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| PLANNING | COMPLIANCE | LITIGATION |
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California Creditor-Debtor Resource California Community Property This page gives a summary overview of California's community property regime as it relates to creditors of one or both spouses only. This page is not meant to discuss how the regime operates at the death of a spouse, or upon divorce or separation. California is one of the few community property states. This creates problems and opportunities for asset protection planning. Planning for spouses is approached much differently in California than in most states, meaning that you absolutely must utilize the services of a California attorney who is well-versed in California's peculiar community property regime and knows how to deal with it. Community Property Defined As a very general proposition, any property that is acquired during marriage by the labors of either spouse or the both of them is presumed to be community property. For example, if during the marriage the couple purchases a house, pays it off, and it appreciates, then the house will be considered community property. Community property is subject to the creditors of either spouse, or of both spouses. This is generally a bad thing, since it means that if either spouse gets into creditor trouble, has a car wreck, etc., then all the community property is available to the creditors. Separate Property Defined By contrast, separate property is property that is owned by one spouse only. This is usually property that either the spouse had before marriage, or was acquired by the spouse through inheritance. Separate property is subject only to the claims of the spouse that owns the separate property. Separate property is not subject to the other spouse's creditors. Thus, let's say that husband owns a $2 million parcel of real estate in his own name. Wife is a stockbroker who gets sued as part of a securities class action suit and a judgment is entered against her for $10 million. Fortunately for husband, his $2 million parcel of real estate is not subject to his wife's creditors. The differences between community property and separate property as it relates to creditors is shown by the following chart: -
- Transmutation Agreement As shown by the above chart, just having community property doesn't make any sense where there are creditor concerns, since community property is subject to claims of both spouses, as opposed to separate property which is only subject to the claims of creditors against the one spouse who owns it. What almost always makes sense is California is to:
California laws allows couples to divide (the technical term is "transmute") their community property and agree that no future community property will be created. Sometimes this can be done by simply re-titling deeds and accounts in the name of "husband as his sole and separate property" or "wife as her sole and separate property" to attempt to defuse the presumption that the property is community property. The much better way to divide community property is by way of what is known variously as a "transmutation agreement" or "marital settlement agreement" or "separate property agreement". It is also sometimes referred to as a "post-nuptial agreement" ("post nupt" for short) to distinguish it from such an agreement made in advance of marriage ("pre-nupt"). After the spouses have agreed to the transmutation agreement, their property will be divided thusly: -
- A transmutation agreement can also be used to change separate property from the husband's name to the wife's name, and vice versa. For instance, Mary inherits a farm that she doesn't want, so she transfers the title in the farm to her husband Bill (who wants it to hunt on) as his sole and separate property; thereafter, the property is Bill's and is not subject to Mary's creditors, and Bill can do with it what he wants without interference from Mary. Transmutation the Wrong Way Sometimes, high-risk professionals will transfer title to their assets to their spouse, reasoning that their spouse is less likely to be sued. Whatever the statistical truth in that, there are several problems with this scheme:
There are some other downsides to putting all valuable assets in the (theoretically) lower-risk spouse's name, but you get the point. Transmutation and Fraudulent Transfer If the transmutation agreement is entered into while a spouse has a claim outstanding, it is possible that the property division might later be determined to be a fraudulent transfer. See State Board of Equalization v. Woo, below. This does not mean that the transfer of property will ipso facto be a fraudulent transfer, only that a fraudulent transfer analysis will apply. If the division of property is roughly even, it may be difficult for the creditor to prove that the division of property was a fraudulent transfer. However, if the division of property is blatantly lopsided in favor of the non-debtor spouse, then the odds will be higher that a fraudulent transfer will be found. |
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State Board of
Equalization v. Woo, California Court of Appeals No. A088646 82 Cal.App.4th 481, 82 Cal.App.4th 481, 98
Cal.Rptr.2d 206, July 20, 2000 As modified August 7, 2000. Petition for rehearing is denied. There is no change in the judgment. STATE BOARD OF EQUALIZATION, PLAINTIFF AND RESPONDENT, V. DOREEN (H. Y.) WOO, DEFENDANT AND APPELLANT. (San Francisco County Super. Ct. No. 981150) Counsel for Appellant: Curtis W. Berner Buell & Berner Counsel for Respondent: Bill Lockyer Attorney General Julian O. Standen Deputy Attorney General CERTIFIED FOR PUBLICATION Doreen (H. Y.) Woo (appellant) appeals from an earnings withholding order for taxes. The underlying tax liability stems from delinquent sales taxes in the amount of $35,504.43 owed by James K. Ho, appellant's husband, to respondent State Board of Equalization. Appellant contends that a marital agreement she entered into with Ho transmuting the couple's community property to the separate property of each spouse precludes respondent from garnishing her wages. We affirm. FACTUAL BACKGROUND In 1992, respondent determined that Ho owed taxes, interest and penalties in the amount of $37,419.90 which represented the unpaid sales taxes of the Monsoon Restaurant. In September 1996, Ho filed a complaint seeking a refund of certain payments made towards that tax liability. The trial court sustained respondent's demurrer to the complaint without leave to amend and entered judgment against Ho. This court affirmed that judgment in an unpublished opinion filed on December 2, 1997 in case number A077815. In July, 1995, respondent notified appellant that it would seek an earnings withholding order against her to pay Ho's tax debt. On November 5, 1995, appellant and Ho entered into a marital agreement transmuting their future earnings to separate property. Appellant subsequently became employed by Wells Fargo Bank, earning approximately $500,000 per year. |
On July 27, 1999, respondent filed an application for an earnings withholding order for taxes. In support of the order, respondent argued that the marital agreement between appellant and Ho did not bar garnishment of her wages because the agreement was fraudulent and unenforceable under Family Code section 851 and Civil Code section 3439.04. Appellant contended that the marital agreement did not constitute a fraudulent transfer because she was not employed by Wells Fargo Bank at the time the agreement was executed and that her future earnings were a mere expectancy that could not be transferred. Following a hearing, the trial court entered an earnings withholding order for taxes directing Wells Fargo Bank to withhold and pay to respondent the sum of $3,000 per month from appellant's earnings. DISCUSSION Civil Code section 3439.06, subdivision (d) provides that "[a] transfer is not made until the debtor has acquired rights in the asset transferred." Relying on Civil Code section 3439.06, subdivision (d), appellant contends that the marital agreement did not constitute a fraudulent transfer of community property because Ho had no property interest in her potential future earnings. This contention lacks merit. Contrary to appellant's argument, Ho had a present interest in appellant's future earnings at the time he executed the marital agreement. It is well settled that earnings of either the husband or the wife acquired during the marriage constitute community property. (Fam. Code, § 760; Martin v. Southern Pacific Co. (1900) 130 Cal. 285, 286, see, also 11 Witkin, Summary of Cal. Law (9th ed. 1990) Community Property, § 17, p. 387.) And, a spouse's respective interests "in community property during continuance of the marriage relation are present, existing, and equal interests." (Fam. Code, § 751.) Ho's interest in appellant's earnings was thus not dependent on whether she was employed at the time she executed the agreement. Further, appellant's attempt to transmute the community property earnings to her separate property constituted a fraudulent transfer. Family Code section 851 provides that "[a] transmutation is subject to the laws governing fraudulent transfers." Civil Code section 3439.04, subdivision (a) provides that a transfer is fraudulent as to a creditor if it is made "[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor." Here, appellant does not dispute that the community estate was liable for Ho's tax debt. (See Fam. Code, § 910 ["community estate is liable for a debt incurred by either spouse before or during marriage"].) Nor does she dispute that she entered into the marital agreement after learning that respondent intended to garnish her wages. Given these facts, the trial court did not err in rejecting appellant's argument that there was no fraudulent transfer. Ho had a present interest in appellant's earnings at the time the agreement was executed. Appellant's attempt to transmute that interest to avoid Ho's tax debt constituted a fraudulent transfer in violation of Family Code section 851 and Civil Code section 3439.04, subdivision (a). The order is affirmed. Hanlon, P.J. We concur: Poché, J., Reardon, J. Trial Court: Superior Court San Francisco County Trial Judge: Honorable Ronald E. Quidachay |