Tricky Assets Flashcards
Commingled Bank Accounts
Presumption: Bank accounts w/ SP + CP assets are presumed CP.
BOP: Spouse claiming SP may rebut the presumption of CP using “Direct Tracing” or “Indirect Tracing”
Direct Tracing
SP proponent must show that the source of the funds used to purchase the asset came from SP deposits in the account, not the CP deposits.
Elements:
- Sufficient SP funds were available at the time of the purchase; and
- Proponent intended to use SP funds to purchase the asset
Indirect Tracing (Exhaustion Method)
SP proponent must prove that CP funds were exhausted at the time due to paying for family expenses (food, clothing, housing, recreation).
Two presumptions apply:
- Family expenses are presumed to be paid w/ CP FUNDS FIRST, and then SP funds as needed
- SP funds used to pay family expenses are PRESUMED TO BE A GIFT to the community.
Educational Degrees + Licenses
Degrees + licenses acquired during marriage are NOT CP.
Right of Reimbursement to Community:
- If CP or QCP funds were used to pay for education or training; and
- Earning capacity was significantly improved
Reimbursable expenses:
- Books paid by CP
- Tuition paid by CP
Not reimbursable:
- Living expenses paid by CP
- If parties waived right of reimbursement in writing
Defenses of Educated Spouse
No need to reimburse community if:
- More than 10 years has elapsed since education was received and the community substantially benefited from the education
- CP was used to pay for other spouse’s education; or
- Education reduces the need for spousal support
Educational Loans
Community entitled to reimbursement if CP funds were used during marriage to repay loans for a degree or license obtained before marriage.
Upon divorce, any outstanding educational loans are assigned to the incurring spouse.
Tort Proceeds for Injury Before Marriage
- Personal injury proceeds are the SP of the victim spouse
- Tort proceeds may be used to reimburse CP or SP of non-victim spouse if such funds were used to pay for injury-related expenses
Tort Proceeds for Injury During Marriage
- Personal injury proceeds for a claim arising during marriage are CP
- Upon divorce, all proceeds are assigned to victim spouse unless:
a. Proceeds commingled w/ CP and are untraceable;
b. Proceeds have been spent; or
c. Justice requires awarding a portion to the non-victim spouse, but at least 1/2 of the proceeds must be assigned to injured spouse
Division of Tort Proceeds Upon Death
Tort proceeds for personal injury are characterized as CP at the death of either spouse.
Retirement Benefits
- Retirement benefits accrue during marriage
- Both vested + unvested pensions are CP
Time Rule:
If retirement benefits are based on # of years employed + partly earned before marriage:
CP takes a fractional share of retirement pension:
- Numerator= # of years employed while married
- Denominator= # of years under retirement plan
Federal Preemption for Government Pension Plans
- Community doesn’t have an interest in a pension plan governed by ERISA.
- Once federal benefit is paid out, CP applies
Retirement Benefits Where Spouse Not Yet Eligible
Court will apply one of two methods to determine CP share of retirement benefits at divorce:
- Division in kind. Court reserves jurisdiction to supervise payment upon retirement. The “time rule” will be applied to the known benefit in order to calculate the percentage paid to CP.
- Cash out: if present value can be ascertained, the non-participant is awarded cash or assets equal to the value of his CP share of the benefits.
Refusal to Retire:
- Spouse may assert right to receive retirement benefits if employee spouse is eligible to retire but chooses not to.
Stock Options
Considered CP if:
- Awarded by employer in lieu of compensation;
- Accrue during marriage (even if they aren’t exercisable until after divorce).
Time Rule:
CP takes a fractional share of stock:
- Numerator= # of years b/w when stock option was awarded + date of divorce
- Denominator= # of years b/w when stock option was awarded + time when it was available to be exercised
Considered SP if:
- Replacing earnings after divorce/separation
Disability Benefits
CP: If intended to replace martial earnings/retirement benefits.
SP: If intended to replace earnings after dissolution.
“The Goodwill” of CP Business
Treated like CP if creating during marriage
- Based on future biz expectation, name, and reputation of entity
- Generates income beyond labor of spouse and reasonable return on capital + physical assets
Valuation techniques:
- Expert testimony providing market sales valuation of goodwill
- Comparing biz in question to peer businesses to determine what excess earnings are attributable to goodwill
Severance Pay
CP: If structured like retirement benefits
SP: If meant to replace lost earnings after divorce/separation.
Whole Life Insurance
Divorce:
- CP in proportion to # of premium payments made w/ community funds
Death:
- Mixed Funds– CP in proportion to # of premium payments made w/ community funds
- Community Funds– 1/2 of proceeds to surviving spouse; 1/2 proceeds to 3P beneficiary (if someone other than surviving spouse).
Term Life Insurance (only covers risk of death)
Divorce
- Policy holds no value to CP because no investment component
Death
- Apportion community interest; or
- Look @ final premium payment to determine whether proceeds are SP or CP. If final payment paid w/ SP, then proceeds are SP. Vice-vera.
SP Business (Pereira Approach)
Logic: Community should get a favorable share of the SP business because its increase in value can be attributed to a spouse’s labor (CP).
Factors: spouse’s personal time, effort, character, energy, capacity, and salary paid.
Formula:
SP= value of SP biz @ marriage + (value @ marriage * fair rate of return [assume 10%] * years of marriage)
CP= FMV of SP biz @ divorce - SP
SP Business (Van Camp Approach)
Logic: Community should get a less favorable share of the SP biz because the primary reason for its increase in value is the character of the biz rather than spouse’s labor.
Factors: adequacy of compensation paid to SP spouse (high salary or large bonuses) implies that community has already been fairly compensated.
Formula:
CP= reasonable value of services provided during marriage - family expenses traceable to biz assets
SP= FMV of biz @ divorce - CP
Reverse Pereira (CP share of biz appreciation during separation)
CP= value of CP biz @ separation + (value @ separation * fair rate of return [assume 10%] * years separated) SP= FMV of biz @ divorce - CP
Reverse Van Camp (CP share of biz appreciation during separation)
SP= reasonable value of services during separation - salary already paid CP= FMV of biz @ divorce - CP
Capital Improvements (Real Property)
SP used to improve other’s spouse’s SP
- Spouse is entitled to reimbursement for contribution unless transmutation in writing or written waiver of right to reimbursement.
SP used to improve CP
- Reimbursement from community available to SP spouse
CP used to improve either spouse’s SP
- Community is entitled to reimbursement or enhanced value (whichever is greater)
