Inherited Property: Applying Direct Tracing in Family Law

In our example the spouse who inherited must show whether separate funds deposited continued to be on deposit when a withdrawal was made for purchasing the stock, and whether it was their intention to withdraw separate property funds for that purpose. These are questions of fact for the trial court. (Hicks v. Hicks (1962) 211 Cal.App.2d 144, 157.)

In Hicks, the plaintiff produced evidence that he deposited separate property funds exceeding the withdrawals made for separate property purchases. (Id. at 158.) Evidence establishing the availability of sufficient separate funds for separate purposes supports an inference that the owner thereof used such funds for such purposes. (Estate of Goodhew (1959) 174 Cal.App.2d 75, 80.)

In Marriage of Mix (1975) 14 Cal.3d 604, the Supreme Court held that a wife had satisfactorily shown a direct tracing of the source of funds used to acquire each item of her disputed separate property:

“Esther introduced into evidence a schedule compiled by herself and her accountant from her records which itemized chronologically each source of separate funds, each expenditure for separate property purposes, and the balance of separate property funds remaining after each such expenditure. She received $99,632.02 attributable to her separate property; expended $42,213.79 for separate property purposes, leaving an excess of separate property receipts over separate property expenditures in the amount of $57,418.23 throughout the course of the marriage.”

(Id. at 613.) The Supreme Court found that the “schedule demonstrated that Esther’s expenditures for separate property purposes closely paralleled in time and amount separate property receipts and thus established her intention to use only her separate property funds for separate property expenditures.” (Id.)

However, Esther was unable to correlate the expenditures of separate property funds with any bank account due to the unavailability of bank records. By itself, the Court held that the schedule was “wholly inadequate”

to meet the direct tracing test. (Id. at 613-614.) However, it noted that the trial court was entitled to accept Esther’s testimony “that the schedule was a true and accurate record, that it accurately reflected the receipts and expenditures as accomplished through various bank accounts, although she could not in all instances correlate the items of the schedule with a particular bank account, and that it accurately corroborated her intention throughout her marriage to make these expenditures for separate property purposes, notwithstanding her use of the balance of her separate property receipts for family expenses.” (Id. at 614.)

“The testimony of a witness, even the party himself, may be sufficient.”

(Id. at 614, citing 6 Witkin, Cal. Procedure (2d ed.) § 248, p. 4240.)

In our example, how can the inheriting spouse connect separate property purchases using inheritance funds to the joint account in which all of the inheritance funds were deposited and from which all purchases of stock were debited through cashier’s checks?

Bank account statements and checks will show deposits of inheritance funds into the account. Bank statements and checks can show the expenditures of separate property for the stock.

Similar to the Mix case, if the balance of her inheritance funds in the account exceed her expenditures on separate property stock purchases, she then merely needs to establish her intention to use her separate property to purchase the stock for herself.

She can testify that she intended to make separate property purchases with her inheritance funds. Unless there is evidence (such as statements in emails, witnesses, etc.) that show an intention to purchase the stock on behalf of the community, her testimony will likely be sufficient. (compare Marriage of Ficke (2013) 217 Cal.App.4th 10, 26 (noting testimony of single witness may constitute substantial evidence of tracing)—no need to produce specific records where H testified mortgage payments on his SP rental were made from rental proceeds account that was never commingled with CP earnings.)

At Divorce Helpline, we regularly work with court-experienced accounting professionals to help our clients navigate through difficult financial analyses, such as Tracing, at a fraction of the cost they would incur in litigation with our services.

Direct Tracing Separate Property in Family Law Actions

Using a Direct Tracing test, you can establish that what you purchased from a community account is a separate property asset when you can show

  1. Your separate funds (e.g., from an inheritance) were deposited with community funds (e.g., into a joint account), and 2. they continued to be on deposit when you withdraw the money for the purchase, and 3. you intend to withdraw your separate funds specifically. (See In re Marriage of Frick (1986) 181 Cal.App.3d 997, 1010-1011.)

Under Direct Tracing, the disputed property is traced to the withdrawal of separate property funds from the commingled account.

For this example let’s imagine you have inherited $100,000, deposited it into a community account, then later pulled it out to purchase $100,000 worth of stock.

To show Direct Tracing, you would first prove that you deposited the inherited money (intended only to go to you).  Let’s say you have the will or other testamentary document and have documents  showing the money flowing from the deceased’s estate and ultimately into the joint account.

Then the stock was purchased:  you would need to prove how much money remained after each stock purchase and in turn prove that there were sufficient separate property funds remaining in that joint account at that time to cover the payment at the time it was made. (See Marriage of Stoll (1998) 63 Cal.App.4th 837, 841; Marriage of Braud (1996) 45 Cal.App.4th 797, 823).

Under the direct tracing method, separate property funds do not lose their character as such as long as the amount of separate funds is ascertainable. (Hicks v. Hicks (1962) 211 Cal.App.2d 144; In Re Marriage of Stoll (1998) 63 Cal.App.4th 837.)

In order to prevail on a direct tracing case in a potentially commingled account, the proponent must present credible evidence as to his intentions coupled with a chronology of the source of separate funds. (In Re Marriage of Mix (1975) 14 Cal.3d 604.)

At Divorce Helpline, we work to help our clients get started in the divorce process, we work as divorce mediators and we are to help navigate through difficult financial analyses, such as Tracing. Be sure to check out our next blog to review how this applies to our example with inherited property.

Tracing Separate Property in Family Law Actions

I recently resolved a case where my client inherited money, deposited it into a community account, and then subsequently purchased stock (which subsequently became very valuable stock).  She claimed that the stock was purchased with her inheritance money. Her husband claimed it was purchased with community money.

Determining whether the stock was community property (i.e., owned by the “community,” the partnership of husband and wife) or my client’s separate property required what is called “Tracing.”  “Tracing” is a test imposed by the court to determine, among other things whether a party can show that their separate property (usually money) has survived after being moved about, and sometimes when assets have been purchased out of accounts in which separate monies have been deposited.

There are generally two types of Tracing:  “Direct Tracing” and “Family Expense” or “Recapitulation” Tracing.

In our next Divorce Helpline blog post we will take a look at Direct Tracing and in the following blog we will review how this applies to our example. In future blogs we will examine Family Expense Tracing, and one of the big traps a spouse can fall into related to Tracing.

The Trap That May Be Hiding In Your Declaration of Disclosure

You may or may not be aware that, in California, prior to signing any partial or complete Judgment of Dissolution, each spouse must serve upon the other a set of documents called a Declaration of Disclosure.

A Declaration of Disclosure is comprised of a Schedule of Assets and Debts (a recitation of all of the assets and debts owned in part or whole by both spouses, including a designation of those assets and debts as community, separate, or mixed-character property, and a value for those assets and debts, and documents attached which support these data points), an Income and Expense Declaration (a recitation of your income over the last twelve months and last month from any source, and details of your expenses, whether actual or proposed, and documents which support this data), and a statement submitted under penalty of perjury concerning your assets, debts, and investment opportunities.

The trap that is potentially lurking in your Declaration of Disclosure is the possibility of under-valuing a high-value asset. If you are taking an asset in the overall division of property, it is important that the estimate of value in your disclosure be accurate, or at least conservatively high.  The reason for this:  if you undervalue an asset that you take in the division of property, it is exceedingly easy in the year after the entry of your Judgment for your spouse to set aside (legally challenge) your stipulated Judgment on the grounds of mistake.  The basis for the set-aside boils down to “I never would have agreed to that deal had I known the pension was worth $X.”

This holds true in the first year after the entry of your Judgment even if you spouse could have investigated and discovered the correct value of the asset, but failed to do so (see Marriage of Brewer & Federici (2001) 93 Cal.App.4th 1334, 1345, 113 Cal.Rptr.2d 849, which held that each party had an affirmative duty to find out information for purposes of disclosure independent of the other’s duty to find out information to protect him or herself. It held that the party who was in the “superior position” to obtain the information “must acquire and disclose such information to the other spouse” and that the other party had no legal duty to value the plans himself.”)

A danger of an innocent under-valuation truly arises for those assets whose value is not easily verified-primarily this is real estate, defined benefit plans (plans that pay out a monthly benefit based on, among other things, an estimate of how long you will live), and business interests.  A financial account is an easy asset to value-you merely print out the most recent statement.  Real property requires more effort-a comparative market analysis or an appraisal.  Defined benefit plans require an assessment by an actuarial accountant.  A business requires a business evaluation.  If you decide to not have valuations done but guess at value, at least guess high-there is no penalty for over-estimating value, just for under-estimating value.

At Divorce Helpline, we have decades of experience in helping our clients understand and comply with their disclosure duties, which in turn allows us to work together to create strong and legally-defensible divorce Judgments.

Fiduciary Duties Between Spouses Part Two: Actions That Require A Spouses’ Prior Permission

Last week we began to explore the “Fiduciary Duty” between spouses legally obligate spouses to care for each other financially with the utmost consideration and duty.

There are certain things that a spouse may not do with regard to the community property without prior permission–it is important that couples be aware of these issues because it is often the case that one spouse is given (or takes) the responsibility of managing assets or finances, and this can sometimes lead to even an inadvertent violation of fiduciary duty.

The first two types of property that can be problematic are non-real property sales or gifts, and real property sales or gifts. A more complicated set of rules govern business (we’ll get into business interests next week).

  1. A spouse may not make a gift of community personal property, or dispose of community personal property for less than fair and reasonable value, without the written consent of the other spouse.

This rule does not apply to gifts (or things sold for less than fair and reasonable value) when this property is mutually given by both spouses to third parties.

It also does not apply to gifts (or things sold for less than fair and reasonable value) given by one spouse to the other spouse.

In other words, if you want to give your brother a “deal” on a community property asset, you better get your spouse’s consent in writing.

  1. A spouse may not sell, convey, or encumber community personal property used as the family dwelling, or the furniture, furnishings, or fittings of the home, or the clothing or wearing apparel of the other spouse or minor children which is community personal property, without the written consent of the other spouse.

Here, let’s focus on real property. Along with the other assets detailed in 2., one spouse may not sell community property real property, [i] even at fair market value [i] without prior written consent of the other spouse.

If you think the writing requirements are burdensome based on your understanding of your spouse’s character, keep in mind the unfortunate fact that sometimes these actions are brought by a spouse’s heirs after the spouse has passed, or by conservators or guardians if the spouse had become incapacitated.

A common mistake is also to “pre-adjudicate” what is or is not or could be community property (“this doesn’t apply to me because my husband and I know that house X is my inheritance . . .”) Attitudes and opinions change, and there are many non-obvious ways an asset which looks to be separate property can take on a community character. A good rule: unless have a written, technically-sufficient writing from your spouse indicating that an asset is your separate property, then it is prudent to obtain written consent for the above-referenced sales.

At Divorce Helpline we routinely work with married and divorcing clients in mediation and coaching to help them navigate the rules governing their fiduciary duties to each other.

Next week we will address the application of fiduciary duties to business interests.

Fiduciary Duties Between Spouses: Legal Landmines in Litigation and in Mediation

A fiduciary is a person who holds a legal relationship of trust between himself or herself and another person.  In California, a “Fiduciary Duty” in a Family Law context means that spouses, because they are married, are legally obligated to care for each financially with the utmost care and consideration.  They “owe” each other a duty of care that is far, far higher than they would owe a stranger, or even another family member.  It has been likened to the level of care a nanny should provide an infant child!

This means that, in California, one spouse can be sued by the other spouse if they fail, even unintentionally, to meet their obligations under this heightened duty.

The possibility of Fiduciary Duty violations is often overlooked in Family Law cases by spouses, attorneys and even judges.  The media stereotype would have you believe that tricks, ruthless behavior, “scorched earth” tactics, etc. are a common part of a divorce litigation.  Worse, many divorce attorneys engage in these behaviors on behalf of their clients, not knowing or not caring that this conduct can open their client to suits for damages and mandatory attorney’s fees.

In California this fiduciary duty can continue for many years after a Judgment of Dissolution is entered:  fiduciary duties continue until the final division and distribution of the community property.

The remedies provided by the Family Code for violations of fiduciary duty can be draconian, even if you had the best of intentions and your violation was accidental.  In future blog posts, I will explore these duties, and the penalties for violating them.

At Divorce Helpline, we can help you understand your and your spouse’s fiduciary duty under California law, and work with you, in mediation, or with our coaching service, to avoid any accidental violation of your fiduciary duty to your spouse.

The Vocational Evaluation: A Useful Tool in Mediations as Well as Litigation

In determining spousal support, both payor and payee are entitled to have spousal support calculated based on what each party COULD earn (considering their skills and training and work history), as opposed to what they actually earn.

It is not uncommon, both in divorce litigation and during divorce mediations, for the parties in a spousal support negotiation to have concerns that either the payee or the payor is not earning as much income as they are capable of earning, e.g., because of career choices, failure to work a full-time schedule, etc.

In dissolution proceedings, to investigate these concerns a court may order a party to submit to an examination by a vocational training counselor. Fam C §4331(a).

A “vocational training counselor” is an individual with sufficient knowledge, skill, experience, training, or education in interviewing, administering and interpreting tests for analysis of marketable skills, formulating career goals, planning courses of training and study, and assessing the job market. Fam C §4331(d).

A Vocational Expert is commonly used in Divorce Litigation to obtain an opinion about a party’s current ability and opportunity to earn. They can also be very helpful during mediations when used in a cooperative fashion by spouses to address a spouse’s concerns about the earning ability of the other party.

Divorce Helpline routinely works with well-known Vocational Experts in mediations where the clients wish to address the issue of Earning Ability.

Future blogs will address using a Vocational Expert to lay out a roadmap showing a supported spouse how to comply with their obligations to become self-supporting within a reasonable period of time (their “Gavron” obligation).

New Family Code Section Reopens Post-judgment Discovery in Family Law Proceedings

Last year the Family Law world was thrown for a loop–new legal authority in the form of a court case (Marriage of Boblitt) found that unless there was an agreement from the opposing side or a court order allowing the reopening of discovery, there was no right to post-judgment discovery.

“Discovery” is the ability to force production of documents, answers to questions, etc. to both explore legal claims and to prove them. In Family Law, many issues survive a trial or a mutually-agreeable Judgment: e.g., spousal support, child custody, child support, enforcement of property divisions, orders relating to pensions, etc. In most cases to effectively assess or litigate these issues “discovery” is a must.

In my opinion, the Boblitt case threw up an unreasonable obstacle to post-Judgment discovery, as it is often difficult to obtain the opposing party’s consent to reopen discovery, and expensive and time consuming (as well as uncertain as to the result) to obtain the court’s approval.

Fortunately, effective January 1, 2015, Governor Jerry Brown signed into law emergency legislation which introduced a new Family Code Section, Section 218.

Under the newly enacted Family Code Section 218, discovery will reopen automatically upon the filing of a post-judgment motion as to the issues raised in that motion.

Exactly how this new Family Code section will be interpreted by the Courts and its overall effect on post-judgment family law matters remains to be seen. At Divorce Helpline, our consultants and mediators can help you navigate the complexities of discovery, and help you obtain the documents and information you need to successfully mediate, or litigate, your case.

The Basic Elements of a Custody Evaluation in California

As we continue to discuss the Child Custody Evaluation, it is important to discuss the impact of the Child Custody Evaluation on your family life, and conversely the impact your family life can have on the ongoing Child Custody Evaluation.

Basic Elements of the Evaluation

An evaluation involves collecting, managing, and analyzing a large quantity of information about the family. A private professional will often spend at least 25 to 50 hours on interviews, testing, and other data collection, spread out over a long period of time, before writing the report and formulating the final recommendations.

While each evaluator has an individual method, procedure, and style, all evaluations usually include a number of basic elements. The basic elements of a Child Custody Evaluation include the following:

  • Individual interviews of each parent;
  • Interviews of each child;
  • Interviews of each child with each parent;
  • Home visit to each parent’s home;
  • Review of various documents submitted by counsel and each parent;
  • Interviews of collateral contacts in the community proposed by each parent or as requested by the evaluator; and
  • Psychological testing of parents and children.

Your Ongoing Family Life Influences Case Throughout Evaluation Process

The evaluation is a study of the family, focused both on past history and relationships and the ongoing lives of the parents and children over a period of several weeks or months. See Fam C §§3110-3118.

Often events that occur during the evaluation become material for the evaluator’s investigation, and guidance from an attorney or other involved professionals (such as your therapist) will help handle the situation appropriately.

You Will Be Placed Under Intense Scrutiny for a Prolonged Time Period

A Child Custody Evaluation can frequently take up to 6 months from the time the evaluator is formally appointed until the report is issued. During that time, you will be placed under intense scrutiny and held to the standard of good parenting. You may feel this standard is too high or unreasonable when others in the community who are not involved in a custody case may parent their children in questionable ways without consequence. You will be experiencing life under a microscope and must understand the importance of exercising good judgment at all times despite the intrusion of the evaluation in his or her family’s life.

At Divorce Helpline we can coach you through the intricasies of the Child Custody Evaluation. We also work with well-known California Child Custody Evaluators and routinely arrange and manage friendly Child Custody Evaluations for our Divorce Helpline clients who would benefit from the process.

Custody Evaluations : A Common, But Expensive Tool, in Custody Litigation

A child custody evaluation is a structured investigation of parents and children by a mental health professional, resulting in a written report about the family and recommendations for a custody and parenting plan as part of a divorce.

(Fam C §§3110-3118; Cal Rules of Ct 5.210(c)(2)). Judges order evaluations to obtain a neutral mental health professional’s assessment of the family, each parent’s capacity to parent, and the children’s needs and capabilities.

“Child Custody Evaluations” are occurring more and more frequently in recent years in Family Court proceedings and even mediations. They have evolved as a legal and psychological tool: where in prior years they were primarily ordered by a court in high conflict custody cases, now they are also commenced by friendly agreement of parents who want a comprehensive child custody expert’s opinion on the parenting plan in the best interest of their children.

There is no process more critical to the custody case than the custody evaluation. Judges usually rely heavily on the evaluator’s opinions and often adopt the evaluator’s recommendations with few or no changes.

Although a trial following the evaluation may sometimes result in a wholesale shift from the evaluator’s recommendations, more often than not it will modify the recommendations in certain respects but not reject them outright.

In a subsequent blog post I will be talking about different aspects of child custody evaluations, their costs, pitfalls, and advantages.