California Marital Settlements: January 2001 Summary

Legal Developments

Taxation Upon Transfer of Stock Options

In a case arising in a non-community property state, the Internal Revenue Service took the position in Field Service Advice FSA 200005006 (dated 11/1/99, released 2/4/00) that an employee is taxed when he or she transfers stock options to his or her former spouse. The former spouse receives a carryover basis in the options and is taxed on the gain only upon the ultimate disposition of the stock. Neither the employee nor his or her former spouse is taxed when the options are exercised by the former spouse. Were this rule to be applied in community property states, it would result in a potentially significant taxable event occurring when there is no cash being generated to pay it. Moreover, the person being taxed is the transferor, not the transferee. This makes it even more important to include a tax indemnity clause in the Stock Options section.

Dissolution Order Construed as QDRO

In Stewart v. Thorpe Holding Co. Profit Sharing Plan (9th Cir. 2000) 207 F.3d 1143, the Court of Appeals stretched the definition of a QDRO to permit a dissolution order that only contained some of the statutorily required information to be treated as a QDRO so as to perfect a former spouse's community property share in her former husband's interest in an ERISA profit sharing pension plan.

Assignment of Residence to Trust Terminates Joint Tenancy

Estate of Powell (2000) 83 Cal.App.4th 1434, 100 Cal.Rptr.2d 501, provides a recent example of how a joint tenancy can be severed without actually recording an instrument. There, the surviving spouse's attempt to terminate a revocable trust after the death of his spouse and claim a joint tenancy interest in their family residence was held to be ineffective. The joint tenancy was revoked by the wife's assigning it to their revocable trust.

Assignment of Residence to Trust Terminates Joint Tenancy

Estate of Powell (2000) 83 Cal.App.4th 1434, 100 Cal.Rptr.2d 501, provides a recent example of how a joint tenancy can be severed without actually recording an instrument. There, the surviving spouse's attempt to terminate a revocable trust after the death of his spouse and claim a joint tenancy interest in their family residence was held to be ineffective. The joint tenancy was revoked by the wife's assigning it to their revocable trust.

Wage and Earnings Assignment Enforceable in Absence of Employer Information

Family Code Section 5230 has been amended, effective September 28, 2000, to add subdivision (b), which provides that the earnings assignment order shall be issued, and shall be effective and enforceable, even if information about the obligor's employer is absent.

Release of Dependency Exemption Requires IRS Form

In Miller v. Commissioner (2000) 114 T.C. 13, the Tax Court held that a divorce judgment does not satisfy the requirements of Int.Rev. Code §152 (e) for effectuating the release of dependency exemptions to the noncustodial parent. IRS Form 8332 or its equivalent is required.