Articles Posted in Community Property

California’s community property system is meant to simplify property division issues in divorce cases by making it clear that all property gained through the efforts of either or both spouses during the marriage is to be split evenly between them. The reality, however, is that complicated issues still arise, including those related to property and income taxes. The state’s Fourth District Court of Appeals recently considered such a case.

accounting-calculator-tax-return-90376-mHusband and Wife married in 1997 and had two daughters before separating nine years later. While their divorce case was pending, the couple entered into a “post nuptial agreement,” wherein they resolved various issues, including their rights to the family home in Southern California. They agreed to list the home for sale and to treat the proceeds as community property, except that Husband was entitled to an additional $2.5 million for separate property funds he had contributed to the residence.

The couple eventually sold the home in 2009 for $10 million. They used nearly $1.4 million from the proceeds to pay state and federal taxes on their estimated capital gains from the transaction. They evenly divided the remaining $3.5 million after covering the additional $2.5 million owed to Husband, as well as interest, fees, commissions, and closing costs. Husband and Wife filed separate 2009 tax returns, with each reporting $5 million in income from the sale of the family home. Husband was required to pay an additional $65,000 in estimated capital gains taxes, while Wife estimated a $475,000 refund because she included the $2.5 million separate property payment as part of her nontaxable basis for the property.

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If you’ve read this blog before, you may already know that we prefer to help clients resolve divorce and other family law matters through alternatives to litigation that help them work collaboratively with a former spouse to reach a positive solution. One of the many drawbacks of the traditional litigation route is the dizzying array of procedural requirements that can end up costing a person his or her case. A recent decision out of California’s Second District Court of Appeals is a good example of one of the primary procedural hurdles:  time limits and filing deadlines.

time-is-going-1415573-mHusband filed for divorce from Wife in May 2009, roughly 10 years after the couple was married. Following a six-day trial, the court ordered Husband to prepare a draft judgment reflecting both the trial court’s decision and a partial settlement agreement that the couple had reached. Wife refused to sign the draft judgment, however, and the court entered it as a final judgment in March 2013. The judgment divided the couple’s assets and set monthly spousal support to be paid by Husband to Wife. The court modified the judgment – with a few handwritten changes to the 12th paragraph – one week later. The court granted Wife’s request to further modify the judgment in May 2013, making clear that Husband was required to make an equalizing payment to Wife covering her share of his Individual Retirement Account (IRA).

Wife filed a notice of appeal two days later. The Second District dismissed the appeal, however, ruling that it was untimely. The applicable rules, the Court noted, require a person seeking to appeal a family court ruling to file an appeal within 60 days of the ruling. Although the lower court had just modified the ruling two days earlier, the Second District said the 60 days started to run when the trial court issued its original ruling in March 2013. That’s because the Court said the modifications made after that time were not “substantial.”

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If you’ve gone to one of those retirement planning sessions lately, you may already know that saving for life after work is not only incredibly important but also can be very complicated. These matters often become even more difficult in divorce cases, where spouses or a court have to decide how to divide savings that the parties can’t actually access yet. California’s Second District Court of Appeals recently considered such a case.

tightened-100-dollar-roll-1377964-mHusband and Wife separated in April 1998 after nearly 11 years of marriage. Husband had been working for the Los Angeles Fire Department for 18 years at the time and was eligible to retire in 2000. The couple entered into a marital settlement agreement in December 2000. The agreement divided the couple’s assets between the spouses and provided that all “income, earnings, employment benefits, or other property” acquired by one spouse after the separation date would be considered the spouse’s separate property. It also stated that Wife was entitled to half of Husband’s pension/retirement plan, due after he reached 30 years of service, if he decided to keep working past his earliest retirement date.

In 2010, Husband began participating in a new LAFD retirement program, the DROP program, which provides firefighters a lump sum payment upon their retirement, along with any monthly retirement allowance to which they are entitled under another plan. As a condition to the program, Husband agreed that his years of service and accrual amounts would freeze upon the date of his entry in the program. Money would be credited to his DROP account during the five-year period, and he would be able to access that money directly upon retirement.

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The State of California operates under a community property regime in which assets and debts derived from the efforts or actions of either spouse during the course of a marriage are considered joint property to be divided equally between the spouses in the event of divorce. In In re Marriage of Rynda, the California Court of Appeals for the First District explains what happens to community property when one of the divorcing spouses also files for bankruptcy.

dollar-2-1003609-m.jpgCarolina and David were married in January 1996. The couple worked together as owners of a small insurance company until Carolina filed for divorce more than eight years later. A superior court dissolved the marriage in May 2005 and ordered that all community property – including the business – be divided equally among the former spouses. When Carolina filed for bankruptcy in 2009, however, the court ordered that all valuations of the couple’s assets for the purpose of dividing it between them be halted until the bankruptcy proceedings were completed. A bankruptcy court-appointed trustee later sold much of the property. That included Carolina’s stock in the company, which the trustee sold to David.

Back in the superior court, Carolina filed a motion claiming that she was entitled to a 50 percent ownership interest in the business and to be compensated for the community debts that were extinguished during the bankruptcy process. She also argued that there remained community property from the marriage for the superior court to divide. The court disagreed. “[T]he bankruptcy court has superior jurisdiction to the superior court,” the judge said. “And if the bankruptcy court divided your businesses or sold them, then they’re done with them. I can’t do anything about that.”

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Under California’s community property system, any property obtained by one or both spouses during the course of a marriage and up until they separate is generally split evenly upon divorce. As the state’s Second District Court of Appeals recently explained, the value of community property is usually based on the property’s value at the time of a divorce trial, not the time of separation. That is, of course, unless the spouses agree to another valuation date.

calendar-1072482-mHusband and Wife separated in January 2012, after roughly 37 years of marriage. Ten months later, Husband stated in an income and expenses disclosure that he planned to close his accounting and financial services practice. The business had generated $115,000 to $140,000 in net profits per year over each of the previous three years. In 2014, he began winding up the practice, advising clients that he was retiring and that they would need to find a new accountant for the upcoming tax season.

A trial court denied Wife’s request to value the business based on what it was worth at the time the couple separated, rather than at the time of trial. Wife had sought this ruling because it was likely that the business would be worth significantly less by the time trial rolled around, given that Husband was winding down the practice and his clients were going elsewhere. The court said Family Code Section 2552 required it to assess the business’ value as of the date of the trial unless Wife showed that there was “good cause” to use another value date “in order to accomplish an equal division of the community estate of the parties in an equitable manner.” Here, it said Husband’s plan to retire was legitimate and did not seem designed to devalue the business for purposes of the divorce proceedings.

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As the Fourth District Court of Appeals explains in In re Marriage of Charles, community property, including a couple’s shared interest in a business, is usually valued at a time as close as possible to the time of trial, unless there is a good reason for valuing the property at the time of the couple’s separation.

1399006__concept_of_a_cash_reg.jpg“The subtext of this date of business valuation case illustrates for family law practitioners in how a strategy can backfire,” the court warned in describing the case. As the court went on to explain, a spouse who doesn’t operate or manage a business owned by the couple often asks a reviewing court to value the company based on the date of the couple’s separation rather than the date of the legal marriage dissolution proceedings. This is because the “non-operating spouse” is typically concerned that the business’s value may diminish over time. The operating spouse, on the other hand, has no incentive to dial back the valuation date. “Time is on their side as value slip slides away,” the court wrote.

In this case, Mr. and Ms. Charles separated in May 2006, but trial in the dissolution proceedings did not begin until more than five years later in August 2011. At the time of the separation, a certified public accountant valued Genesis Associates – Mr. Charles’s design partnership – at $226,000. Three years later, the same CPA valued the business at $198,000. The business flourished following the second valuation, however, and by October 2010 was valued by the same CPA at $716,000.

As the court describes it, Mr. Charles sprung into action. He hired a new attorney and filed a motion in December 2010 asking the trial court to value the business as of the time of the couple’s separation. At this point, all discovery had been completed and a trial date set for February. The trial judge denied Mr. Charles’s motion as untimely, noting that Mr. Charles waited until shortly before trial to file it.

Based on expert opinion, the trial court found that the total value of Genesis Associates – as of the date of the trial – was about $1.8 million.

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Celebrities: they’re just like us, well sort of anyway. Among other things, that means that they often encounter the same types of issues as regular folks in divorce cases.

microphone-1382165-m.jpgCalifornia is a community property state, in which property acquired by a spouse during the marriage, except for gifts or inheritance, is shared equally between the spouses in the event of divorce. That might seem like a pretty clear-cut rule, but divorcing spouses often resort to the courts to decide disputes over how certain property should be characterized or divided. The California Supreme Court recently took on the issue as it applies to a life insurance policy taken out by one spouse – legendary singer Frankie Valli – for the benefits of the other.

Husband and Wife separated in September 2004 after 20 years of marriage. More than a year before, Husband used money from a joint bank account to purchase a $3.75 million life insurance policy. He named Wife as the sole owner and beneficiary of the policy and paid premiums with funds from the joint bank account.

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Anyone who has been through a divorce probably already knows that it can be a stressful, complicated, and emotionally and financially draining experience. The legal issues involved may be even more complex in situations where the couple work together running a business. In In re Marriage of Greaux and Mermin, California’s First District Court of Appeals explains that the spouse who is ultimately awarded the business has the right to protect it from being devalued by the other spouse. In some cases, that may include seeking a court order to stop the spouse from starting a competing business.

stapling-machine-1440644-m.jpgIn this case Wife filed for divorce in 2009. During the six-day trial that occurred two years later, one of the few remaining disputed and unresolved issues was what to do with the beverage company they owned and jointly operated during the marriage. The company distributed and sold a type of rum.

The business was community property and the judge determined that both spouses brought “unique talents to it.” Husband had little education, training, or experience running a business, but the judge said his considerable effort and determination were “crucial” to the business’ success. Husband also developed relationships with others in the industry whose experience and personal relationships were very helpful to the business. Wife, on the other hand, had marketing and sales skills also crucial to the business, and her family history in the Caribbean served as the “brand story.” The trial judge also noted that Wife had a deep understanding of the rum, its ingredients, and the process for making it, and had qualified as an official industry “taster.” She was designated in company investment materials as the “face of the brand.”

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Retirement benefits are an important piece of the puzzle in transitioning comfortably to life after work. And often, they are the subject of intense debate in divorce proceedings. In In re Marriage of Green, California’s Supreme Court considered what to do with retirement benefit credits made available based on service before the marriage, but paid for with community money.

fire-extinguisher-483491-m.jpgMr. Green began working as a firefighter in 1989 and married his wife, Ms. Green, roughly two years later. He continued to work for the Alameda County Fire Department over the course of the marriage and earned retirement benefits through the California Public Employees’ Retirement System (CalPERS). Mr. Green also exercised his option to purchase four additional years of service credit for retirement purposes based on his stint in the U.S. Air Force before joining the Department. Under this option, Mr. Green agreed to pay bi-monthly installments of $92 for 15 years.

The Greens separated in October 2007. At that point, Mr. Green had paid more than $11,400 in payroll deductions toward the additional retirement credit. The payments were scheduled to be completed in July 2017.

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Bonuses are a common and often significant form of compensation for a number of people who live and work in California, particularly those in certain professional fields. In In re Marriage of Finby, the state’s Fourth District Court of Appeals explains that all or some of the money is likely to be deemed community property to be divided among spouses in the event of divorce.

untitled-1237498-m.jpgHusband and Wife married in 1985 and separated 15 years later in February 2010. Wife worked as a financial advisor during the course of the marriage and was employed by UBS before signing a contract with Wachovia in 2009. The company was later purchased by Wells Fargo.

Wife’s contract with Wells Fargo provided for a variety of bonuses, including a “transitional bonus” of more than $2.8 million. The bonus was premised on the fact that she had developed a list of clients – referred to as her “book of business” – whose investments were worth more than $192 million at the time and whose accounts were expected to go with her to the new job. Under the terms of the contract, the bonus was conditioned on Wife’s staying at Wells Fargo for more than 9 years and maintaining a gross production level of over $1.12 million, as determined on an annual basis. Wife opted to obtain the complete amount of the bonus immediately, however, and signed a loan agreement with her employer under which it agreed to forgive $27,700 each month over the course of 112 months. If Wife stopped working at any time during the period, the company had the right to demand the entire amount remaining on the bonus/loan.

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