Recent Posts in Prenuptial Agreements Category
| October 14, 2010 |
| Marriage of Tharp, Important Victory Against Game-Playing Family Law Litigants |
| Posted By Thurman Arnold |
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On October 1, 2010, the Court of Appeal for the Fifth Appellate District issued what is a monumental decision affecting under-empowered spouses enmeshed in litigation in a case entitled IRMO Tharp (2010) 188 Cal.App.4th 1295. This is one of the biggest family law cases of 2010.
I am so excited by the Appellate Court's decision in response to what was clearly an abuse of litigation by in this case - the Husband - and of the abuses of discretion by the trial court, that I can barely contain my enthusiasm.
An obviously intelligent and experienced trial judge was reversed (up-ended) for failing to exercise fairness, for succumbing to bias, and for failing to maintain equanimity in the family court process under facts and circumstances that I will blog over the weekend - sorry.
This case speaks to abusive claims regarding prenuptial agreements, discovery abuse,
abuse of power by higher earners, and much more.
Judging is a terribly difficult task, but the administration of justice that our system depends upon requires that our appellate judicial officers act in appropriate circumstances. This they did, with vigor.
I will blog this important decision in detail over the coming weekend because there are a series of themes that may deeply affect family law litigants.
I predict that we will soon hear lawyers using this case name as a verb - as in "I was THARPED" or they "THARPED my client." Carl Tharp's name is destined to become a California Family Law synonym for abusive family litigation tactics and justice! I predict that we will see a THARP II once sanctions are issued.
Kudos to Attorney Dale R. Bruder - really nice job!
IMHO
Thurman W. Arnold III
http://www.ThurmanArnold.com/Blog.aspx
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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 I put my wife on TITLE to my RESIDENCE does she get half if we DIVORCE? |
| Posted By Thurman Arnold |
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Q. If I had my new Wife's name to my residence, do I give her half of the equity up to that point?
A. If you place your wife on title for any reason you run the risk that in the event of later divorce she will have some claim to the house, but not half.
Your question deals with the law of "transmutations"; a transmutation is a change in the character of property from separate to community property, or could include a change from community to separate property. These are complicated issues and very fact specific, so each situation (even each transaction) must be analyzed separately.
Whenever you change the form of title to a type of property that has titles (i.e., real property, automobiles, bank accounts) to add a person you run the risk of inadvertently transmuting the character of the property. People rarely intend this, but it happens quite commonly.
However, when an interspousal transfer unfairly advantages one spouse, there is a presumption that the transaction was induced by undue influence; this presumption may not apply, all other things being equal, if both parties enjoyed advantages). Marriage of Burkle (2006) 139 Cal.App.4th 712. It is the burden of proof of the party who was advantaged to show that the disadvantaged spouse's action was freely and voluntarily made, with full knowledge of all the facts, and with a complete understanding of the effect of the transaction.
Marriage of Matthew (2005) 133 Cal.App.4th 624.
Where a valid transmutation occurs (and deed transfers are presumptively valid), there still remains what is known as a Family Code section 2640 tracing right of reimbursement. This is a continuing separate property interest that belongs to you - assuming you do not and did not waive that reimbursement in clear separate writing. This is the separate property equity that exists as of the date of the new deed, into the future.
So, assuming on the date of marriage you place the home you received in your last divorce (btw, why are you getting remarried without a premarital agreement?) into joint tenancy with wife number 2. On that date the equity in that home is 100% yours and there is no Moore-Marsden effect to consider. Say you have $100,000 in equity.
In this simple example, absent a new transaction or a later refinance, you will continue to have a $100,000 separate property reimbursement claim in your home for all time, and in the event of a subsequent divorce, assuming at the time of the divorce sufficient evidence exists that allows you to prove the $100,000. That will typically simply consist of your mortgage balance on that date, and your testimony as to the fair market value of the property on that date (or an expert's opinion of value), with the difference being your 2640 reimbursement. You do not receive interest on that, but it does come "off the top" before the remaining equity - which would now be all community, is divided. The difference to note here is that if you had not deeded the property, it would remain your separate property subject to a Moore-Marsden reimbursement to community which usually is going to be smaller than the reverse situation.
I have written more about this in my Riverside County Family Law Blog. Use the search engine in the upper right corner of the page.
TWA
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