Central District Consumer Bankruptcy Attorney's Association

Will be interesting to see if this case comes up with any trustees.
See below.
Jeffrey M. Verdon, Es
*A SCARY COURT RULING... *
*A MORE FRIGHTENING RESULT:*
*A Cautionary Tale of Microsoft Stock*
Dear Clients, Colleagues, and Friends,
Divorce happens.
In fact, between 40-50% of all marriages in the United States end in
divorce.
For those of us who live in community property states (Arizona, California,
Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), we
understand that the division of property during a divorce will be governed
by well-established *community property laws*.
In a community property jurisdiction, most property acquired during
marriage is jointly owned by both spouses and divided upon divorce,
annulment or death. This is known as *community property*. Alternatively,
property that each partner brings into the marriage or receives by gift,
bequest or devise during marriage is called *separate property* (i.e., not
community property).
Generally speaking, community property is fair game during a divorce
proceeding, and will be divided between the spouses according to state
law. However, separate property usually remains the protected, separate
property of its owner spouse, and the other spouse traditionally has little
or no claim, depending upon individual state law and the specific
circumstances of the parties.
Accordingly, common wisdom is that as long as* we don't co-mingle separate
property with community property, our separate property remains truly
separate.*
In other words, it is protected against that money-grabbing ex-spouse.
Right?
*Well, it depends.*
Take the case *In Re Marriage of Christopher Ross Larson v. Julia Larson
Calhoun*, in which the Court of Appeals of the State of Washington just
ruled.
In 1975, Christopher Larson began his career at a tiny software company as
a summer intern. After graduating from Princeton University with a
computer engineering degree, he was offered full time employment, and over
the years was given a good deal of stock in his employer, a nascent company
called Microsoft. Then he married Julia Calhoun in 1986 (the year
Microsoft went public) and his interest developed into a "colossal
fortune," which Christopher held principally as his separate property.
After many years of marriage in which Christopher exercised his stock
options, their community property assets also significantly increased. In
2009, the Larsons unfortunately decided to divorce.
After an extensive three-week long divorce trial, the trial judge awarded
Julia Calhoun 100% percent of the community property in an amount equaling
$139 million and an additional *$40 million* of Larson's *separate
property*in the form of Microsoft stock and cash.
The trial court judge found it necessary to award a portion of Larson's
separate estate to Calhoun "to achieve a just result," citing two
objectives: (1) to recognize Calhoun's intangible contributions to the
marital community; and (2) to help ensure Calhoun's short- and long-term
financial security.
You might rightly ask, "After an award of $139 million of community
property, how on earth can a judge argue that Calhoun lacks financial
security? Isn't $139 million enough?1"
Larson asked the same question and appealed the decision.
In Washington state law, the court has broad discretion to determine a just
and equitable division of property that is based on the individual
circumstances of each case. Larson argued that while the court does indeed
have such broad discretion, Washington law also prohibits the award of
separate property to the non-owning spouse if "ample provision for the
[non-owning] spouse can be made from the community estate alone." Larson
argued that the $139 million award to Calhoun of the community property did
indeed constitute "ample provision."
In a surprising ruling, the appellate court disagreed with Larson's
argument, citing the *Konzen v. Konzen*2 case, stating that "*separate
property is no longer entitled to special treatment*," and that *the
character of the property is only a relevant factor to consider in division
of assets, not a controlling one. *
Because the Larsons' community property assets consisted largely of real
estate and fine art - illiquid assets - the court determined that Calhoun
was entitled to an additional $40 million award of Larson's separate - and
liquid - property to guarantee her short-term financial health.
The court's solution in finding a "just and equitable" distribution of
property was to invade Larson's separate property holdings and give a huge
chunk to his soon to be ex-wife, even after she was awarded 100% of
community assets and no debt!
This Washington ruling means that separate property can no longer be relied
upon as truly separate in that state. A court can look at the totality of
the couple's circumstances and invade the separate property to ensure a
"just and equitable" distribution of property, even in cases where the
non-owning spouse will be walking away with significant assets despite any
separate property division.
The result of this case is a shot across the bow to any individual with
large separate property holdings. Mr. Larson relied on what he thought was
the law, but the court disagreed and he suddenly discovered that *his
separate property was up for grabs. *
*Is yours?*
This may not be the result in your community property state now, but this
case has just cracked opened a door wide enough to allow clever
enterprising lawyers to make the arguments enough times that the courts
will ultimately buy it. It may not be this year or next, but you can rest
assured one day they will.
*One tool that remains available to counter this nonsense is the offshore
Asset Protection Trust or APT. Assets held in an APT are those that can be
removed outside the jurisdiction of a U.S. court, e.g., cash and marketable
securities. At the appropriate time, those assets would be removed from
the U.S. by the trustee of the APT, and once outside the legal limits of
the United States, such assets are not subject to the court's powers;
therefore, a court may award that the separate property be invaded, but the
order would not be enforceable. This would not constitute a fraudulent
transfer because the separate property would have been owned by the APT
well beyond the statute of limitations to assert such a claim.*
APTs are legal and used by thousands of astute individuals as their way to
fight back against a legal system that has gotten out of control. No fair
minded individual could possibly think an award of $139 million of
community property wasn't enough and necessitated reaching beyond to take
Christopher's separate property otherwise not subject to a divorcing
spouse's reach. Unfortunately, at least two courts disagree. More will
likely follow.
If you currently have separate property derived from a previous marriage or
from a gift, bequest or inheritance, and your assets are not safely tucked
inside an APT, you might one day you find yourself in a similar predicament
as Christopher, deserving the resulting outcome. Thus, the adage: Chance
favors the prepared mind... Call us today for an immediate consultation
and more information about asset protection trusts.
1* Christopher agreed to retain the obligations on their entire community
property debt of over $25M.*
*2 **Konzen v. Konzen**, 103 Wn.2d 470, 693 P.2d 97 (1985)*
Jeffrey M. Verdon, Esq.
Jeffrey M. Verdon Law Group, LLP
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