California Family Law Attorney
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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


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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

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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?


What Is the Moore Marsden Formula?

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.

What About Transmutations?

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.

What to learn more about 2640 reimbursements?

What to learn more about transmutations?


Only Calculate the Moore Marsden Claim Up to Point of Transmutation

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 for mortgage debt payment - 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. It still apples to determining the other party's 2640 reimbursement at the time of transmutation.


Moore Marsden and Residence Improvements

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. If the source of the improvements are the community dime, rather than the owner's SP, the value of those improvements may need to be reimbursed.

However, they are not reimbursed as part of a Moore-Marsden calculation. Moore Marsden reimbursements are limited to issues relating to reduction of debt on real property (mortgages), but also include a share of appreciation, as part of the "acquisition" of that property. Capital improvements are not considered an "acquisition."

Instead, a separate line of cases empowers courts to reimburse the community estate (of which each party owns one-half) for at least the dollar-for-dollar value of the contributions (i.e., installing an irrigation ditch: Marriage of Wolf (2001) 91 Cal.App.4th 962), but possibly for the enhanced value to the property that the improvements create, if that sum is greater than the out of pocket costs (Marriage of Frick (1986) 181 Cal.App.3d 997). Thus, the extent of the reimbursement may turn 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). Many improvements (or repairs) 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.

What happens when one spouse's SP is used to make some form of payment on the other spouse's SP, whether for mortgage reduction or improvements? It may well be treated as a gift. Marriage of Camire (1980) 105 Cal.App.3d 859.

And, what happens where the CP improvements for which a reimbursement right does exists were made prior to a transmutation, i.e., before the other spouse comes to be added to title? In those situations, the party who owned the separate property is entitled to a Family Code section 2640 credit for their equity in the property on the date the other becomes a joint owner. That will require a Moore Marsden calculation as of the transmutation date, but it won't take the CP improvements into account. Whether these get reimbursed at all would seem to depend on whether the property has continued to increase in value after becoming joint. It will be within that increase that the prior-to-transmutation improvements get reimbursed. If there is no increase, or even a decrease, then the community ultimately made a bad investment. Remember, these types of reimbursements only come from the asset itself, and not from some other unrelated property or asset.

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.

Here is a link to more articles discussing Moore-Marsden claims!

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Author: Thurman Arnold
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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
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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
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April 07, 2010
  Q. Who is liable for debts that we assign between us in our divorce settlement?
Posted By Thurman Arnold

Q. Who is liable for debts that we assign between us in our divorce settlement?


After property is divided incident to divorce or legal separation it is no longer community property; it is the separate property of the recipient. This separate property always remains liable to pay your own debts no matter when they were incurred. Even if that debt is assigned to the other spouse in the divorce division, you remain liable on the debt as between you and the creditor. Family Code section 916(a)(1).

Your separate property and what you receive at the time of the division is not liable for the other spouse's debts, whether incurred before or during marriage, and you are not liable for those debts unless the debt was assigned to you in the settlement.

If your property is nonetheless applied to satisfy your spouse's debts by a creditor, you have a further right of reimbursement against your former spouse, plus interest and possibly attorney fees.


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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

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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


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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


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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

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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


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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



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