Author Archive: Philip A. Wasserman

SUGGESTIONS FOR THE SELF-EMPLOYED SOLE PROPRIETOR

One of the biggest problems in divorce is determining the actual income of a sole proprietor. This person owns a small business, and takes draws from the business rather than W-2 income. Usually, this person also pays for their car and other expenses through their business. All of this can get very messy if there is a divorce because the other spouse will usually claim the self-employed sole proprietor is “hiding cash,” and “paying for everything through the business.” This can lead to a long and expensive discovery process, including but not limited to depositions, subpoenas and the hiring of forensic accountants and financial investigators. So, how do you avoid this? A little preventive medicine is the answer, whether or not you ever get divorced. The following are some suggestions for the self-employed sole proprietor. These are only suggestions and should not be considered legal advice. Further, I make no representations that these suggestions will work, because the old saying in the world of computer programers applies here: “Garbage in, garbage out.” You should always work with a CPA and/or tax attorney to make sure you avoid putting in “garbage.” With that in mind, here are some tips:

1. Hire an elite CPA. You need to make sure your business is set up properly, and that your taxes are prepared properly.

2. Hire a bookkeeper and get everything into QuickBooks or some other accounting software with back ups. You want to do this for reasons that I will explain, below.

3. Don’t “shuffle” or “shift” your income. Depositing money into a personal account and then transferring the same money into a business account does not pass the smell test. YOU NEED TO HAVE A SINGLE BUSINESS ACCOUNT WHERE YOU DEPOSIT ALL OF YOUR INCOME! You take your draws from your business account after you pay your expenses. Further, there is an accounting presumption that any checks you write from your business account are for expenses, unless they are draws. This is a rebuttable presumption. In my experience, having a single business account makes everything clean and tidy, provided you keep it that way.

4. You may find that your business account is low on funds. When that happens, avoid the temptation to simply pay business expenses from your personal account. Take the extra step of writing your business an advance and when you get more funds into your business account, then you need to repay yourself.

5. You need to hire a bookkeeper. YOU DO NOT WANT TO DO THIS YOURSELF. Why? Because if the other side takes your deposition, you don’t have to defend each and every entry and withdrawal. All you need to say is: “I give everything to my bookkeeper and she/he reconciles my books, etc.” This forces the other side to take the deposition of your bookkeeper as well, and assuming your books are in order, the other side won’t get anywhere.

6. Stop being cheap. Seriously, you’ve got to become financially sophisticated and buckle down and pay for professional services like an elite CPA and a bookkeeper. It is not that expensive and it provides you with a clean record if you ever end up in court.

7. You never want to be in the position of explaining your deposits. Only your earnings/income go into your business account. If your parents give you a gift of money that should be placed into your personal checking or savings account. If your parents or other parties lend you money for your business, discuss how to deal with that with your CPA and/or tax attorney.

8. If you are getting divorced, make sure your CPA adds back your perquisites and that you account for those perquisites on your QuickBooks or other accounting software profit and loss statement so YOU can tell the Court what you believe your perquisite add backs are, rather than let the other side take the high ground on this.

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IMPORTANT NEW DEVELOPMENTS IN PET CUSTODY AND DIVORCE

There’s big news in the world of animal law. The news comes from of the State of Alaska, and it could have a major impact on some divorce cases here in California. Alaska has become the first state in the country to require courts to take “into consideration the well-being of the animal” and to give judges in divorce cases the power to assign joint custody of pets. In effect, Alaska family court judges will have the power to award custody and visitation of a pet on the basis of what’s good for the pet, not the human owners. This means pets will be treated more like children in divorces in Alaska.

Here in California, pets acquired during marriage are presumed to be community property. This means that in a divorce, the family court will divvy up pets similar to dividing furniture or vehicles. One spouse gets the pet, the other doesn’t.

Here’s the potential impact of the new Alaska law on California divorces: There is something called Secondary Authority in the law. When a State’s law is silent on a disputed issue, the courts of that State may adopt the law from another State to decide the disputed issue.

In at least one area of California law affecting families, pets have gained important legal rights. The victim of domestic violence can obtain a restraining order that will award them the sole possession, care and control of their animals. The victim can also obtain an order that the perpetrator of domestic violence stay away from the animals and not “take, sell, transfer, encumber, conceal, molest, attack, strike, threaten, harm or otherwise dispose of the” animals. The heading for this order states: “Animals: Possession and Stay-Away Order.” Although this law extends protections to animals, it does not use the words “sole custody” to describe that protection. This seems to put animals somewhere between property, such as a vehicle or residence and children. Or does it? Consider that the restraining order states that the alleged perpetrator of domestic violence is ordered not to “molest, strike, threaten, or harm” the animal. This language is the same language that is used to protect the victim of domestic violence and their children.

Will the California legislature look to Alaska and adopt a similar statute for our Family Code? California has already extended protection to our animals in domestic violence cases, so adopting a statute similar to the one in Alaska might not be much of a stretch for lawmakers.

And, while there is no published California Appellate Court case that directly deals with pet custody in divorce, the emotional link between humans and pets was recognized by former California Supreme Court Justice Armand Arabian in his dissenting opinion in the case of Nahrstedt v. Lakeside Village Condominium Ass’n (1994) 8 Cal. 4th 361, 393, 394. At issue was a condominium association’s restrictive covenant which banned pets. Justice Arabian wrote:

“The value of pets in daily life is a matter of common knowledge
and understanding as well as extensive documentation. People of
all ages, but particularly the elderly and the young, enjoy their
companionship. Those who suffer from serious disease or injury and
are confined to their home or bed experience a therapeutic, even
spiritual, benefit from their presence. Animals provide comfort at
the death of a family member or dear friend, and for the lonely can
offer a reason for living when life seems to have lost its meaning. In
recognition of these benefits, both Congress and the state Legislature
have expressly guaranteed that elderly and handicapped persons living
in public-assistance housing cannot be deprived of their pets.
(12 U.S.C. §170r-1; Health & Saf. Code,§19901.) Not only have children
and animals always been natural companions, children learn
responsibility and discipline from pet ownership while developing an
important sense of kindness and protection for animals. Single adults may find
certain pets can afford a feeling of security. Families benefit from the
experience of sharing that having a pet encourages.”

Even the Court’s majority agreed with Justice Arabian when it came to the emotional bond between humans and pets, but decided the case against the pet owner on the narrow issue of whether the restrictive covenant was legal. Using the new Alaskan law as Secondary Authority, combined with the reasoning of former Justice Arabian, might be the starting point for a party who seeks joint physical custody or visitation of a family pet in a divorce here in California.

To avoid a pet property or custody dispute, parties might want to consider a pet prenup, which will dictate who gets Fido or Fluffy in a divorce. Or, if you received your pet as a gift from your spouse or a third party, make sure you get that in writing and keep the writing in a safe place, because a gift is presumed to be the separate property of the receiving spouse in California.

A final note about sharing pets. Animal experts tell us that if divorced parties decide to share a pet, they should make sure the pet eats the same food at each residence to avoid stomach upset and that discipline and care for the pet should be the same at each residence. Animal experts also tell us that shared custody may work for dogs, but probably not for cats.

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BUT IT ISN’T FAIR. HOW GOVERNMENT PENSION HOLDERS LOSE OUT IN DIVORCE

BUT IT ISN’T FAIR!

What happens in divorce here in California when one spouse contributes to a government pension and the other spouse contributes to Social Security? The answer creates what is arguably an inequitable result.
The case directly on point is In re Marriage of Peterson (2016) 243 Cal.App.4th 923: The genders of the parties are irrelevant, so I am not using the words “Husband” or “Wife.”
Here’s basically what happened: You are eligible to receive a government pension, which means you did not pay into Social Security. You are barred from contributing to Social Security pursuant to the Windfall Elimination Provision of the Social Security Act and the Government Pension Offset. You therefore will not receive Social Security. Your ex-spouse paid into Social Security. If you are getting divorced here’s what happens:
Your ex-spouse gets their community property share of your government pension, and you get none of your ex-spouse’s Social Security retirement, because Social Security is is separate property under Federal law. That may not be fair, but Federal law preempts California law, so your ex-spouse’s Social Security is their retirement alone. Here’s where it gets even worse: The current law in California does not even allow you to obtain a credit or offset from your ex-spouse’s Social Security retirement, which would potentially reduce or eliminate your ex-spouse’s interest in your government pension.
So, your ex-spouse gets what many believe is a windfall…their community property share of your government pension and all of their Social Security to boot, even though your ex-spouse paid into Social Security using income earned during the marriage, which was community property. In this situation, the community acquired no interest in your ex-spouse’s Social Security retirement.
This leaves you living on your share of your government pension, usually one-half of the full amount, and your ex-spouse gets to live on all of their Social Security retirement and their community property interest in your government pension.
The only current way to equalize this would be through spousal support payable by your ex-spouse to you, but that is problematic at best.
The Court of Appeal in Marriage of Peterson said the California legislature could craft a statute to direct family law courts to assign a portion of community assets to one spouse when the other spouse’s retirement is classified as separate property under federal law. Congress could also change the Social Security Act to eliminate this provision. The Court of Appeal said, however, that whether California or federal law should be changed to address the challenges presented here is a legislative policy decision that is beyond the purview of the Court of Appeal.

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WHY YOU SHOULD CONSIDER MEDIATING YOUR DIVORCE

Why consider divorce mediation? Because the stress of divorce temporarily decreases a person’s I.Q. by as much as 25% and the result can last until approximately 1 ½ years after the divorce is final. (Source: American Journal of Family Law, Volume 27, Number 4, Winter 2014).
Mediation is far less stressful than divorce litigation. Imagine not having the stress of being adversaries in a courtroom, preparing for court, taking time off from work to attend court, and you get the idea.
In addition to their mediator, parties may choose to use third party neutrals, such as family counselors, who can assist parents in creating parenting plans and dealing with parenting issues. Financial experts and accountants can provided much needed guidance when two parties must live on one income, at least temporarily.
Mediating your divorce doesn’t guarantee that you will won’t lose a few I.Q. points, but it will substantially reduce the stress and expense of litigation.

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ADVICE ON HOW TO CHOOSE AN ATTORNEY

Clients who believe they need an attorney who will personally take on their cause are fooling themselves. They have just hired the worst attorney to represent them.

Recently, the State Bar of California Family Law News included the following observations about family law attorneys who are what I call the true believers:

“Oftentimes, we vest ourselves in our client’s story, or her history. You may find yourself identifying with your client, or taking on her cause as though it were your own. When this happens, take a moment to consider that you are an advocate for the client, but you are not your client. Failing to separate your role as advocate from your client’s position results in a loss of objectivity and analytical thinking required to be an effective attorney. You must determine what level of passion is required to convince the judge or the jury to rule in your favor, but be cautious to avoid wording such as “we” and rely instead on “my client.” ¹

Oftentimes, family law attorneys become the alter egos of their clients. Their clients believe they have the best attorney when in fact they have the worst attorney because their attorney has lost the ability to give their client objective and reasonable advice.

We all remember the story of the Emperor’s new clothes. You want your attorney to be the little boy who shouts out that the Emperor is naked. The best way to do this is for your attorney to take the other side of your case as an exercise. Your attorney should cross-examine you and your case. Your attorney should explore, research and analyze the weaknesses and holes in your case before exploring, analyzing and researching the strengths of your case. Trust me, every case has weaknesses and holes. There are no perfect facts and no perfect clients. Or, as one noted family law judge likes to say, “Snow White did not marry Attila the Hun.”

Beware of any family law attorney who gives you a guarantee or who tells you not to worry about the costs of your case because they are so committed to your story and history that they will handle your case Pro Bono (without charge). Ask yourself this question: How much time is your attorney putting into your case as opposed to the case of someone who is paying their bill?

Oftentimes, your anger, emotions, and aggressiveness will lead you to an attorney who will reinforce all of these emotions. This is a terrible mistake. Instead, you should seek out an attorney who is calm in the face of the storm you’re in. After all, you want the captain of your ship to be steady so he/she can guide your case to calm waters or if necessary, steer your case successfully through stormy seas.


1. The State Bar of California, Family Law News, Issue 2, 2015. Volume 37, No.2. Page 45.

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HOUSE VS. PENSION

THINK TWICE BEFORE TRADING AWAY YOUR COMMUNITY PROPERTY RIGHTS TO HIS RETIREMENT PLAN FOR THE HOUSE. My articles are usually gender neutral, but this article is an exception. It is primarily written for women going through a divorce and addresses one of the most important choices they may be faced with making.

The headline was striking: Becoming a bag lady is feared by nearly half of U.S. women.

According to a recent poll by Allianz Life Insurance Company of North America, 49% of U.S. women fear becoming a bag lady—a homeless woman who wanders the streets lugging her meager belongings in a shopping bag or cart.

This fear may be unjustified due to the gains made by U.S. women in the workforce. However, it does bring to light that women—even those earning six figure incomes with generous benefits—have deep-seated financial fears. For women who have not worked or have limited work experience and skills, the fear is certainly justified. This is one of the main reasons I advise women going through a divorce to think twice about giving up their community property interest in their husband’s retirement plans, especially defined benefit pension plans, in exchange for the family residence.

The family residence comes with monthly obligations. The mortgage, insurance, property taxes and utilities are just some of the expenses. Even without a mortgage, the house can be financially draining. Consider plumbing repairs, heating and air condition repairs or replacement, roofing repairs or replacement, painting, repairing or replacing appliances, landscaping, etc. These will all occur during the course of home ownership. On the other hand, renters need only pick up the phone and call the landlord for repairs, a new dishwasher, etc. The boom line: You need enough cash flow to maintain the home you just traded for your community property interest in the pension.

The problem is that many women develop an emotional attachment to the house because that is where their children grew up or are still growing up. That is the place, especially for a full-time homemaker, that is their emotional foundation.

Women need to be prepared to give that up. As we saw in 2008, there is no guarantee that your house will appreciate in value forever. Even when you sell your house, the money you receive may not provide you a guaranteed monthly income such as a pension.

You’d like to earn 5% interest at the bank, but that isn’t going to happen in the era of low interest rates that currently exists. If you are nearing retirement age and going through a divorce, you need cash flow. Trading your community property interest in your spouse’s pension and/or other retirement plans for the house may trap you into an asset that you can’t afford. Instead of taking the house, consider the cash flow you will receive from your community property share of retirement accounts. If the house has equity, consider selling the house and putting your community property share into an income producing asset.

Having some cash at the ready, even in a low interest rate environment, isn’t a bad idea. Besides, you’ll probably sleep better at night knowing you have a cash reserve instead of trying to figure out how you are going pay to fix the roof. Finally, don’t assume that you will get by on spousal support from your ex spouse. Why? Because if your ex-spouse is also nearing retirement age, your spousal support may end or be severely reduced. In California, persons are not required to work beyond age 65 to pay current or future spousal support obligations.

If you decide to take your community property share of retirement funds instead of trading them for the house, make sure your divorce attorney is knowledgeable with respect to pension issues and brings aboard a pension expert to determine the best method of protecting your community property pension rights to your spouses’ retirement plan(s).

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IT’S ALL ABOUT CASH FLOW

You’d like to earn 5% at the bank.  Ain’t gonna happen, at least not immediately. Interest rates are stuck near zero, and if you are nearing retirement age and going through a divorce, you need cash flow.  Trading your community property interest in your spouse’s pension and/or other retirement plans for the house may trap you into an asset that you can’t afford.  Houses come with the costs of maintenance, rising property taxes, and the potential for major repairs.  Even worse, there is no guarantee that your house will continue to appreciate in value, or appreciate at all.  Remember the housing implosion?  Instead of taking the house, consider the cash flow you will receive from your community property share of retirement accounts.  If the house has equity, consider selling the house and putting your community property share into an income producing asset.  Having some cash at the ready, even in a low interest rate environment, isn’t a bad idea.  Besides, you’ll probably sleep better at night knowing you have a cash reserve instead of trying to figure out how you are going to fix the roof.  Finally, don’t assume that you will get by on spousal support from your ex.  Why? Because if your ex-spouse is also nearing retirement age, your spousal support may end or be severely reduced.  In California, persons are not required to work beyond age 65 to pay current spousal support obligations.   When nearing retirement age, cash is king.

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SEPARATE YOURSELF FINANCIALLY FROM YOUR EX SPOUSE

SEPARATE YOURSELF FINANCIALLY FROM YOUR EX-SPOUSE

1. Don’t bank where your ex-spouse banks.  I remember receiving a phone call from an ex-husband who told me that his ex-wife was accessing his separate banking information through a friendly bank employee at the same bank where they kept a joint account during their marriage.  Of course, the friendly bank employee’s actions were both illegal and against bank policy.  Nonetheless, this stuff happens. So, after your divorce is final, separate your primary bank from your ex-spouse’s bank.   You can always have an account at the same bank if you are paying support via direct deposit.

2. Get new credit cards and cancel any credit cards you had with your ex-spouse. There should be no reason that I have to explain this one.

3. Don’t use the same tax preparer, accountant or CPA, because even though these professional are forbidden to comment about you to your ex-spouse, you don’t know about their lower paid and non-licensed staff.  Once again, separate yourself financially from your ex-spouse.

4. You don’t want to be using the same stock broker or financial advisor as your ex-spouse, especially if your ex-spouse is also a social friend or golf buddy of the stock broker/financial advisor.

5. Change your passwords on all of your financial accounts, and sweep your computers for tracking software.  Yes, ex-spouses spy on each other all of the time. They can probably even teach the NSA a thing or two about computer spying.

6. Finally, get a new cellular phone and a new cellular phone number.  I know this is chore, but your ex-spouse can also obtain financial information about you from your cell phone, which you are probably using to both text and connect to the internet.

These are some of the most common “backdoor” ways an ex-spouse can keep tabs on your financial affairs.  Now, all of this may sound like I’m advising you to be paranoid, but as the old saying goes, “an ounce of prevention is worth a pound of cure.”

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ALTERNATIVES TO DIVORCE LITIGATION

One of the biggest financial burdens of divorce is litigation. However, how do you avoid litigation, but still protect yourself? One relatively new option is called “COLLABORATIVE DIVORCE.” The collaborative divorce model requires the parties to make a commitment not to litigate. Each party is represented by an attorney, who is their advocate throughout the process. The parties may also hire neutral financial advisors and therapists, to deal with matters such as income available for support, tax issues and custody of minor children. However, all the professionals must commit to disqualify themselves if a client reneges on collaborative divorce. Collaborative divorce won’t guarantee you’ll stay out of court, but it may allow you to resolve important parts of your case, such as property division and custody of your children without litigation. Be advised: Not all family law attorneys have been trained in the collaborative divorce model. Attorneys who are unable to transition from a litigation stance and personality are ill suited for collaborative divorce.

Before starting collaborative divorce, ask your attorney if they have obtained formal continuing legal education in the collaborative model and insist that your spouse’s attorney has done so as well. Because collaborative divorce involves both parties having their own legal representation, this model differs from MEDIATION, which involves a neutral third-party to help spouses reach an agreement. I often tell my mediation clients that the role of the mediator is to help the parties find the road to an agreement, or if the parties are stuck, then the role of the mediator is to build the road to an agreement. However, the mediator only has the power to empower the parties. The mediator has no power to force an agreement. Mediation is typically the least expensive method of dissolving a marriage. It may cost only a few thousand dollars.

Before considering mediation, spouses need to ask themselves how much their time is worth and whether they are willing to work together in the mediation process. The parties may have attorneys assist them during the mediation process. I call this hiring an “attorney coach.” Even if you don’t hire an “attorney coach,” at the end of the mediation process you’ll still have the opportunity to have an independent attorney of your choice review all the paperwork before you sign your agreement. Either collaborative divorce or mediation can be a smart choice for couples who don’t want a significant portion of their hard earned money and/or savings being spent on litigation.

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FOLLOW THE MONEY

“My spouse is hiding income!”  My spouse earns cash under the table.”  I hear these allegations often in my family law practice.  If your spouse is self-employed, or is able to earn cash, you are probably correct.  However, before you tell a family law judge that your spouse lies on his or her tax returns, think about this: How many times did you sign those tax returns?  Be careful if your family law attorney tells you that you’ll be treated as an “innocent spouse” by the IRS.  Remember, if there is a tax audit, or worse, you have the burden of proof to show the IRS that you are the “innocent souse.”  In other words, you’ve just bought yourself a bunch of work and probably the need to hire a tax attorney or even a criminal defense attorney, possibly at your own expense.  Dealing with unreported income, especially where parties have been filing joint tax returns for years, can be problematic.  One way to avoid this problem: Hire a private judge and keep all the allegations about failing to report income out of the public eye. And, if you are the spouse who has unreported income, think about this: Either you are going to be reasonable when it comes to child and/or spousal support, or you are going to put your spouse into a corner where they’ll feel they have nothing to lose by exposing you in a public courtroom. 

What if you need to follow the money?   Money almost always leaves a trail, but following the money can be expensive. Your attorney will need to do an extensive amount of discovery, including but not limited to Interrogatories, Demands for Production of Documents, and Depositions.  You’ll need to issue subpoeans to banks and financial institutions, lenders, etc., and you’ll need to hire a forensic accountant and perhaps even a private financial investigation team.  These costs can be prohibitive and are usually only justified in cases where large amounts of assets are being hidden. 
Remember, your attorney needs to present admissible evidence to a judge.

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