Summer 2008 Newsletter

THE PITFALLS OF AN EARLY TERMINATION OF MARITAL STATUS IN AMARITAL DISSOLUTION PROCEEDING

The early termination of marital status separate and before resolution of the other issues in a case is commonly known as "bifurcation of marital status." While this is an option for some Parties who may have their particular reasons for wanting an early termination of their marital status prior to resolution of the other issues in their case, obtaining a bifurcation of marital status can have serious and unintended financial consequences if one or both Parties die before the division of community assets is completed.

In order to prevent certain of those serious and unintended consequences, the California Legislature passed a law which automatically revokes all beneficiary designations of one's spouse in cases where there are Payable on Death accounts (P.O.D.'s), IRAs, Profit Sharing and Pension Plans, Life Insurance, and the like, once the Parties are no longer married, and occurs whether or not the Parties intended it as a consequence of the termination of their marriage. The only exceptions to such revocation are when there is strong evidence that the person designating a beneficiary intended to make that designation for his or her former spouse, despite the fact that they are no longer married, or the Judge makes such an order. Furthermore, this law is complicated by the fact that it is not recognized by the federal government in certain types of employee benefit plans.

If the spouse making the beneficiary designation dies before the court divides the community estate by awarding certain assets and debts to each spouse, it could be the case that the surviving spouse will be unable to prove that the deceased spouse intended to maintain the surviving former spouse as a beneficiary on one or more of the above-mentioned assets. Unless the surviving former spouse can prove such intent, an asset which should have been deemed a community property asset will have to pass entirely to a different beneficiary and out of the community estate altogether, depriving the surviving former spouse of his or her community interest in the asset.

Bifurcation of marital status may also bring about the unwanted result of having to pay more taxes to the federal government than would otherwise be the case. For example, the tax liability incurred by a non-spouse (or former spouse) IRA beneficiary who received payment of all or a portion of his or her IRA as a beneficiary of such IRA will be greater than the tax liability incurred by a surviving spouse of an IRA owner. Thus, unless care is taken to ensure that such issues are addressed in the Judgment of Dissolution of Marriage As to Status Only, the surviving former spouse could be forced to give more of the asset away in taxes than necessary.

While it may appear attractive to some to obtain an early termination of marital status, awareness of the potential for serious and unintended financial consequences resulting from a bifurcation of marital status is important, and it must be thoroughly thought out whether it would be in the Parties' best interest to obtain a bifurcation of marital status and how to go about accomplishing the goals of both Parties with minimal financial risks to both of them. The attorneys at Cooper-Gordon LLP are well equipped to advise their clients in this area of expertise.