Effect of Parties' Actions on Characterization of Assets

Question 1

What happens when an installment purchase (e.g., a mortgage) is made before marriage and CP funds are used to pay off the purchase during the marriage?

NOTE: Also applies, if during the marriage, one spouse inherits land [SP] subject to a mortgage and pays off the note with CP funds

Answer 1

Proration Rule applies:

(How much debt was paid using CP)/(Purchase price)

This will give you a ratio (e.g., 7/10 CP, 3/10 SP)- Apply to current price of property.

REMEMBER, if the question is asking how much a party would receive in the event of death or divorce, may need to cut CP in half, add on SP etc.

Question 2

CP used to improved spouse’s own SP

Answer 2

When a spouse uses community funds to improve their own SP, no gift is presumed and the character of the asset is not changed.

The community is entitled to THE GREATER OF: (1) reimbursement of the cost of the improvement OR (2) the amount by which the improvement increases the value of the asset.

NOTE: The Anti-Lucas statutes do not apply here (they deal with SP spent on CP)

Question 3

Spouse expends CP to improve the other’s SP

Answer 3

Traditionally: a gift was presumed unless there was evidence of an agreement to reimburse. If the reimbursement agreement does not specify otherwise, the reimbursable amount is the cost of the improvement.

SPLIT: Several appellate courts have rejected the no-reimbursement rule and reimbursed the community even absent a reimbursement agreement.

NOTE: Since there is a split of authority, you should argue both ways.

Question 4

Spouse expends CP to improve their own SP

Answer 4

The community has a reimbursement claim for the greater of the cost of improvements or the enhanced value.

Question 5

Spouse expends SP to improve the other spouse’s SP

Answer 5

The contributing spouse is entitled to reimbursement without interest

Question 6

If a spouse expends SP to improve CP

Answer 6

Anti-Lucas statutes apply in case of divorce, and Lucas applies in case of death

Question 7

Two Presumptions for Commingled Bank Accounts

Answer 7

1. Family Expense Presumption: Expenditures for family expenses (e.g., food, housing, clothing, or vacations) are presumed to have been made with community funds, even if separate funds were also available.
2. Gift to Community
   Absent evidence of a reimbursement agreement, a gift is presumed when separate funds are used to pay family expenses, therefore, the paying party is not entitled to reimbursement.

Question 8

What are the two permissible tracing methods (i.e., to show that SP funds rather than CP funds were used)

Answer 8

Exhaustion Method:
Show that, when the asset was purchased, all community funds in the account had already been exhausted by the payment of family expenses, and therefore the asset must have been purchased with separate funds.

Direct Tracing
Show that, when the asset was purchased, there were separate funds available, and the spouse intended to use those separate funds to purchase an SP asset.

Examples of Direct Tracing:
- A party deposited separate funds into the account shortly before making a specific payment
- A payment is the exact amount of a recent deposit.

Question 9

Impermissible tracing method

Answer 9

Recapitulative Accounting

The SP proponent may not simply show that total family expenses exceeded total community income and conclude that all remaining funds and assets purchased from the commingled account are that party’s SP.

Question 10

What if the SP proponent fails to trace the funds?

Answer 10

The entire commingled account and assets purchased from the account will be treated as CP.

Question 11

What if a commingled account is jointly titled?

Answer 11

The contents of a bank account held jointly by married persons is presumptively CP.

This presumption may be overcome by tracing funds to one spouse’s SP (unless the spouses expressly agree that such sums will be CP).