Fiduciary duties are the last thing on your mind when you say, “I do.” Most people learn that spouses owe one another the highest duties of loyalty, care, and confidentiality when they first talk to a family law attorney at the beginning of a divorce.
That’s the first time the average person will learn about Family Code section 721 (fiduciary duty), section 1100 (management and control), and what might happen to them à la Denise Rossi who almost succeeded in hiding $1.3 million in lottery winnings from her husband. (Marriage of Rossi (2001) 90 Cal.App.4th 34)
Realizing they owe an accounting, or being accused of self-dealing, takes many clients by surprise. Divorce planning, unlike wedding planning (which can be fun), can land a client on the wrong side of a breach of duty claim. Divorce planning means taking steps to separate finances prior to filing, taking on new liabilities, canceling insurance policies, or liquidating assets. So how do we advise spouses on developing a plan without falling into this trap?
Depending on the level of conflict, it may be as simple as obtaining consent before acting. Though it can be tough to broach the subject of a post-nuptial agreement over the family dinner table, spouses can always enter into agreements that meet the strict requirements of Family Code section 852 over the course of a marriage. (Of course, no post-nup conversation is complete without addressing the very real possibility that it will be invalidated by the Family Court because of the undue influence presumption, thanks to Marriage of Haines (1995) 33 Cal.App.4th 277. ) Agreeing to keep some funds in separate accounts or remove beneficiaries from an insurance policy before separation can save months of costly litigation later, so long as the spouses are transparent.
If agreements are not possible, the most important step in planning is to gather documentation. Any evidence that may support future reimbursement claims, or claims that the other spouse has breached their duty, is far easier to gather while still sharing a home. Most financial institutions cooperate smoothly with records subpoenas, but the standard document retention policy is to purge records after seven years. We frequently advise clients who are planning to move out to make copies of all financial and property records, back up data, and photograph the home. This has become easier with advances in technology, and mitigates the need for formal discovery down the road. The key here is preservation of information and records, not destruction or obfuscation.
Timing is key for big financial changes prior to divorce. Upon filing and service, a set of Automatic Temporary Restraining Orders designed to preserve the status quo take effect. Parties are prohibited from such actions as disposing of or manipulating assets or creating new debt (with few very narrow exceptions) until they can reach agreements or obtain orders from the court. Since it can take years to reach judgment, it makes logical sense to make any changes prior to these prohibitions—and the attendant sanctions for violating them—kick in. However, the appearance of divorce planning can be just as harmful if changes are made just before filing, or in a way that has the appearance of impropriety. (If it quacks like a duck…) A pattern and practice of otherwise prohibited behavior will create a new status quo, if transactions are regular enough. Changing beneficiaries at open enrollment or withholdings at the start of the year is the natural time to do so, for example.
Patience and trust in the process is often the best advice we can offer. So long as we assert a client’s claims and gather enough evidence to support them, the court will address them in due time. Whether asserting or defending a claim of breach, or simply making sure your clients don’t run afoul of their duties, have a plan but don’t plan.
About the author:
Gary Dubrovsky is a partner and family law attorney at Dubrovsky Law focused on complex property and child custody litigation. In 2019, he was named a Rising Star on the Super Lawyers list published by Thomson Reuters, a title granted to the top 2.5% of California attorneys 40 years or younger.