Timing Is Everything In Characterizing Property

It is generally well known that California is a community property state. That means all earnings and accumulations between the date of marriage and the date of separation are community property subject to equal division in the event of a divorce. Separate property is all property owned before marriage, gifts and inheritances received during marriage and the earnings and accumulations on that property.

The case I want to discuss this month involves a financial advisor who moved from one firm to another about a year before the parties separated.

At the time of moving firms, Wife, who was the financial advisor, received four distinct and different bonuses. The first was transitional bonus of in excess of $2.8 million. The entitlement to receive the bonus was conditioned on maintaining certain production levels and continued employment with the new firm for 112 months. Common for these transactions, Wife opted to receive the entire bonus up front which was than paid to her as a loan and forgiven in 112 equal monthly installments.

The second was a deferred recruitment award bonus, but to be eligible for it, Wife must remain employed with the new firm for 7 years.

The third was a production bonus which Wife achieved and was paid the bonus before separation but it was also paid in the manner of a loan forgiven over a period of 10 years.

The final was called a level 4front bonus requiring Wife to maintain profiles, meetings with clients and follow up. Wife qualified for the bonus but was not paid until after separation. Again, the bonus was paid as a loan forgiven over a period of 108 months.

The issue for trial was the characterization of each bonus as either community property, separate property or a mixture of each.

The analysis requires us to look at each on order. The transitional bonus was paid during marriage but earned in the form of a loan forgiveness over 112 months. Wife argued that this constituted a mixed asset and her expert used a time rule to allocate approximately 13.5% to the community. The trial judge found the book of business had no value and as to the transitional bonus, that the community was entitled to that portion earned before separation. The appellate court disagreed with this characterization, finding that client lists and a financial advisor’s book of business can and does have a value as advisors commonly take their clients with them in changing firms. The problem is that the bonus paid up front was earned over time. This fact does not defeat a community interest. Property interest, whether vested or not, represents property and subject to division. The court states further that this does not simply mean Husband is entitled to one-half of the bonus as it could be lost if conditions were not met. A court facing this can either get evidence of the present value of the asset and award it to one spouse or award each spouse their share as it is being paid, much as we currently do with pension benefits.

As to the deferred recruitment bonus, it was found to be Wife’s separate property. The right to the bonus did not arise until 7 years after employment. It was at the time of her hiring an expectancy as Wife had no enforceable right to receive it or any portion of it until 7 years later.

Applying the same reasoning to the production bonus and the level 4front bonus, the court focuses on when Wife had an enforceable right to receive the bonus and not on when it was paid. The production bonus was in Wife’s offer of employment and the level 4 was announced after hire but before the parties separated. Each was paid after separation. However, the contractual right to receive the bonus accrued prior to separation giving rise to a community interest.

The case was remanded back to the trial court to determine the portion of the bonuses earned before separation and evaluate the potential that the conditions would or would not be met. Thereafter, the court could choose a method of division.

Complex compensation and property issues require expert analysis. If you face such issues, be certain to engage a knowledgeable professional to assist you.