California Marital Settlements – February 2005 Summary

Legal Developments

Joinder of third party business held necessary to prevent its sale of property

The failure to join the husband's third party business was one reason why the Automatic Temporary Restraining Orders (ATROs) were ineffective to prevent the sale of real property by the business. Gale v. Super. Ct. (Gale) (2004) 122 Cal.App.4th 1388, 19 Cal.Rptr.3d 554. Law and Strategy updated at Question 106.

Importance of Terminating Family Trusts Emphasized

In Heaps v. Heaps (2004) 124 Cal.App.4th 286, 21 Cal.Rptr.3d 239 , the husband and wife, not realizing that the revocable family trust that they created owned their family residence, sold it and took title to the resulting promissory note and deed of trust in their own names. When the wife died, the husband, believing that he owned the deed of trust, put it into a trust with his new wife. When he died, she incorrectly believed that she owned the note and deed of trust. In fact, since the trust owned the residence, the sale by husband and his first wife was a conversion of trust assets and their children, who were beneficiaries under the trust, owned an interest in the assets. Question Help updated at Question 131.

Importance of Assigning Choses in Action Emphasized

In Schauer v. Mandarin Gems of Calif., Inc. (2005) 125 Cal.App.4th 949, 23 Cal.Rptr.3d 233 , the wife's 3 carat diamond wedding ring was confirmed to her as her separate property. She subsequently learned that the quality of the stone was far less than her former husband had been led to believe and he overpaid for it by $24,000. Her attempts to sue the jeweler were initially stymied by the fact that she was not assigned the chose in action in the property settlement. New Question 166 . See Updated Product Features below.

Revenue Ruling on FICA and FUTA Withholding

Rev. Rul. 2004-60 provides: "The nonstatutory stock options are subject to FICA and FUTA taxes at the time of exercise by the nonemployee spouse to the same extent as if the options had been retained by the employee spouse and exercised by the employee spouse. The nonqualified deferred compensation also remains subject to FICA and FUTA taxes to the same extent as if the rights to the compensation had been retained by the employee spouse. To the extent FICA and FUTA taxation apply, the wages are the wages of the employee spouse. The employee portion of the FICA taxes is deducted from the wages as and when the wages are taken into account for FICA tax purposes. The employee portion of the FICA taxes is deducted from the payment to the nonemployee spouse." Law and Strategy updated at Question 230 and 255; New Questions 231 and 277 . See Updated Product Features below.

Importance of Compliance with IRC IRA Transfer Provisions Emphasized

Cohen v. CIR (2004) T.C. Memo. 2004-227 provided an illustration of the tax effect of a proper transfer and the consequences of failing to comport with the IRC. There, the husband's $120,000 IRA was ordered equally divided. There were no tax consequences after it was divided with a trustee-to-trustee transfer. However, when the wife subsequently withdrew her share from her IRA believing that it was nontaxable to her, she was assessed taxes, penalties and interest. Law and Strategy updated at Question 246.

Importance of Description of the Nonemployee Spouse's Interest in Retirement Benefits Emphasized.

In In re Marriage of Simundza (2004) 121 Cal.App.4th 1513, 18 Cal.Rptr.3d 377, the parties specified that the nonemployee spouse would receive $120 per month for 120 months as her full interest in her husband's retirement. When she later realized that the plan was more valuable than she thought, she petitioned to divide the excess as an “omitted asset.” As the parties had described her share as a fixed amount, her motion was denied. Law and Strategy updated at Question 271.

Importance of Monitoring Changes in Retirement Benefits Emphasized.

In In re Marriage of Davis (2004) 120 Cal.App.4th 1007, 16 Cal.Rptr.3d 220, a DROP program was set up whereby LAPD officers could retire, begin receiving their full pension, which was deposited into a Deferred Retirement Option Program account and still draw full salary. When they finally left service in five years, they would receive their full DROP account plus continue to draw retirement. The Court of Appeal reversed a trial court determination that the officer's former spouse could not receive both her spousal support and her interest in the DROP account. Law and Strategy updated at Question 281.

Importance of Terminating Spousal or Family Support upon Death of the Payee Spouse Emphasized.

In Okerson v. CIR (2004) 123 T.C. No. 14, 123 T.C. 258, Tax Ct. Rep. (CCH) 55,742, the payor was denied over $150,000 in deductions because despite labeling the payments as deductible alimony, the trial court's order required substitute payments should the recipient die before the entire obligation was fulfilled. The fact that she did not die and no substitute payments were actually made did not save the deduction. Law and Strategy updated at Question 389.

Chief Counsel Advisory Suggests Safe Harbor that will Convert Interest Payments to Nontaxable Income

A Chief Counsel Advisory written determination (IRS CCA 200444026) has held that interest paid on past due child support is generally taxable to the recipient. However, it also stated that "if a divorce or separation agreement specifically provides for interest on past-due child support and characterizes such interest as payable for the support of children of the payor spouse, we believe that payments under those circumstances may rightfully be considered excludible from the recipient parent's income." Thus, the IRS has suggested a safe harbor that will convert the interest payments to nontaxable income. Since interest on past due child support accrues as a matter of law and when paid is not deductible to the payor, adding this phrase to the MSA costs the obligor nothing while providing a potential benefit to the obligee and children. New Question 451. See Updated Product Features below.

No Obligation to Provide Monthly Proof of Continued Eligibility as a Condition for Receipt of Child Support

There is no obligation to provide monthly proof of continued eligibility as a condition for receipt of child support for an adult child between 18 and 19 years of age. (In re Marriage of Hubner [Hubner III] (2004) 124 Cal.App.4th 1082, 22 Cal.Rptr.3d 549 .) Law and Strategy updated at Question 456.

Custody Order Splitting Siblings Reversed

In In re Marriage of Heath (2004) 122 Cal.App.4th 444, 18 Cal.Rptr.3d 760, an order splitting siblings was reversed where there was insufficient "proof of compelling circumstances, based on evidence that the family law court can evaluate and this court can review" that it was necessary to do so. Law and Strategy updated at Question 500.

Importance of Custody Burden of Proof Emphasized

In Ragghanti v. Reyes (2004) 123 Cal.App.4th 989, 20 Cal.Rptr.3d 522, the Court of Appeal rejected a mother's argument that something in addition to best interests need be shown to take custody away from her after she had been the sole custodian for child's entire six years of life. She argued that the father should be required to show detriment or that her care was deficient in some way. The Court of Appeal disagreed. Where no final permanent custody determination has been made, the trial court must use the best interests analysis and consider all circumstances. Law and Strategy updated at Question 505.

Importance of Continuing Jurisdiction Emphasized

Be aware that unless custody provisions are limited temporally, they will continue so long as the child is a minor and subject to the jurisdiction of the court. This was demonstrated by In re Marriage of Kreiss (2004) 122 Cal.App.4th 1082, 19 Cal.Rptr.3d 260, wherein the mother agreed to waive her privilege regarding her psychological medical records “through the pendency of this action.” Later, she sought permission to travel with the child and the father sought access to her psychological records again. Her objections were overruled because “the pendency of this action” lasted through the child's minority. Law and Strategy updated at Question 541.

Updated Product Features

New Option to Provide for Reimbursement of Separate Property Contributions to Spouse's Separate Property During the Marriage

Fam. Code §2640 (c) has been added to provide:

"(c) A party shall be reimbursed for the party's separate property contributions to the acquisition of property of the other spouse's separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division."

You may now specify reimbursement for such contributions. New Questions 115-117 and 119-121.

New Option to Add Choses in Action to Property Division Provision

You may now specify that choses in action associated with specific property will be assigned to the party receiving the property. New Choice at Question 148; New Question 166.

New Option to Add FICA Reimbursement for Nonqualified Stock Options

You may now specify reimbursement for FICA taxes withheld from the nonemployee spouse's share of the nonqualified stock options that benefit the employee spouse. New Question 231.

New Option to Add FICA Reimbursement for Nonqualified Deferred Compensation

You may now specify reimbursement for FICA taxes withheld from the nonemployee spouse's share of the nonqualified deferred compensation plan that benefit the employee spouse. New Question 277.

New Option to Add Interest on Child Support Provision

You may now include the following provision to maximize the likelihood that interest payments on past due child support payments will be treated as non-taxable income by the IRS . “Although it is the intention of the parties that child support be paid when due, should arrearages occur, the unpaid principal will accrue interest at the legal rate as provided by law. Such interest shall be payable for the support of children of the payor spouse.” New Question 451.

New Option to Seal Pleadings Containing Financial Information