Recent Posts in Date of Separation Category
| September 23, 2010 |
| What METHODS OF TRACINGS Do Family Courts Use? |
| Posted By Thurman Arnold |
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Q. What rules apply to how tracings are performed in California dissolutions and what must be shown?
A. 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 disso's as between the parties without going to trial, this information must be provided 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 C3d 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 C3d 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. Marriage of Mix (1975) 14 C3d 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If money is withdrawn to purchase specific property, questions of fact that must be determined include (Marriage of Mix, supra):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 CA3d 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 CA3d 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 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 C2d 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.
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....
T.W. ARNOLD
www.ThurmanArnold.com |
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| September 16, 2010 |
| What Does TRACING Refer to in CALIFORNIA DIVORCE CASES? |
| Posted By Thurman Arnold |
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Q. What is meant by tracings in California in the context of divorce, domestic partnership dissolution, or legal separation?
A. Married people routinely combine cash and assets in ways that must be disentangled if either party later claims that some of those assets were their separate property and wants it returned - I rarely see a case where they don't. In the absence of a prenup agreement saying otherwise, money or property acquired through the time, skill, or industry of either spouse between the date of marriage or registered domestic partnership and physical separation is presumed to be the community property of both parties. Property owned or acquired by either before marriage or after the date of separation, or inherited or gifted to them during marriage, is considered to be that party's separate property to the extent it can be shown to still exist. Separate property is not reimbursed where it has been spent on living expenses, although it may be reimbursed when spent on certain other categories of items. Usually the question involves who is entitled to what share of some asset which is still in existence.
Typical examples include:
- One spouse has money in a savings or investment account before marriage. They then deposit earnings into that account after marriage. The account is used for living expenses. At the end of the relationship, what portion of what remains is separate and what is community?
- The other party is added to a formerly separate property deposit account, for instance so that the account can be held in joint tenancy to avoid probate in the event of death.
- Spouse A inherits $500,000 from grandma during the marriage. This separate property inheritance gets put into a jointly titled bank account, into which other monies flow in and out. How is the balance divided?
- Spouse A then contributes some of this inheritance to the purchase of a new residence. Title is taken jointly. When the couple splits, Spouse A naturally wants their contribution back. How is this achieved?
- A married couple decides to establish a Living Trust to protect them both in the event of death or incapacity. They fund the Trust by transferring cash and real estate into it. A common mistake made by Estate lawyers is to describe the trust property as "community property" and to add a provision that says that if the parties divorce, this property will not be considered to be community and will be restored to each contributing party. Unfortunately, once separate property is declared in such instruments to be community a transmutation has occurred and the language that it is to be restored is of no legal effect - only a new transmutation will resurrect the status quo before the transfer. However, Family Code section 2640 provides that separate property contributions will nonetheless be reimbursed to the extent that the amounts can be separated out and established. The person seeking to confirm their SP contribution must trace the funds in order to receive this reimbursement.
- One spouse places their separate property into the name of the other spouse, possibly to hide it from creditors or other family members. Upon separation, the receiving spouse claims it was a gift and wants to keep it all.
- During the marriage one spouse's separate property is used to build an addition to the jointly titled home that significantly increases its value. When the house is valued and ordered sold, or purchased by one of the two partners, this contribution to improvements may be reimbursed if it can be traced to a separate property source.
Variations of this theme are endless because people when they get married just don't contemplate the relationship failing, don't understand the legal consequences of what they do, are reassured by their spouse in pillow talk that they will be reimbursed, and so blindly throw assets into a common pot in which the character and value of the contributions become mixed and muddied.
The separation of these interests all require tracings, often involving transactions spanning many years. Maybe bank and other records still exist, but maybe they have been lost, destroyed, or hidden by the other. Even attorneys with some years in family law practice don't have a firm grasp on what tracings require in determining community separate property interests. When separate property and community property are commingled in an account, tracing issues arise.
Sometimes these accountings are relatively simple. Frequently they require the use of a forensic accountant.
Thurman W. Arnold, CFLS
www.ThurmanArnold.com
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| September 16, 2010 |
| How Are EARNINGS AND PROFITS From a BUSINESS APPORTIONED? |
| Posted By Thurman Arnold |
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Q. My Wife is a lawyer with a good practice which she started before we married. We have been separated for two years. I know that she has had some big cases and earned significant income since then. She is telling me that the practice is all hers, and I get no share of either or any of it. Is this true?
A. No.
There are two separate questions here - the increase in value of the law practice owned before marriage, during the marriage (or at its end), and the increase in the value of the practice after separation.
The practice is separate property at is inception, but there is a community property component at date of separation. This needs to be valued. Likewise, increases in value after the date of separation may similarly need to be valued. The same rules apply to the two situations, but the analysis is different for each.
When people marry or become domestic partners, they often already own assets like businesses and professional practices. This is especially likely for people who have been previously married.
During the marriage or partnership they improve those businesses through investments or contributions of their time, skill, and efforts. In the absence of a prenuptial agreement that declares those increases to be owned solely by the one spouse or partner, the premarital (separate property) interest often gets improved through community estate labor or infusions of community money. These are reimbursible to the community, unless they have been waived.
It is a breach of interspousal fiduciary duties to not reimburse the community for this increase. After separation the businesses or professional practices may likewise increase in value through post-separation contributions, which is reimbursible to the separate property estate of the managing spouse because it is unfair that the community should benefit from separate property efforts.
This is called "apportionment" or "equitable apportionment."
There are two basic principles that California judges are trained to apply:
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Fair return on investment. This is called the Pereira approach to apportionment, after
Pereria v. Pereira (1909) 156 Cal. 1, 103 P. 488, which involved a husband saloon owner. It apportions a "fair return" on the owning spouse's separate property investment in the business as separate property, then apportions any excess to the community property as arising from that spouse's efforts during marriage.
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Reasonable compensation. This is the Van Camp apportionment method, which derives from
Van Camp v. Van Camp (1921) 53 Cal.App. 17, 199 P. 885 (yes, seafood in Long Beach), which apportions the reasonable value of the spouse's services during marriage as community property, then treats the balance as sepearate property attributable to the normal earnings of the separate estate. Reasonable compensation is typically the analysis used in small business valuation cases, and is often found by looking at what other people in the same field performing the same functions tend to earn.
Either analysis is performed to determine the value of the premarital interest in separate property, or in deriving the community interest in what began as separate property. These methods deal with the first half of your question - valuing the law practice (these analyses are more easlier demonstrated with businesses as opposed to professional practices) as of the date of separation. They have to be applied in reverse to back out the separate property contributions after the date of separation.
In achieving the apportionment between separate and community property the Court has discretion to decide which formula will achieve 'substantial justice' between the parties.
Pereira is commonly used when business profits are principally attributed to the community efforts (i.e., during marriage).
Van Camp is applied when the community efforts are more than minimally involved in a separate business, but the business profits that accrued are attributed to the character of the separate asset (Van Camp was turning out cans of tuna before marriage).
Under either analysis, once the community income has been determined, the community's living expenses must be deducted from the community income to determine the balance of the community property interest. This is called the "family expense" presumption, which is very important in all tracing and commingling and mixed asset cases.
It is presumed that the expenses of the family are paid from community rather than separate funds and in the absence of evidence showing a different practice, the communitiy earnings are chargeable with those expenses.
A forensic accountant will almost certainly be required in dealing with any form of business.
I will have to blog the reverse Pereira and
Van Camp issues another day.
Thurman W. Arnold III
http://www.ThurmanArnold.com
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| April 08, 2010 |
| If DATE OF SEPARATION is CONTESTED, what do COURTS look at? |
| Posted By Thurman Arnold |
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Q. If I contest date of separation, what evidence do courts look at?
A. The question for trial courts is: Does one or both spouses objectively and subjectively act and appear as though they intend a separation? It only takes one of the two, because either can legitimately harbor and intention to separate and finally terminate the relationship - consent to dissolution is not required in California.
Objective evidence of separation includes very prominently whether the spouses continue to live under the same roof. Spouses that do not maintain separate residences do not appear to be living separately, even where they are occupying different rooms within the same address. It becomes quite problematic for courts to determine what is going on inside the dwelling, and if they are still maintaining intimate relations, and family courts desire to avoid the "liar's contests" that so often accompany the stories of couples whose interests have diverged.
The fact of filing a dissolution, itself, has been found by appellate courts to be insufficient to prove physical separation as in a case where the husband filed, but went off on a international speaking tour for two years and then returned, who discovered in the court's view the marriage had continued all along.
In another case, the husband moved out to live with his girlfriend, but brought his laundry home to the wife each week to do every week. This was not a physical separation.
A separation to be effective needs to reflect a final breakup in the marriage. Ambivalent, on and off again, spouses are difficult to evaluate but the court is always going to error on the side of finding the parties have not separated if the evidence is inconclusive. This is because the policy of the law is to promote marriage, and court's are reluctant to second guess parties who fail to act with exquisite clarity. Reconciliation is a related topic, and where it is found to exist downstream (so called 'serial relationships' of get mad and make up) it will wipe out an otherwise valid physical separation.
Today, in this economy, the notion that parties must be living in two households in order to show convincing evidence of an intent to separate may be unrealistic and unfair. Many couples are forced by financial constraints to live at the same address, unfortunately loathing most or every moment of it. This is a new development in the law of physical separation in California, and may lead to some new appellate court decisions which liberalize the existing standards, and most notably the holding of the case of Marriage of Norviel. Norviel is a middle level appellate decision which is not binding on California Trial Courts, but may be followed by them as the judges feel is appropriate. That decision essentially requires that the parties, if they want to be considered separated, must:
* Clearly communicate the intent to separate to the other mate and everyone else you both know
* Move out physically or physically partition the house (nail the doors between rooms shut!)
* Divide financial accounts, including joint checking and credit accounts (cancel joint cards)
* Decline marital counseling
* Cancel prepaid vacations and do not take trips together
* Don't take your laundry "home"
* Don't date your spouse and don't be intimate
* Tell anybody who asks the marriage is toast and you are filing for divorce
* File for dissolution
* Still expect to lose the issue if you don't aggressively move the divorce forward, earlier rather than later
Fortunately, there are other cases which trial courts can follow which are not nearly so draconian if circumstances are different but nonetheless convincingly demonstrate a final and complete break in the marital relationship.
The take away from all of this is: You cannot have your cake and eat it too! Beware, and be clear or assume the risk. |
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| April 08, 2010 |
| How is the DATE OF SEPARATION determined in California? |
| Posted By Thurman Arnold |
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Q. How is the date of separation determined?
A. This is a critically important question, that no non-family lawyer would have much of a clue about and so it is my honor to set forth an outline here of what you need to know - since the justice system will pretend you knew it anyway, when of course you otherwise did not!
Once spouses separate, all their earnings and everything that is acquired with those earnings are separate property of each spouse, respectively.
Physical separation doesn't exist just because one or even both spouses have started a divorce or legal separation proceeding. There is a box at page one of California Judicial Council Form FL-100 which sets forth each person's contentions regarding the date of separation but this is in no way determinative. It is true that often people agree on the date, but there are good reasons why they may not.
For instance, if your wife buys the winning lottery ticket a month after you and she separate, she would have an a fiduciary duty duty to disclose the winnings but they would nonetheless be her separate property. You can imagine hard hard you would argue for a separation date after the ticket was purchased and the entire case might then be about the correct date of separation. Or, consider a situation where a major liability is incurred on a given date; how that liability is assigned between the parties may have everything to do with whether it occurred before or after separation.
The issue also commonly arises when people reconcile after a physical separation for some fleeting period. Does this extend the original date of separation and create a new, later, date? Yes.
What if the spouses reside intwo households now, but continue to date, have intimate contact, or take vacations. Might this affect the date of separation? Absolutely. Or, what if they want to keep the fact of separation secret from family or friends, does this have an impact? Yes it may.
Spouses can stipulate to a date of separation, as is often the case. But when it matters to how property or debt is characterized or divided, or what the length of the marriage was for purposes of awarding spousal support, or where the parties' conduct has arguably been ambiguous, it becomes a contested issue that a family trial must resolve after taking testimony and receiving evidence.
Often it becomes a "bifurcated issue," meaning a separate mini-trial may occur since the court's findings may have a major impact on other issues and those issues cannot be resolved (or lawyers are limited in what advice they can safely give) until the DOS (date of separation) is known.
For more information on physical separation and its legal significance, click here.
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