The Most Common Mistakes That Radically Affect Marital Rights
and Obligations Upon Separation or Divorce
It is amazing how we tend to enter into the most important business relationship of our lives with blindfolds on. Marriage works because it allocates the energies and resources between two persons to support the overall success of a family unit. Yet, many people give the same degree of attention to the marriage contract as they do to "accepting" software updates by clicking "I agree," reading nothing. Naturally they are in for nasty surprises if they separate or divorce, and while we can disagree about the accuracy of U.S. Census reports about divorce rates, the odds don't favor lifelong marriages. Instead they increasingly reflect "serial monogamy".
The law imposes predictable consequences upon transactions between spouses and with others during marriage, including legal fictions about what married partners intended and 'must have known' about them. These are euphemistically called "presumptions." They are often different from what was assumed, if thought was given to them at all. These later become the battleground for property and support wars that are exquisitely expensive to unravel. Why monkey around with marriage, when you'd do your due diligence in any other type of transaction that so potentially affected your money and future security? Isn't this common sense?
Here is a list of the most common, and costly, mistakes that I've seen over and over in 30 years of practicing family law.
1. Failing to buy an hour of time with a family law expert prior to marrying
Any divorce attorney will confirm that it hurts us (yes, we have feelings) when clients become resentful of the fees incurred to undo the consequences of the client's own uninformed decision-making or bad choices. People blame divorce attorneys bitterly at times, and yet we didn't create your situation - you did. Start by honoring the diligence responsibility that is your's alone; I'd rather not take your money, but if I have to work to unwind your mess my efforts are as deserving of compensation as what you do to earn your living.
If you plan on marrying, spend an hour or two with a legal professional who understands the intricacies of California family law. You can do it secretly, but if that feels like betrayal take your fiancé with you! Don't hide from inconvenient truths in the name of romance. Browse this website if you reside in California, but have a face to face consult with a competent attorney in any event. Any number of decisions that you might make a little differently because you were properly informed could avoid untold aggravation and expense if the unthinkable happens.
I am available for webcam consults for anyone in California!
2. Refusing to consider or understand a premarital agreement
A premarital agreement may, nor may not be, in your best interests. Prenuptial agreements often favor a monied, more powerful soon-to-be spouse - but not always. I am working on one now that expands the rights of the wife-to-be if the marriage ends beyond what the law would otherwise allow.
Premarital agreements increasingly withstand court challenges. In 2001 California adopted the UPAA (Uniform Premarital Agreement Act). The rules for drafting enforceable agreements are now quite clear (Family Code sections 1610 et seq.), at least as they relate to community and separate property. Spousal support limitations and waivers remain problematic, because a trial court has the authority to disregard such provisions depending upon the parties' circumstances at the time they are sought to be enforced (see FC section 1615). However, appellate decisions are moving firmly towards upholding them as well, so long as certain conditions are met.
Any discussion with a lawyer about prenups will gain you important insights about community and separate property rules, even if you elect not to draft or sign a premarital agreement.
3. Placing your spouse on title to property (particularly real estate)
Property owned prior to marriage is separate property. As long as the other spouse never goes on title, such property remains separate with one very important qualification: If there is a mortgage on the property that is paid down with community funds, the community estate develops a reimbursement right that tracks (but is not the equivalent amount of) principal reduction and appreciation during the marital period. This is the so-called "Moore-Marsden" situation. These often require the aid of a forensic accountant to value the respective interests if a divorce or legal separation ensues.
It is a breach of fiduciary duty to use community "capital" to aggrandize your separate property interests without reimbursement to the community estate! In the absence of a premarital agreement saying otherwise, the fruits of all time, skill and efforts generated by either spouse during marriage are presumed to be community property.
If you have rental properties, use a management company rather than self-managing the properties, since each spouse's time and efforts managing property during marriage belongs to both.
A title transfer from a husband to wife of property he owned before marriage, during marriage, is called a "transmutation." It doesn't matter why the other spouse is added to title (i.e., that a lender required it or one spouse has bad credit). "Pillow talk" or alleged oral promises about the true ownership is generally not admissible for setting aside the transfer or the resulting 'record' title. While there is a legal presumption that such transfers are accomplished through undue influence on the part of the party whose financial position is thereby improved, possibly resulting in the instrument being cancelled, the presumption is not hard to overcome.
4. Failing to Use Revocable Living Trusts to Protect the Other Spouse So Long As the Marriage Is Intact
Adding your spouse as a joint tenant to your separate property, even though it may only be intended to become effective upon your death in order to avoid probate expenses, is a transmutation that possibly may not be undone. Always use a revocable trust if you wish to protect your beloved while the marriage remains intact, but be sure to employ a competent estate attorney to draft it. Revocable trusts can themselves result in unintended transmutations if not worded properly. This occurred in Marriage of Holtemann (2008) 162 Cal.App.4th 1175, where an estate attorney clearly committed malpractice and the husband received a rude and costly awakening.
A transmutation can be avoided if, concurrent with the deed transfer, a separate written agreement is entered into that sets forth the parties' expectations. Family Code section 852.
I have seen many cases where, unquestionably, the spouse who benefited from coming onto title knew exactly what he or she was doing and intended to acquire a legal advantage that they later claimed upon break-up. Here is one horror story that illustrates the risks and costs of uninformed decision-making concerning jointly held titles to real estate.
5. Deeding off of real property
This is the inverse of the foregoing situations. For example, at the time property is acquired, during marriage, say only one party can qualify for the loan. Possibly one has filed a bankruptcy in the past, or their credit is otherwise in disarray. A decision is made that only the good credit spouse will apply for the loan. The escrow officer calls both parties in to sign a ream of documents, and one of them is a Quitclaim Deed by one spouse transferring all his or her interest in the property to the other. The lender will require this, whenever a person is married, to ensure clean title. Maybe the spouses discuss re-deeding the waiving spouse back onto title at a later date, but more likely don't even consider the implications since everyone is basking in the glow of their new purchase and all the wonderful things it will bring to the couple's financial union.
Or perhaps - as occurring frequently right now - the parties wish to refinance a property to take advantage of better rates, or to pull money out. Whether or not the other spouse is on title, they may be asked to sign a Quitclaim Deed. Even if that spouse is not on title, that quitclaim will wipe out all Moore-Marsden interests that have accumulated to that date.
From time to time I meet a client who has put the other spouse solely on title to the first spouse's home or other real estate, to avoid creditors. What were they thinking! This is a knowing and intelligent (not exactly) decision that may well not be undone.
Very rarely does either spouse openly intend that the deeding spouse is waiving their interest in the property, as opposed to acting for the sake of convenience or expediency. Yet, each of these transactions has the legal consequence of waiving, or transmuting, a community property right into the separate property of the other spouse.
These circumstances, if challenged at the time of divorce, have the effect of making the litigation far more costly. Cases tend to settle when court outcomes can be predicted, but disputes over deed transfers raise questions that are hard to reliably advise clients about. Uncertainty about whether you can prove your case always gives the other side leverage in settlement negotiations.
6. Commingling separate property funds with monies owned by the other, or community property in bank or brokerage accounts
Commingling community and separate property (or separate and separate) funds creates a host of issues and an accounting nightmare. If you want to claim your separate property funds in a commingled account as your own, you will be required to trace the funds to their source using a forensic accountant, who may need to go over every transaction spanning years. I have written about the "community expense" presumption. I have seen forensic accountants charge thousands of dollars to catalog all of these transactions. For most people the amounts in controversy aren't that great. Which means that assuring that you receive proper credit in smaller tracing situation becomes inordinately expensive relative to the amounts you might recover.
Another way to ensure your case is more costly to resolve is to move your money around alot, or between accounts, and to open a whole bunch of them. I have seen cases where husbands, who controlled the parties' funds, created a score of different bank accounts with the deliberate plan of making it difficult and hugely expensive to track them all.
Always maintain your separate property funds in a separate account. Never deposit your earnings during marriage into them (if you have a premarital agreement, some of these precautions become unnecessary). If you need to make cash infusions into a community account, realize that you are probably kissing the funds goodbye. If you are acquiring an asset, write the check directly from your separate account to the seller, and don't park the funds in intermediate joint accounts. This preserves your right to claim a Family Code section 2640 reimbursement. Section 2640 speaks to your separate property contributions to the acquisition of property, which you are entitled to recover "off the top" so long as the net value of the asset has an equity cushion in some amount. Your separate property contributions evaporate to the extent that no such equity exists, and they cannot be applied to, or extracted from, some other asset.
7. Commingling funds inherited, or gifted from family members, during marriage with monies belonging to the other party, or with monies that were accumulated during the marriage
This is the same problem, wearing a different face. Keep your inheritance monies separate and don't commingle them with any other funds. If your parents are going to loan you money, think about whether you want that loan to be yours alone (e.g., if used to purchase an asset) or jointly (if it is going to be spent on living expenses). Encourage your parents to require a promissory "demand" note be signed by both if you want both to be on the hook, even if they will never call it due. Treat loans as loans, not as gifts.
8. Contributing your separate property, or community, funds to expenditures for which you are not entitled to be reimbursed
Only certain classes of expenditures result in a reimbursement right. For instance, if you place $10,000 of your separate funds into a joint account to buy consumer goods (or worse to pay household expenses), you will likely never see this money again (or at least not its full value). On the other hand, if you placed the $10,000 into escrow to buy a 'hard' asset you will receive it back as Family Code section 2640 credit.
I have many times seen two spouses who are making an equal contribution to the purchase of property, but these equal contributions are spent differently. Party A pays their $10,000 to be used as the down payment for a home. Party B pays their $10,000 to be used to buy the furniture that goes in the home. If the parties divorce, Party A gets their money back but Party B, at best, only gets the now worthless furnishings. Again, I have seen cases where a husband controlled the parties funds' and intentionally plopped his money directly into the acquisition of the asset and intentionally plopped the wife's money into furnishings, or some other thing. While the husband may have breached his fiduciary duties by this selective 'investment', guess who usually gets their money back.
9. Keeping cash in a place that the other party can access
This is a tough one. You'd think you could trust your newly minted partner not to steal your cash, but then chances are that this cash is itself pilfered from the government as unreported income.
In the past year I have taken on three cases where a husband (but it could just have easily been a wife) has socked away separate property cash in a safe, under a mattress, or in a safe deposit box. In each case the trusted spouse knew that the money was there. Either at separation, or before, the other spouse grabbed all the funds. In one case I suspect the client had not reported the cash as income to the federal government (and so isn't going to get much help from a family law judge); one of the others was an inheritance received during marriage, and the third involved funds that he had accumulated before marrying. Indeed, in one of the cases we believe we know of a new safe deposit that the wife moved the funds into, and we will be blocking her access to the safe deposit box while we get a court order to inventory them. We can only cross our fingers that the money will be there.
Not uncommonly I see cases where the spouse has not taken all the funds they found stashed someplace, limiting their "withdrawal" from the cash "bank" to half or less of the total amount. In those cases, the party who wasn't overly greedy later regretted that they didn't snatch it all. Ideally these funds should be taken and turned over to an attorney, who can deposit it into a trust account for the time being in order to preserve the asset (or use to pay your fees on the community dime).
I also see this situation arise frequently with gold and silver coins, coin collections, and jewelry.
10. Disposing, or failing to keeping track, of premarital agreements, bank records, escrow documents (especially closing statements), refinances, and in general records relating to property acquisitions and important financial transactions
Nobody thinks to keep records, like those relating to closed escrows, bank statements, probate (inheritance records), and so on for more than a limited time. But these records provide the crucial and necessary evidence that is often required in order to rebut community property presumptions, or to prove up your separate property interests and reimbursements. Sometimes these records get "disappeared" by the other spouse. You can literally lose all of your separate property interest in a property where there is no paper trail to prove it. Given the never-ending dance of bank acquisitions and mergers, these records cannot later be recovered from many institutions. Give some thought to what you should keep, and where it should be kept.
IF YOU HAVE A DIFFERENT POINT THAT YOU'VE LEARNED, PAINFULLY, PLEASE SHARE IT WITH THE REST OF THE READERS BY COMMENTING TO THIS BLOG.
Thurman W. Arnold III, C.F.LS.
