
if you claim it to be all or partly community, but understand those aren't
real numbers until a judge rules.
- Don't leave the document lying around where someone else might find it.
- If property is held in one spouse's name alone but a mortgage or taxes
were paid during marriage, or if it was improved or refinanced during
marriage, understand that the community probably has some Moore-Marsden
interest in that property but that you will have great difficulty figuring
out what that is without expert assistance.
- Similarly, if one spouse owned property (i.e, real estate) prior to marriage
and the other was placed on title during the marriage, note to yourself
that the property has community and separate property attributes and understand
you will need more information or help to value those competing interests.
Make a note of all separate property contributions you made for the acquisition
or improvement of any property. These are called
Family Code section 2640 reimbursement credits.
- List all other reimbursements due to the community. For instance, there
are many situations where the community property is used to pay one party's
separate obligations (i.e., child support from a previous marriage) and
if you know to assert the claim the community may be entitled to a reimbursement.
- List consumer goods like furniture at garage sale prices unless there is
something truly special about the items. Nothing is valued at its purchase
price or even its replacement cost new.
- Be sure to include loans from parents, work, or family members that were
made during the marriage and assign those that relate to your family or
work to you.
- Make a note of any gifts to one or the other of you alone that were used
to purchase or improve community property, whether they were received
before or during the marriage.
- Look at your bank balances at the date of separation and assign those balances
appropriately. If your husband emptied the savings account the day before
he walked out, list the amount he took under his column.
This is just a starting point and is valuable as a roadmap to get you thinking
about what needs to be done to conclude the divorce. Once you discipline
yourself to begin to overcome any paralysis you might feel, the marital
balance sheet will speak to you about what is important for you, what
the issues are, and will give you some idea of what important paperwork
you need to obtain to evaluate your interests now or in the future. Get
that paperwork at once. You are going to have to do this exercise anyway
once a legal action is filed.
This the some of the information that you must provide in your Declarations
of Disclosure. It is an efficient idea to use those forms from the beginning.
These California Judicial Council Forms include:
Getting started on this early will make any meeting with a family attorney
cheaper and far more useful then if you've not even thought about
To the extent you can determine values or ranges of values, add up the
net equity in your column for the community property you want or get,
and subtract 100% of the debts that are to be assigned to you. Again,
chances are there will be categories where you can't put a number
on the items. But if you had the numbers, then after totalling the total
net to the other party, subtract the two net numbers. One of you will
show a higher number. This number will reflect the over-credit amount
to that person which needs to be equalized between you. Divide this number
by 2, and the person who netted more owes that resulting number to the
one who received less. This amount is called an "equalization payment."
This is just one way to do a marital balance sheet. Often times there
is no money to pay the equalization payment because all or most of the
community is held in the form of personal and real property. An equalization
payment is no good to you unless you can collect it. Perhaps you can get
a promissory note secured by a deed of trust on the family residence that
is awarded to the wife. That is usually a bad idea - you don't want
to become a bank, with all the attendant risks of default and depreciation.
Another option once you have these numbers are pencilled out is to go
back and rethink how the property was divided. Maybe you should take those
Peter Max lithographs after all. Maybe the residence or that vacant lot
must be sold to raise money for the equalization payment. It is frequently
seen in Stipulated Judgments or Marital Termination Agreements. It is
not common in litigated judgments because courts generally must equalize
the division at the time of trial, not in the future. This is why property
may be ordered sold to ensure an equal, current division of the estate.
If defined contribution pension plans exist these are a good place to
find the money to assure the equalization payment is actually honored.
But a 401k with a net asset value of $100,000 might only be worth $80,000
after penalties and ordinary income taxes are charged on it. Pensions
can be divided without tax consequences (QDRO's) but if you are owed
a $100,000 equalization, creating a new pension in your name and transferring
$100,000 from the other party's interest in it is like being handed
a check for $80,000.
T.W. Arnold, III, C.F.L.S.
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|September 24, 2010 |
| My Ex Has Been EXCLUSIVELY USING Our RESIDENCE - Is There an EPSTEIN CREDIT For This? |
|Posted By Thurman Arnold|
Q. I have been occupying the home after my wife left over a year ago. I
pay all the interest-only mortgage, property taxes, and insurance with
no help from her. Does she owe me half of any of this?
A. You may be owed you something, but not necessarily one-half of what
you have paid out. This situation involves at least three potential legal issues:
- Epstein Credits
- Watts Credits
- Jeffries Credits
This particular Blog addresses your question in terms of Epstein's
- the next blog deals specifically with
Watts and Jeffries credits.
I have described
Epstein Reimbursements in another Blog. "Epstein credits" is a doctrine derived from
the case of
Marriage of Epstein (1979) 24 Cal.3d 76, 84-85. It holds that as a general rule, courts must
reimburse one spouse by crediting them on the community property 'balance
sheet' for their contribution of post-separation earnings, or other
separate funds (loans from parents or inheritances), made
after separation to pay pre-existing community obligations. This commonly occurs with credit
cards where there was a balance remaining when the parties separated,
that one or the other spouse pays after. Epstein's don't apply
to new debt on an old credit card account that was run up after separation.
Depending upon the parties' financial circumstances, it therefore
can make the
"date of separation" a more important disputed issue than elsewise. This rule is not limited
to credit cards but applies to almost any class of debt.
Courts may be unwilling to order this reimbursement if under the circumstances
it would be unreasonable for the paying spouse to have expected reimbursement.
In almost any conversation you might have with an opposing lawyer, they
will back down on demanding the offset UNLESS you derived some beneficial
use from it.
If there was an agreement that a party would not be reimbursed for these
payments, or if the paying spouse intended the payment as a gift, or if
the payment is made on account of a debt for an asset that the paying
spouse was or is exclusively enjoying, and the amount was not substantially
in excess of the value of that use, the Court may decline to order reimbursement.
This idea of the
value of use of some item of property that was acquired through a debt that continues
to exist after the date of separation underlies the concepts of
Watts credits and
Jeffries credits, and is obviously implicated in your question since you occupy
the house for which you seek credits and reimbursements. Few family court
judges will want to hear testimony about what the portions were that were
paid towards interest after the DOS, as opposed to principal, on the debt.
You are pretty much stuck with the principal amount due at separation
as the credit you can claim, even if principal plus interest for monthly
payments over that time period amounts to more - at least unless these
relative numbers are large. This creates unfair results in cases that
take years to resolve, but arguably the parties should have moved the
case to conclusion sooner.
So, Epstein's are almost always granted as to post-separation payments
for expenses, for goods and services, that didn't leave a tangible
asset behind that is now being exclusively enjoyed by only one of the
As an example of how this works if there is $15,000 owing Visa for that
trip to Hawaii, some groceries, and a child's school tuition at the
time of separation and one party pays it off or makes monthly installments
on the debt with their earnings or other separate property after that
date, a benefit has been conferred upon the community because a joint
obligation has been extinguished or reduced. That benefit must be equalized
by a payment to the payor of one-half the amount paid or a credit or set-off
against other property that gets divided. One-half is paid because the
paying spouse owed their half anyway. Any portion paid before the DOS
(date of separation) ordinarily will not be reimbursed.
This is generally true even if only one of the parties actually took the
trip to Hawaii, unless that trip was in breach of a marital or fiduciary
duty (if the husband snuck off with his paramour to Hawaii, an argument
exists that he should not be reimbursed for paying that portion of the
debt over the wife's objection).
Family Code section 2625 directs courts to award a debt incurred by one spouse to them alone if
debt was not "incurred for the benefit of the community."
Family Code section 2602 empowers courts to "award ... the amount the court determines to
have been deliberately misappropriated by the party to the exclusion of
the interest to any other party in the community estate." FC section
2625 is a powerful and much underused statute (many attorneys seem to
be unaware of it or try to bluff as though it didn't exist).
Compare this with a situation where a credit card was used to buy a dishwasher
that the paying spouse possesses or receives in the divorce - since they
are retaining a tangible asset it may not be fair to allow them to both
keep the asset and get reimbursed for one-half its costs. Applying Epstein's
can become fairly fact specific.
In situations involving use of a family residence or other tangible assets
that continue to exist after separation and which are used and enjoyed
by only one of the spouses, an Epstein analysis provides only a part of
the answer to the reimbursement question. In effect first the amount of
the Epstein reimbursements are determined, and then the question requires
a Watts analysis to determine under equitable principles whether it is
fair to actually order reimbursement and, if so, in what amount.
Hence, to resolve your issue you would begin by adding up the costs of
everything related to the house that is spent to preserve or protect the
asset. Property taxes are included, but utilities are not. The utilities
you used after the physical separation are your obligation anyway, because
they were not incurred during 'the marriage.'
(Please see the Blog Category "Physical Separation.") Mortgage payments and insurance are considered, and probably the pool
man or gardener as well.
Please continue on to the next blog for detailed information concerning
Epstein Credits and Fiduciary Duty Issues
Sometimes a spouse or domestic partner will raid the credit cards and take
cash advances or buy a new wardrobe, or fix a car, during the weeks prior
to separating. If it later appears that their intention was to stick the
other spouse for one-half of this expense, the presumption that this is
a community debt (because incurred during marriage) may be overcome and
so it may be assigned to the one spouse alone. It is not fair to hold
both parties responsible for debts incurred in anticipation of separation.
However, when one partner incurs a debt frivolously as opposed to recklessly
before separation, in a situation not amounting to a breach of fiduciary
duty - even over the prior objection of the other spouse - it is likely
to be equally divided and Epstein reimbursements ordered. Both spouses
have, under California law, equal rights of management and control of
the community property and community credit.
Courts in my experience are reluctant to find breaches of fiduciary duty
in Esptein situations unless the behavior was fairly egregious. Charging
10 pairs of shoes at Macy's a month before separation may not be viewed
as a big deal. If the debt was incurred in pursuit of an illegal activity
like supporting a drug habit or sex addiction, many judges are less reluctant
to declare a breach.
To illustrate another twist, if the credit card was used to pay the spouse's
tuition expense instead of a child's schooling, as in my example above,
it may also be unfair to charge the non-schooled parent with one-half
the tuition portion of the credit card balance. A court is likely to look
at whether this schooling benefited the community in some way before splitting
that debt between the parties - i.e., because of the schooling did the
student spouse earn more money which was then contributed to the community
standard of living and so confer a benefit on both?
Pure student loans are usually awarded to the party who incurred the debt
as their separate property obligation.
|Continue reading "My Ex Has Been EXCLUSIVELY USING Our RESIDENCE - Is There an EPSTEIN CREDIT For This?" »|
|May 11, 2010 |
| What are EPSTEIN REIMBURSEMENTS? |
|Posted By Thurman Arnold|
Q. My wife and I are getting our divorce with the assistance of a paralegal.
That person has prepared a Marital Settlement Agreement. The paralegal
says she cannot give us legal advice. There is a phrase in the agreement
that says something about each of us waiving Epstein reimbursements. I
have no idea what this means.
"Epstein reimbursements" deal with the question: "How do
we divide debts that we incurred during the marriage, where one of us
after we separated and up to the time of divorce?" The best family lawyers know the
answer - but most don't.
A common situation is that parties have credit card debt that needs to
be divided in the divorce. Say there was a balance of $10,000 owing to
American Express on December 31st, the day before your wife drank too
much at the office New Year's celebration and had an unfortunate tryst
with her boss - this isn't the first time this has happened, and your
New Year's resolution is to move out (sorry, I am just trying to be
colorful), and so you do move out the next day. Her reaction is to file
for divorce, because her boss looks way more interesting to her than you
do these days.
Under this example January 1 is your date of separation. From the date
of separation on, the earnings of either spouse are no longer community
property, or joint earnings, but instead these earnings belong to each
of you separately.
Family Code section 771.
Often where a credit card is in the name of one person alone, the other
spouse or domestic partner doesn't contribute to the payments after
separation - sometimes because they won't and sometimes because they
can't. But as between the two of you, the $10,000 is jointly owed
to American Express, even if the other spouse did not sign the credit
card application or is not named on the card, or on the statement. This
is also true whether or not both parties directly benefited from the use
of the credit card - for instance, maybe the $10,000 was charged by your
wife to buy shoes over the course of the past year to help make herself
feel better about the fact that you never have intimate conversations
with her any more (or for any other reason), or perhaps you charged the
card to add more chrome to your Harley Davidson Fat-Boy because your hairline
If the card is not paid, American Express can pursue collection either
against the spouse who is the account holder, or against the community
property of both spouses.
Family Code section 910. If the credit card is in your name alone, it will be your credit that
might be ruined if the monthly installments are missed.
Now again, as between you and your wife, the general rule is that each
of you owe one-half of the credit card debt which means that all other
things being equal, in a property settlement or if a Judge is forced to
divide your property and estate, if one party is assigned 100% of the
debt the other owes a reimbursement of $5,000. Lawyers and Judges speak
of assigning the debt to one party or the other on the
"marital balance sheet" which implies a corresponding credit or right of set-off against the division
of some other item of property.
Circumstances When Not Entitled to Epsteins
There are, of course, exceptions. These exceptions frequently include
(a) situations where a debt was incurred in breach of a fiduciary obligation
owing the community estate or to the other spouse and (b) where one party
retains the benefit of the property that the credit card was used to acquire
(believe it or not, I am frequently asked about breast augmentations or
other cosmetic surgeries - except in extreme cases, courts do not charge
one party for these). For example, if when you learned of your wife's
affair your reaction included flying to Las Vegas and having a wild weekend
and you recklessly charged the $10,000 at the casino, this might be considered
a breach of fiduciary duty and result in the entire $10,000 being your
responsibility even though the two of you had yet to physically separate.
Or, if instead you spent the $10,000 buying more chrome for your Harley
and you expect to keep it in the divorce, then even though the $10,000
was otherwise a community obligation equitable considerations may result
in the debt being assigned to you. If in the divorce the two of you decide
to sell the Harley but the chrome you spent $10,000 buying adds only $2,000
in value to the sale's price, in that case the $10,000 remains a joint
obligation because you neither breached a fiduciary duty nor retained
a sufficient benefit that the law would charge you for it and the asset
is being divided. Another common situation is where one spouse retains
the furniture or refrigerator charged at Lowe's - in that case more
of the debt may be assigned to that party.
Assuming you continue to make monthly payments of principal and interest
on the credit card up to the point of dividing the debt in a marital settlement
agreement (MSA), or if a judge makes the call for you both after a trial,
as a general proposition your wife owes you one-half of all those payments.
These are called Epstein credits or Epstein reimbursements in California,
and many other community property states have similar rules. These are
also called equitable reimbursements, meaning that the right to be reimbursed
is not absolute and certain but that the court has wide discretion to
grant the reimbursement or not depending upon fairness. Typically California
family law courts do grant the reimbursement so long as the parties benefited
equally (or the money was equally wasted).
The principle in California was first set forth in the case of Marriage
of Epstein (1979) 24 Cal.3d 76. It is to be distinguished from the rule
that the debt itself, if community, must be divided equally between parties
Family Code § 2550. It covers reimbursements rights that accrue between physical separation
and the date of ultimate division of the liability.
So, the agreement the paralegal has prepared includes an agreement each
of you is giving up any right to be reimbursed for debt related payments
made after separation. You are not being asked to waive your credit for
$5,000 if the $10,000 debt is assigned to you (unless there is a separate
provision assigning the credit card balance to you completely). You
are being asked to waive all the debt maintenance up to this point. It is
not an unusual clause in an MSA, but it may or may not be in your best
interests to agree to it.
Epstein credits take a variety of forms, and are not limited to credit
card debt. The Epstein case itself involved a husband who voluntarily
made the mortgage, insurance, and tax payments on the family residence
during the separation period. Wife and their son occupied the home. Up
to that point the law was that if one party used separate property (earnings
after separation) to pay community debt (the mortgage, etc., on the residence),
there was a presumption that this was intended to be a gift to the community
unless an agreement could be proved that it was not to be a gift.
Each party may have separate Epstein claims as to different items of debt.
Upon separating, it is a smart idea to get and keep copies of credit card
statements and statements for all liability accounts as of the date of
separation. From an accounting point of view, the date of separation is
a critical snapshot of a point in time. It is essential that the parties
maintain these records as proof of what the numbers were, and of what
payments were made afterwards.
Whether or not you should waive the Epstein reimbursements that might
be owing you is part of the give and take of negotiating a divorce settlement.
These are usually simple accounting issues, but not always.
If your Wife gets an attorney that attorney might try to convince you
to waive the Espteins, or hope that you don't understand the concept
or have it independently explained to you. In my experience where we are
speaking in terms of vanilla debt (meaning there is no questionable conduct
and the charges were incurred in the normal course), your wife's lawyer
would also agree that you are entitled to these reimbursements without
a fight if you know enough to insist.
There is an important flip side and hybrid of the Epstein reimbursement
concept - that of
Watts charges and credits. The deal generally with who pays for the beneficial
use of community property (i.e., the home) during the separation period,
once the divorce is finalized.
To learn more about Epstein reimbursements in California divorces, visit us here!
I address Watts issues separately.
We have tons of free articles - could we bother you for a FB Like before
you leave us?
Author: Thurman W. Arnold
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