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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.
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.
Separate funds do not lose their separate character when commingled with
community funds in a bank account so long as the amount of separate funds
can be ascertained and at no time period were the funds spent down below
the balance of SP claimed unless replenished with SP instead of CP.
Marriage of Mix (1975) 14 Cal.3d 604.
If money is withdrawn to purchase specific property, questions of fact
that must be determined include (Marriage of Mix, supra):
The party seeking to establish a separate interest in presumptive community
property must keep adequate records. The party must show the exact amount
of money allocable to separate property and the exact amount of money
allocable to community property before it can be said that the money allocable
to separate property is not so commingled that all funds in the account
are community property.
Marriage of Frick (1986) 181 Cal.App.3d 997. If the payments claimed to be separate were
made periodically, each payment must have been made when separate property
funds were in the account and must have been accompanied by an intent
to use those funds rather than community funds.
Marriage of Higinbotham (1988) 203 Cal.App.3d 322, 329.
Tracing Through Family Expenses
The second method of tracing to establish that property purchased with
commingled funds is separate property requires a consideration of family
expenses. This tracing method is based on the presumption that family
expenses are paid from community funds.
If at the time the property is acquired it can be shown that all community
cash and income in a commingled account was exhausted by family expenses,
then all funds remaining in the account at the time the property was purchased
were necessarily separate funds.
Marriage of Mix, supra.
This method can be used only when, through no fault of the spouse claiming
separate property, it is not possible to ascertain the balance of income
and expenditures at the time property was acquired.
See v See (1966) 64 Cal.2d 778, 784.
The spouse claiming separate property must keep adequate records to overcome
the presumption that property acquired during marriage is community property.
See v See, supra. Most people don't.
The take-away: If you are contemplating a divorce and have tracing issues,
protect your records now so that they do not 'disappear.' It can
be very expensive to obtain bank statements and canceled checks dating
back years, and with all of the bank failures and mergers today these
records may become impossible to obtain. If you cannot meet your tracing
burden of proof, you lose on the particular reimbursement issue.
As you probably have guessed, tracings are quite expensive and typically
involve the assistance of a forensic accountant. Moreover, not just any
attorney will know what to do with this information!
Thurman W. Arnold III
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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?" »|
|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.
|Continue reading "How Are Funds in a JOINT BANK ACCOUNT Treated in Dissolution or Legal Separation?" »|
|September 14, 2010 |
| How do CALIFORNIA COURTS divide EDUCATION LOANS? |
|Posted By Thurman Arnold|
Q. My husband completed his training as a doctor after we married. He incurred
substantial educational loans which we paid off during the marriage. What
rights to I have for recovering those costs?
The community estate is supposed to be reimbursed for
community contributions to education or trainingof a spouse that substantially enhances that person's earning capacity.
The amount reimbursed must include interest at the legal rate, accruing
from the end of the calendar year in which the contributions were made.
FC section 2641(b)(1);
see FC section 2627.
Reimbursement is not appropriate in the following circumstances:
The parties expressly agreed in writing to the contrary
[[FC section 2641(e)]; or
The contributions were for ordinary living expenses that would be incurred
regardless of whether the spouse attended school, stayed home, or worked [Marriage of Watt (1989) 214 CA3d 340, 354].
If the loan is still outstanding at the time of dissolution, the balance
is not divided but is instead assigned to the party who was educated or
trained, except when the parties expressly agreed in writing to the contrary.
FC section 2641(b)(2)(e).
Nonetheless, the Court may reduce or modify the reimbursement and assignment
of educational loans to the extent circumstances render such a disposition
unjust, including the following
[FC section 2641(c)]:
- When the community substantially benefited from the education, training,
or loan incurred for the education or training of the party. There is
a rebuttable presumption affecting the burden of proof that the community
has not substantially benefited from community contributions to the education
or training made fewer than 10 years before the commencement of the proceeding.
On the other hand, it is presumed that the community substantially benefited
from community contributions to the education or training made more than
10 years before the commencement of the proceeding.
- The education or training received by the party is offset by the education
or training received by the other party for which community contributions
have been made.
- The education or training enables the party receiving the education or
training to engage in gainful employment that substantially reduces the
need of the party for support that would otherwise be required.
Professional licenses and education are not "property" that can
be divided in divorce or legal separation in California. Reimbursement
for community contributions and assignment of loans under
FC section 2641 is the exclusive remedy of the community or a party for education or training
costs and any resulting enhancement of a person's earning capacity.
Author: T.W. Arnold
However, importantly, the Court should consider the effect of the education,
training, or enhancement, or the amount reimbursed, on the circumstances
of the parties in ordering permanent spousal support pursuant to
Family Code section 4320(b). [FC §2641(d).]
|Continue reading "How do CALIFORNIA COURTS divide EDUCATION LOANS?" »|
|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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|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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|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
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
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.
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
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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