Consulting with a Non-Family Law Attorney About Family Law Related Issues

Introduction

Frequently, individuals contemplating a divorce seek opinions about divorce laws and procedures from non-divorce lawyers with whom they have an ongoing personal or business relationship.

This article will hopefully help people contemplating a divorce and non-divorce lawyers in spotting important issues in pre-divorce counseling. Of course, this short article cannot fully address this broad area and is not intended to give legal advice.

Most Orange County divorce lawyers are more than willing to extend the courtesy of having a telephone conversation with a non-family law attorney about his or her client who is contemplating divorce.

Providing accurate and early guidance to an individual considering divorce may be critical to that person’s decision-making process. The advice may encourage an individual to act more quickly or it may encourage an individual to work on the relationship, seek counseling and avoid a divorce altogether. There is a need to understand the true cost of divorce. Accurately seeing the issues will help in revealing the true consequences of a divorce. The total costs include an Orange County divorce lawyer and other professional fees for the individual and potentially for his/her spouse, opportunity costs due to spending a year or more in divorce litigation, spousal and/or child support, commissions relative to the sale of assets, and so on. An accurate and honest analysis of all divorce costs is important to understand before filing for divorce.

Standard Family Law Restraining Orders

Does the Filing for Divorce Result in the Issuance of Restraining Orders?

Filing a petition for divorce or legal separation results in the issuance of restraining orders. These restraining orders may influence a decision to file or the timing of the filing for divorce.

The Standard Family Law Restraining Orders (“SFLRO”) issued when the divorce petition is filed, prohibit each party from the following:

  • Removing the minor child or children of the parties, if any, from the state without the prior consent of the other party or an order of the court;
  • Cashing, borrowing against, canceling, transferring, disposing of, or changing the beneficiaries of any insurance or other coverage, including life, health, automobile and disability, held for the benefit of the parties and their minor child or children;
  • Transferring, encumbering, hypothecating, concealing, or in any way disposing of any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court, except in the usual course of business or for the necessities of life; and
  • Creating a non-probate transfer or modifying a non-probate transfer in a manner that affects the disposition of property subject to the transfer, without the written consent of the other party or an order of the court. Before revocation of a non-probate transfer can take effect or a right of survivorship to property can be eliminated, notice of the change must be filed and served on the other party.

These orders could stop and/or complicate:

  • A vacation;
  • A residential move of a parent and child;
  • Sale of a business;
  • Sale of stock or other investments;
  • Sale of a house;
  • The completion of a buy-sell agreement and transfer of a share of a business to an existing employee, or other third party;
  • Cancellation of a life insurance policy; and
  • Estate planning

Date of Separation in Divorce

What is the Date of Separation?

The date of separation is “the date on which there is a complete and final breakdown of the marriage.” The date of separation is a frequently misunderstood concept. This issue can be the subject of a multi-day bifurcated separate divorce trial. All Orange County divorce lawyers would agree that an understanding of the law as it relates to separation and its significance can avoid expensive litigation and unexpected consequences.

Is a Person Separated If They Move Out of the Marital Residence?

A separation does not necessarily occur when a spouse moves into a separate bedroom or moves out of the family residence. It is a date when one spouse clearly communicates that the relationship is irrevocably over and subsequently, conducts his or her life consistent with being a non-married person. One spouse must have a subjective intent to end the marriage and there must be objective evidence of conduct furthering that intent. In other words, one spouse must have the intent to get a divorce or permanently separate, take action consistent with the intent and clearly communicate the intent to the other party.

What Issues Are Impacted by the Date of Separation?

The date of separation may be important relative to the following issues and many more:

  • The valuation date of a business;
  • The responsibility for a debt;
  • The characterization of earnings as separate or community;
  • The length of a spousal support order; and
  • The characterization of stock options.

Such events as marriage counseling, sex, gifts, cards and/or social dinners may affect the determination of the date of separation.

The length of the marriage may affect spousal support. California defines a ten-year marriage as a “long term” marriage. Characterization of a marriage as long term, may result in lifetime spousal support. It can certainly impact the court’s reservation of jurisdiction to make spousal support orders long after it would have been terminated in a “short term” marriage.

Amount of Support in Divorce

How Much Will the Family Law Court Order in Support?

Individuals contemplating separation and divorce are generally concerned with spousal and child support. Family Code sections 4052 and 4055 control child support. Child support is calculated using a complex algebraic formula reflected in a software programs known as “DissoMaster” or “XSpouse.” Permanent spousal support is determined by the application of 13 factors in Family Code section 4320. Temporary spousal support is generally determined by a software program.

Spousal and child support are based on each party’s total income from all sources. The combination of a child and spousal support may result in a spousal and child support package equaling up to 50% of a payor spouse’s income. Circumstances can certainly cause the percentage to be far lower, but it is accurate to say that the total support level can be devastating. If the parties share custody on a 50/50 basis and have equal incomes, there will likely be no child or spousal support. Every situation is unique. All Orange County divorce attorneys would agree that predicting what a court will order in support is essentially impossible except in the simplest of cases.

Tax in Divorce

Is Tax Important to Understand Relative to a Divorce?

Tax can play a significant role in a divorce. An individual should be aware of the significance of this issue, not just before filing, but during the entire process. An individual going through a divorce expects to have their assets reduced by 50% after the divorce. Individuals probably have not considered the potential further reduction in net worth based on taxes if assets are sold.

The sale of an asset (e.g., real property, stock) in a divorce can result in the recognition of tax. However, the transfer of assets between spouse’s incident to a divorce does not result in the recognition of tax pursuant to Internal Revenue Code (26 U.S.C. § 1041).

Tax affects the amount of pre-12/31/2018 spousal support and family support order. Child support is tax-free to the recipient.

Tax issues may affect the value of accounts receivable, tax affecting S-corporation, valuation of stock options, etc.

Residence Rental Charge in Divorce

Can a Spouse Be Charged for the Use of a Community Asset After Separation?

A spouse remaining in the family residence after the date of separation may be charged for the fair rental value of the residence in what is referred to as a Watts Charge. (In re Marriage of Watts (1985) 171 Cal.App.3d 366.) This issue may motivate an individual to move out of the residence or sell the residence to avoid the charge. This principle may exist relative to other community assets.

Residence Valuation in Divorce

How is a Residence Valued in a Divorce?

The disposition of the family residence is often the key concern to a client in a divorce. Many individuals desire to retain the residence but have not logically analyzed economics of such a decision.

Individuals considering divorce need to understand how assets are divided. This is particularly important if an individual wants to know what assets they will have after the divorce. If a house is awarded to one spouse, it is awarded to the spouse at fair market value less existing liens. There is no deduction for capital gains taxes and/or commissions that would have been incurred had the house had been sold.

Evidence

Most clients are not aware that evidentiary issues are relevant to divorces. A divorce trial is a trial in the traditional sense. It would be a huge error to assume that the rules of evidence do not apply in divorces.

Hearsay rules apply, records must be authenticated, burdens of proof must be met, and so on. A spouse can be sanctioned for destroying electronic evidence on a cell phone, PDA or computer. The age of electronic discovery has arrived in divorce actions.

If a spouse intends to claim certain assets as separate property in a divorce case, there is a burden of proof to trace separate property monies from their original source into the currently existing assets. Tracing requires records. The records may include bank statements, canceled checks, deposit slips, stock/brokerage statements, passbooks, escrow statements, and other documents that show the flow of funds. Banks, stock brokerages and escrow companies do not retain these records indefinitely. The earlier the request is made for the records by an Orange County divorce attorney, the better the chance that the records will still exist. Any delay to request the records could result in the institution’s destruction of the records. If the records are not available directly from the institution, it may not be possible to trace.

What Records Must Be Exchanged in a Divorce?

If a spouse intends to file for divorce, then it is generally advisable to carefully organize and copy a full and complete package of financial records for the other spouse, both Orange County divorce lawyers, and both accountants. The initial and basic record package should include at least the following:

  1. Five years personal tax returns;
  2. Five years corporate tax returns;
  3. Most recent corporate financial statements;
  4. Deeds to real estate;
  5. Credit card statements for the last 24 months;
  6. Bank statements and canceled checks for the last 24 months;
  7. Check registers for the last 24 months;
  8. Stock brokerage statements for the last 24 months;
  9. IRA/401(k) statements for the last 24 months;
  10. Most recent personal financial statements; and
  11. Other relevant financial records.

The time spent organizing and copying these records will expedite the resolution of the case and reduce costs significantly.

Separate Property Reimbursement

Frequently, a spouse contributes pre-marriage assets to the marriage and uses those assets to buy a joint asset. The spouse may be entitled to a reimbursement when the contribution can be traced to the spouse’s separate property.  For example, if a wife contributes $100,000 in separate property money for the purchase of a marital residence, in a divorce, the community may reimburse the wife $100,000 if she can trace the $100,000.

Businesses

The owner-operator of a business may want to know how the value of a business is determined in a divorce. This issue presents a number of complex issues in divorces. Many individuals often have significant misconceptions.

The business will generally be awarded to the operator-spouse with offsetting assets awarded to the other spouse. The fact that the community business would not exist or would not be successful without the services of the operating spouse is not relevant to valuation.

The owner-operator will generally be ordered to “buy” the business from the community in a divorce. The owner-operator generally cannot force a sale of the business or force the non-operating spouse to accept the business in the divorce. The owner-operator cannot shut down the existing community business and open a new similar business to avoid being charged with the value of the community business.

A business is generally valued differently in divorces than in the open market. The value is based upon the historical earnings not the projected future earnings and/or potential future events. In a divorce, the value of the business is not reduced for potential capital gains taxes or the potential costs of sale, in that the business is not being sold. It is valued at the value it has to the operator-spouse as an ongoing investment.

Community Interest in Separate Property Business

Can the Community Acquire an Interest in a Separate Property Business?

In some cases, the most important question a client in a divorce will have will relate to whether there is a community interest in a business that was owned before the date of marriage.

Generally speaking, family law provides for reimbursement to the community for community services given to a separate property business. Family law provides for two basic methods to allocate the increase in the value of the business during the marriage between community and separate property.  The non-operating spouse does not acquire an interest in the business but rather a right to reimbursement.

The two leading cases are Van Camp v. Van Camp (1921) 53 Cal.App. 17, 199 P. 885, and in Marriage of Pereira (1909) 156 Cal. 1, 103 P. 488.

Simply stated, Van Camp divides the increase in value of the business by allocating a reasonable and adequate rate of compensation for the services of the operator-spouse to the community and allocates the remainder of the increase in the value of the business to the separate property of the operator-spouse as his or her separate property. The formula is generally applied to capital intensive businesses and generally favors the spouse who owns the business.

Pereira allocates a reasonable rate of return to the separate property business and allocates the remainder of the increase in the value of the business to the community. This formula is generally applied to labor-intensive businesses and generally favors the community.

Fiduciary Duties and Disclosure in Divorce

A potentially divorcing individual should understand that the issues of disclosure and fiduciary duties are very significant in family law. The issues have been present in family law from the beginning. However, with relatively recent legislation (Family Code §§ 721(b), 1100(e) and 2100(e)) and the case of Marriage of Feldman (2007) 153 Cal.App.4th 1470, 64 Cal.Rptr.3d 29 (4th District), these issues have now been brought to the forefront.

In a divorce, a client should be proactively prepared to make full and immediate disclosures to his/her spouse to avoid potential and serious sanctions.

Traditionally, in divorces, the spouse without access to key documents had to ask the right questions and demand the specific key documents in order to determine the extent, nature and value of the community estate.  This burden placed the “in-spouse” in an advantageous position. Frequently the “out-spouse” did not know what to ask, failed to aggressively seek records, could not afford to fight a discovery war, etc. The new rules somewhat level the playing field.

In the landmark divorce Feldman, the Court of Appeal seemingly changed the rules in divorce litigation, or at a minimum, signaled the beginning of new thinking regarding the production of documents and disclosure.  The Feldman court stated that under Family Code §721(b), “in transactions between themselves, a husband and wife are subject to the general rules governing fiduciary relationships which control the actions of persons occupying confidential relations with each other.” (153 Cal.App.4th at 1476.)

In a divorce, Family Code section 1100(e) requires each party to act with respect to the other consistent with the general rules governing fiduciary relationships until the assets and liabilities have been divided between the parties. The duty obligates each spouse to make full disclosures to the other spouse of all material facts and information regarding the existence, characterization and valuation of assets that are or may be community property.

Family Code section 2100(c) requires a party or an Orange County divorce lawyer to make a full and accurate disclosure of all assets and liabilities in which the parties have or may have an interest. The disclosure must be made in the early stages of the proceeding.

In Marriage of Feldman, a husband who, during the divorce, failed to disclose the existence of assets and income to his wife. He demonstrated a pattern of non-disclosure, showing he had no intention of complying with the disclosure rules, thus warranting sanctions. (In re Marriage of Feldman, SUPPA, 153 Cal.App.4th 1485, at 1488.)  The family law court ordered him to pay his wife financial sanctions and fees in the amount of $390,000 in the divorce action.

Of particular significance, sanctions were not ordered pursuant to the California Code of Civil Procedure but under the fiduciary duty related Family Code sections (Family Code §§ 271, 2107).

The sanctions were ordered even though there was no economic damage to the wife. The wife’s divorce lawyer learned of the non-disclosed assets prior to the family law trial and thus was able to do the necessary investigation to receive her share of the assets. The family law court held that the wife’s divorce lawyer need not prove damage. The court stated that the sanctions were designed to deter repetition of non-disclosure and to encourage disclosure during a divorce.

The court found that the husband had the duty to:

  • Disclose material facts to the wife in writing;
  • Supplement and augment the discovery continually; and
  • Disclose material data immediately and before a new project.

The Feldman court cited Marriage of Brewer & Federici (93 Cal.App.4th 1334, 1348 (2001)), which stated: “a spouse who is in a superior position to obtain records or information from which an asset can be valued and can reasonably do so must acquire and disclose such information to the other spouse.” (153 Cal.App.4th 1487-88.)

The court rejected Mr. Feldman’s divorce lawyer’s argument that the non-disclosure was unintentional. The court held that the fact that the non-disclosed assets were insignificant in relation to the entire estate did not excuse the failure to disclose. The family law court also rejected the husband’s argument that his non-disclosure of new companies was excused because their formation was simply part of his “standard business transactions.”

The court made it clear that “hide the ball” and delay tactics in a family law matter were unacceptable.

Of significance also is the fact that the duty to disclose continues until the assets are distributed. This means that the duty to disclose will continue after the judgment is entered until the assets are distributed between the parties.

To avoid significant financial sanctions in a divorce, a divorcing spouse must proactively provide the other spouse with sufficient information to allow the other spouse to determine the extent, nature, character and value of the community estate. The court was attempting to level the playing field in divorce discovery.

This ruling motivates the managing spouse to disclose fully, early and often. In turn, discovery battles should essentially be unnecessary, resulting in reduced fees.  On the other hand, the disclosures will likely increase the fees incurred by operator-spouse determining what is “material.” Time and money will be spent attempting to determine what needs to be disclosed to avoid sanctions and/or a potential “set aside” of the divorce judgment.  A client’s Orange County divorce attorney will have to determine what level of disclosure complies with the code.  In a divorce, the spouse with superior access to documents and knowledge must determine the level of disclosure required. This spouse will be at-risk if the disclosures are insufficient.

In Marriage of Feldman, the Court of Appeal held that responding to divorce discovery accurately does not necessarily prevent a party from being guilty of non-disclosure. The duty to disclose, in a divorce, requires disclosure to be made early in the divorce. If the event in question is not subject to early discovery, a party is not excused from the duty to inform the other spouse of the events, facts, and/or information. Disclosure should be a part of divorce strategic planning from before the date of separation.

Significant time, attention and analysis should be given to these disclosure requirements to avoid financial sanctions and/or a judgment set aside. Obviously, no one wants to go through a divorce twice with the same spouse.

Pre-Nuptial Agreements / Post-Nuptial Agreements

A discussion about the consequences of a divorce would be incomplete without a careful analysis of pre-nuptial agreements. Pre-nuptial agreements can be attacked on a number of grounds. Voluntariness is a significant issue. Ambiguity is a problematic issue with many agreements. Litigation regarding a pre-nuptial agreement can increase the cost of a divorce dramatically and increase the time required to complete the divorce. The interpretation, enforceability and validity of prenuptial agreements can be the subject of multi-day bifurcated trials.

Unreported Income

A person contemplating a divorce who has received unreported income in the last several years should carefully consider the consequences of voluntarily placing themselves in a position of having to execute mandatory forms (e.g. income and expense declaration) and testify under penalty of perjury about his/her actual income and/or his/her spouse’s income. Careful consideration should be given to consulting with criminal tax counsel and amending prior tax returns prior to filing for divorce. An Orange County divorce attorney cannot be aware of unreported income and allow a client to misrepresent the actual income in a divorce action. Some judges feel duty bound to report unreported income.

Conclusion

A lawyer not specializing in family law can be of significant assistance to a client contemplating a separation or divorce. Spotting issues and alerting clients to issues that need further exploration and analysis may turn out to be invaluable.