ASSET PROTECTION
AND MARITAL PLANNING
By: Jeffrey R. Matsen, Esq.
(Copyright 2009)
Matsen Voorhees Law
MV
LLP
Maximizing Value with Estate, Business,Tax,
and Asset Protection PlanningTM
695 Town Center Drive|7th Floor|Costa Mesa, CA 92626
Phone: 714.384.6580|Fax: 714.384.6551
www.MatsenVoorhees.com|www.JRMatsen.com
Community Property and the Division of Community Property between Spouses
a.
Introduction
California is a community property State and under California law:
1)
Community property is generally property acquired during the
marriage and any separate property that may have been transmuted
into community property or commingled with marital property.
2)
All post marital accumulations are community property.
See
California Family Code Section 760.
3)
Community property generally is liable for the debts incurred by
either spouse. See Family Code Section 910. In other words, the
community estate is liable for a debt incurred by either spouse
before or during marriage irrespective of which spouse has the
management and control of the community estate and regardless of
whether one or both spouses are parties to the debt or to a
judgment for the debt.
4)
In this regard, it should be noted that it is the community estate and
not the non debtor spouse that incurs the liability. There are no
“community debts”, only “debts for which community property is
liable”. See Lezine v. Security Pacific Financial Services, Inc. 58
Cal Rptr. 2d 76 (1996).
5)
On the other hand, the spouse’s separate property is liable only for
that spouse’s debts. See Family Code Section 913.
b.
Transmutation
Under California law, a married couple can transmute community property
into separate property. See Family Code Section 850. The agreement of
spouses to separate and divide their community property whether by
formal written contract or informal transmutation between themselves will
be enforced. See Kennedy v. Taylor 201 Cal. Rptr. 779, 781 (4th Dist. Ct,
App. 1984). Under the Kennedy case cited above, informal transmutation
will be binding on third parties including creditors. Any separate property
that has been transmuted from community property cannot be reached by
creditors. The intended outcome under California law is to protect a
separate and non contracting spouse from the debtor spouse’s obligation.
See Kennedy, Supra at 201 Cal. Rptr. at 780. Parenthetically, it should be
noted if the debtor spouse receives primarily exempt and illiquid assets, it
may be that the creditor’s recovery has been diminished by more than
50%.
c.
Transmutation and the Fraudulent Transfer Laws
Transmutation is subject to the fraudulent transfer laws. See Family Code
Section 851. However, in a transmutation process where each spouse
receives equivalent amounts as separate property, each spouse will be
treated as having given fair value thereby avoiding the application of the
fraudulent transfer laws. See Britt v. Damson 334 F. 2nd.. 896, 903 (9th
Cir. 1964), cert. den., 379 US 966 (1965). See also In re Chappel, 243F.
Supp. 417 (S.D. Cal 1965).
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However, community property transferred to the non debtor spouse as part
of the distribution of community assets upon dissolution of marriage may
still be liable for the debts of the debtor spouse. See Family Code Section
916. The following summary of cases is relevant with respect to the
application of Section 916:
1)
In the case of In re Marriage of Braendle, 54 Cal. Rptr 2d. 397
(1996), the Court found that “[o]nce the marriage was dissolved
and division of community property had occurred, …the
provisions of Section 916 of the Family Code control.” Therefore,
the separate property of the non-debtor spouse allocated to him/her
by the marital settlement agreement cannot be attached by the
creditor of the debtor spouse.
2)
In the Lezine case previously cited, the Court in commenting on
the predecessor to Family Code Section 916, observed: “Under this
provision, following the division of property, the community
property awarded to one spouse no longer is liable for marital
debts that are assigned to the other spouse, with the exception that
the award of community real property to one spouse that is subject
to a lien remains liable for satisfaction of the lien, i.e., the lien
remains enforceable to satisfy the underlying debt.”
3)
In Gagan v. Gouyd, 73 Cal. App. 4th 835 (4th Dist. Ct. App. 1999),
the Court held “… that to engraft the fraudulent transfer remedies
onto a valid and approved marital settlement agreement would
result in needlessly complicating the already emotionally laden
dissolution process.” The Court further cited California Practice
Guide: Family Law (the Rutter Group 1999), Paragraph 8:778 at
Page 8-191: “ … unless the nondebtor (sic) spouse was assigned
the debt by the property division judgment, he or she is not
personally liable thereafter for the other spouse’s debts incurred
before or during marriage. The nondebtor (sic) spouse’s separate
property and his or her share of the community estate awarded by
the dissolution judgment may be reached by creditors only if
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payment of the debt was assigned to the nondebtor (sic) spouse in
the property division.”
4)
After the Gagan Case, the 6th District (Santa Clara County) issued
its decision in Mejia v. Reed, 97 Cal. App. 4th 277; 118 Cal Rptr.
2nd 415 (6th Dist. Ct. App. 2002). In Mejia, the Court held that
marital property settlements and judgments are subject to the
fraudulent transfer laws and specifically rejected the holding in
Gagan. However, it appears that the bankruptcy court will accord
substantial weight to a determination by the State court in a
marriage dissolution proceeding even though made as a noncontested approving the party settlement. (See Britt v. Damson
and In Re Chappel cited above).
5)
Subsequently, the defendant in Mejia v. Reed sought review of the
judgment from the Court of Appeal, 6th District (Santa Clara
County) decision. In Mejia v. Reed, 3 Cal. Rptr. 3d. 390 (2003),
the Supreme Court of California held that the Uniform Fraudulent
Transfer Act (UFTA) applied to property transfers under marital
settlement agreements. The court determined, however, that there
was no triable issue of fact as to constructive fraud. The discounted
value of future child support, because it was generally paid from
future income rather than current assets, was not to be considered
as a debt in determining solvency under Cal. Civ. Code § 3439.05.
Thus, the Defendant was not rendered insolvent by the transfer.
Actual fraud, however, was a triable issue.
d.
Conclusion
In view of the foregoing, a transmutation or marital settlement agreement
is subject to avoidance as a fraudulent conveyance. However, see State
Board of Equalization vs. Woo 98 Cal Rptr. 2d 206 (2000), (Rehrg denied,
August 7, 2002), wherein the California Court of Appeals held that a
wife’s attempt to transmute her future earnings into separate property in
order to avoid her husband’s existing tax debt constituted a fraudulent
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transfer in violation of Family Code Section 851. Query whether the dicta
in Mejia overrules Woo and allows future earnings to be transmitted into
separate property.
One of the problems of transmuting community property into separate
property is the loss of the step up in basis that would otherwise occur upon
the death of the transferor spouse. If property is classified as community
property under State law, upon the death of the first spouse to die, the
entire property (even the community property one-half ownership interest
of the surviving spouse) receives the step up in basis for income tax
purposes.
Accordingly, the surviving spouse can thereafter sell such
property and there will be little, if any, gain on the sale as a result of the
step up in basis. However, if community property is transmuted into
separate property either by gift or by means of the marital settlement
agreement, when the transferor spouse predeceases the transferee spouse
there will be no step up in basis at that time with respect to the property
transferred.
Jeffrey R. Matsen is the founder of Wealth Strategies Counsel and a partner in the Southern California
law firm of Bohm, Matsen, Kegel & Aguilera, LLP. Attorney Matsen’s knowledge, professionalism,
responsiveness and integrity have vaulted him to the top of his field culminating in his designation by
Worth Magazine as one of "America’s Top 100 Attorneys", by Los Angeles Magazine as one of
California’s "Super Lawyers" and by OC Metro Magazine as one of "O.C.'s Top Lawyers."The
Nationally Renowned Attorney Rating Service, ‘AVVO’ has rated Mr. Matsen a perfect "10/10 Superb",
he has continued to achieve the highest "AV rating" and has been designated a "Preeminent Lawyer" by
the only other prestigious attorney rating directory, Martindale Hubble. He has been a Professor of Law
at Western State University and Adjunct Professor of Law at Chapman University School of Law and an
instructor at the Golden Gate Program of Advanced Taxation. He is a member of the American Bar
Association Sub Committee on Asset Protection Planning and has written several course materials and
delivered continuing education programs to other attorneys and advisors in the areas of estate and asset
protection planning, limited liability companies, family limited partnerships and business formations.
Matsen is an internationally recognized authority in these areas. Simply put, Mr. Matsen Structures his
client’s personal and business assets in the best way possible to preserve, protect, and transfer them in
the most efficient and tax saving manner.
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