CHARACTERIZATION PROBLEMS RAISED BY CERTAIN ASSETS

Question 1

Apportionment of business profits

Answer 1

One spouse may bring an SP business into the marriage and devote community labor to the business. At divorce or death, the business may have appreciated and assets may have been purchased with business profits. To apportion between SP & CP aspects of the business, courts have developed 2 apportionment methods.

Question 2

2 apportionment accounting methods:

Answer 2

1. Van Camp
2. Pereira

Question 3

Van Camp Accounting

Answer 3

1. The manager’s services are valued at the going market salary.
2. The family expenses that were paid from business earnings are then subtracted.
3. The remainder, if any, represents the CP of the business. The rest of the business is SP.

Use where capital investment was the major factor in the business’s growth, and spouse’s skills and efforts were less of a factor. Look for instances where spouse
was paid substantial salary and large bonuses (meaning the community was compensated).

Formula:

1. Start with value of spouse’s services at market rates (how much would executives in similar positions be compensated on the market?)
2. MINUS family expenses paid from community funds EQUALS community component.
3. The balance is SP.

Question 4

Periera Accounting

Answer 4

SP consists of the manager’s seperate capital + a fair rate of return. The rest is CP.

Use where spouse’s time, skill, and effort are major factors in growth of business. Look for instances where spouse contributed creative ideas or develops new techniques, and/or worked long hours and only drew modest salary.

Formula:

1. Pay interest on SP (legal rate of 10% annum) on value of business at time of the marriage.
2. The rest is CP

Question 5

CA Supreme Court on using either Van Camp or Periera?

Answer 5

California Supreme Court has said that court is not bound either to adopt Pereira or Van Camp.

May select whichever formula will achieve substantial justice between the parties.

Question 6

Pension benefits

Answer 6

Employee retirement benefits accumulated during marriage, whether or not vested at the time of divorce, are CP

Question 7

Use a proration rule for pension benefits:

Answer 7

years service while married

_____________________________

total years employed to retirment

Question 8

Two options for taking former spouses pension benefits the spouse is waiting for:

Answer 8

1. if and when received decree; or
2. cash her out

Question 9

H’s election not to retire, despite ability to retirement maturing:

Answer 9

cannot defeat wifes present right to retirement benefit

Question 10

If a nonparticipant spouse (“NPS”) in a qualified pension plan divorces a participant spouse…

Answer 10

her community property interest is recognized; under federal law she can get a qualified domestic relations order (“QDRO”) and receive payments from the plan.

Question 11

What if the marriage ended by death rather than divorce. Does the NPS have a devisable interest in a qualified plan if she predeceases the participant?

Answer 11

No

There is federal preemption under the Employment
Retirement Income Security Act (“ERISA”), which trumps CP laws. Her interest is terminated when she predeceased the participant.

Question 12

Disability retirement benefits and workers’ compensation benefits are treated as:

Answer 12

wage replacement

Thus, disability retirement and workers’ compensation benefits are classified according to when received, not when earned so after divorce they are SP

Question 13

What about severance pay?

Answer 13

o No clear rule (Courts of Appeal are split) – argue both ways!:

• H’s severance pay is SP because it replaced lost earnings which after a divorce or permanent separation would be H’s SP; OR
• H’s severance pay is CP because it arose from a collective bargaining agreement and was thus earned by employment during marriage.

Question 14

Stock options

Answer 14

A stock option gives an employee (typically an executive) an option to purchase shares of the company’s stock at a set price on a certain date in the future. Stock options typically provide that they are not “vested,” and that the option-holder must be employed by the company as of
the date the option becomes exercisable for the option to vest.

Question 15

If the stock option is awarded during marriage but does not vest until after the economic community has ended….

Answer 15

the proration formula that is used in determining what portion of the option is CP and what portion is SP depends on the primary intent of the employer in granting the option.

Question 16

The divorce court determines that the stock options were awarded primarily to reward Hank for his past services, as a form of deferred compensation. The court should
employ which formula?

Answer 16

Marriage of Hug Proration Formula

Question 17

Marriage of Hug Proration Formula

Answer 17

the starting point for both the numerator and denominator of the fraction is the date of employment.

The fraction is then multiplied by the number of shares of stock that can be purchased under the options:

years from the date of employment to date economic community ends

____________________________________________

years from date of employment to date options become exercisable

Question 18

Suppose, instead that the divorce court determines that the stock options were awarded primarily to encourage Hank to remain with the company. The court should
employ the…..

Answer 18

Marriage of Nelson proration formula

Question 19

Marriage of Nelson proration formula

Answer 19

the starting point for both the numerator and denominator of the fraction is the date the options are granted.

The fraction is multiplied by the number of shares of stock that can be purchased under the options:

years from date options are granted to date economic community ends

____________________________
years from date options granted to date options become exercisable

Question 20

Goodwill of a professional practice…

Answer 20

is CP subject to equal division on divorce

(to the extent acquired during the marriage)

Question 21

Goodwill are:

Answer 21

those qualities that generate income beyond that derived from:

(1) the professional’s labor; and
(2) reasonable return on capital and physical assets.

Question 22

Goodwill is primarily established by….

Answer 22

expert witness testimony as to its value.

Question 23

Hobie and Winkie are married shortly after Hobie graduates from USC with a degree in history and Winkie graduates from nursing school. They both want to go to medical school, but realize they cannot both do so at the same time.

Because Winkie’s prospects for employment as a nurse are better than Hobie’s, they decide that Winkie will work the night shift in an emergency room while Hobie gets his MD. Four years (and $120,000 in GSL ) later, it
is graduation day. Hobie tells Winkie he has good news and bad news. The good news is that he will finally be a doctor. The bad news is he is filing for divorce. Is Hobie’s professional degree “property” that is subject to division on divorce?

Answer 23

No

To what then is Winkie (actually the community) entitled?

Reimbursement for cost of education if the education enhanced his earning capacity

Question 24

Is reimbursement available if the educational expenses were incurred before marriage and the loans were paid with community funds after the marriage?

Answer 24

Yes

Question 25

Defenses to reimbursement of community estate for educational expenses:

Answer 25

1. Community has already substantially benefited from the earnings of the educated spouse. If more than 10 years have elapsed since the degree was awarded, the presumption is that the community has substantially benefited, meaning that unless presumption is rebutted, no reimbursement. OR
2. if other spouse also received a CP-funded education.