DivorceThere are times I think our legal system is irreparably broken. The system has been infected by a malevolent virus that is systematically dismantling the very institution from the inside out.  This virus is composed of activist judges who believe it is prerogative to reinterpret the law to reach outcomes that align with their personal views.  This ‘legislating from the bench’ approach leads to uncertainty in the legal system and ultimately drives up the costs for everyone.

Proof of this problem is the fairly recent decision of In Re Marriage of Christopher Ross Larson v. Julia Larson Calhoun, in which the Court of Appeals of the State of Washington just obliterated the meaning of separate property.

Here are the facts.  In 1975, Christopher Larson began working as an intern for a tiny software company while attending Princeton University to earn a computer engineering degree.  Upon graduation, he was offered full-time employment and over the years was given a good deal of stock in his employer.  His employer was Microsoft.  In 1986, the year Microsoft went public, he married Julia Calhoun.  Mr. Larson kept his pre-marriage stock options separate but anything acquired from Microsoft after the marriage he treated as community property.  After 23 years of marriage, Mr. Larson’s separate stock and his community assets swelled to a sizeable fortune.

In 2009, Mr. and Mrs. Larson divorced.  After a three-week long divorce trial, the trial judge awarded Julia Calhoun 100% percent of the community property totaling $139 million and an additional $40 million of Mr. Larson’s separate property in the form of Microsoft stock and cash.

The trial court believed it was necessary to award a portion of Larson’s separate estate to Calhoun “to achieve a just result”.  According to the judge, Julia provided intangible contributions to the marital community (these were described as her community activism and the raising of their children which were instrumental in allowing Mr. Larson to achieve his financial success at Microsoft); and to help ensure Calhoun’s short and long-term financial security.  WOW!  You are probably wondering who thinks $139 million is not enough?!  The judge gave the spouse everything Mr. Larson acquired during the marriage but somehow this was not enough to protect Ms. Calhoun’s financial security.

On appeal the appellate court upheld the decision and stated under Washington state law, the court has broad discretion to determine a just and equitable division of property including, but not limited to, the dividing of community assets and separate assets.  The court agreed with the trial court’s reasoning that because the Larson’s community property assets consisted largely of real estate and fine art – illiquid assets – Ms. Calhoun was entitled to an additional $40 million award of Larson’s separate – and liquid – property to guarantee her short-term financial health.  I forgot to mention, Mr. Larson got stuck with all of the community debt!

This case illustrates the risk of relying upon the legal system to protect our interests.  Mr. Larson should have taken steps much earlier to hold his assets in a separate trust or other instrument to place them beyond the reach of his spouse.  Many times people fail to consider these implications when dealing with their estate plan.  Although outright distributions of assets to a child may seem the logical way to distribute your estate, consider what might happen if your child ends up in a divorce.  Might a court award the child’s ex-spouse part of the inheritance to make a “just and equitable division”? 

Many options exist when creating an estate plan to protect your children from Mr. Larson’s scenario.  Here is a link to a recent webinar I taught on estate planning wherein I address this and offer solutions to protect your estate.  Please enjoy as it may be time to consider updating your living trust.

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

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