Community Property

Question 1

Basic Presumptions (Intro paragraph)

Answer 1

California is a community property state. All property acquired during the course of a marriage is presumed to be community property.

All property acquired before marriage or after permanent separation is presumed to be separate property. In addition, any property acquired by gift, devise, or bequest is presumed to be separate property.

Property acquired in a non-CP state by either spouse before they became domiciled in CA is quasi-CP. Upon death or divorce, quasi- CP is treated as CP.

To determine the character of an asset, courts will trace to determine: 1) the original source of the asset; 2) actions of the parties that may have altered the character of the asset; and 3) any statutory presumptions affecting the asset.

Question 2

Requirements for the application of CA CP Law

Answer 2

Valid marriage and CA domicile

Question 3

Valid Marriage

Answer 3

A valid marriage requires (1) legal capacity (age and understanding the legal consequence of marriage) and (2) legal formalities (ceremony, license issued and recorded, witnesses)

Question 4

Domestic Partnership

Answer 4

CA CP laws apply the same to domestic partners as they do to married couples. Declaration must be filed with the state.

Question 5

Common Law Marriage

Answer 5

Common law marriage cannot be formed in CA. CA will recognize a common law marriage that was valid in different jurisdiction.

Question 6

Putative Spouse

Answer 6

A person who believes in good faith that an invalid marriage is in fact valid. The principles of quasi-marital property will apply to property acquired before the realization of an invalid marriage. Property acquired after the realization will be separate property.

Question 7

Determining Character of the Asset

Answer 7

To determine the character of an asset, courts will trace to determine (1) the original source of the asset; (2) the actions of the parties that may have altered the character of the asset; and (3) any statutory presumptions affecting the asset.

Question 8

Community Property

Answer 8

All property acquired by either spouse during the course of a marriage is presumed to be community property. This presumption can be overcome by proof there was an agreement between the parties or title was taken in a manner inconsistent with CP. The party attempting to overcome the presumption has the burden of proving the property is SP.

Question 9

Reverse Pereira/Van Camp

Answer 9

If an SP business increases in value during the marriage, the community is entitled to a share of the increased value, which the court may choose to calculate using either the Pereira or Van Camp method (discuss both on essay).

Reverse Pereira/Van Camp
If value increases after separation, the SP owner will receive the increase if their separate labor is the primary cause of the increase separate effort, and the community will receive the increase in value if other factors, such as economic circumstances, are the primary reason for the increase.

Question 10

Separate Property

Answer 10

Property is SP if it is 1) owned by either spouse before marriage; 2) acquired during marriage by gift, bequest, will or inheritance, 3) acquired during marriage with the expenditure of separate funds or 4) rents, profits, income or increases in value derived from SP.

Question 11

Disability and Worker’s Compensation

Answer 11

Disability pay is a wage replacement, so it takes on the same character as the wages being replaced (eg CP if taken in lieu of CP retirement benefits, and SP if intended to replace future post-separation earnings)

Question 12

Quasi-Community Property

Answer 12

Quasi-Community property is all real or personal property acquired by 1) either spouse wile domiciled elsewhere which would have been CP if the acquiring spouse had been domiciled in CA at the time of acquisition or 2) in exchange for real or personal property which would have been CP if the acquiring spouse had been domiciled in CA at the time of acquisition.

Question 13

Earnings

Answer 13

Wages earned by a spouse during the marriage are CP, and wages earned outside of the marriage are SP.

Question 14

Quasi-Martial Property

Answer 14

In putative spouse cases, property acquired by the parties to the invalid marriage that would have been CP or Quasi-CP had the marriage been valid will be considered quasi-marital property and, upon request of the putative spouse, will be treated like CP or quasi-CP as applicable.

Question 15

Education and Training

Answer 15

Degree or License: SP of educated spouse.

Enchancing Educated Spouse’s Earning Capacity: The community is entitled to reimbursement for contributions

Educational Expenses Incurred Before Marriage: Reimbursement for payment of loans made during marriage.

Defenses: No reimbursement if the community substantially benefitted from the earnings (10 year marriage, presumed) or the other spouse also received community funded education or training.

Question 16

Employee Stock Options

Answer 16

If the option is awarded during marriage but does not vest until after the economic community has ended, the proration formula that is used to determine which portion is CP and which is SP will depend on the primary intent of the employer in granting the option.

Question 17

Borrowed Funds and Acquisitions on Credit During Marriage (Specific Source Rule)

Answer 17

Presumed to be CP.
May be rebutted by showing intent of the lender was to rely primarily on the purchaser’s SP in extending the credit.

Question 18

Marriage of Hug Formula

Answer 18

When the stock options were awarded for past services as a form of deferred compensation, use this formula to determine the amount of CP.

(Years from the date of employment to the date the economic community ends/Years from the date of employment to the date the options become exercisable) x (number of shares of stock that can be purchased under the option)

Question 19

Intent of the Lender Test

Answer 19

Evidence that the lender relied on repayment with separate property AND items purchased are traceable to separate property Rebuts the community property presumption

HOWEVER, separatizer has an uphill fight because lenders almost always rely on community reputation and creditworthiness which belongs to the community.

Question 20

Marriage of Nelson

Answer 20

When the stock options are awarded primarily for future services as a way to encourage the spouse to stay with the company use this formula to determine the amount of CP:

(Years from the date options are granted to the date the economic community ends/Years from the date the options are granted to the date the options became exercisable) x (Number of shares of stock that can be purchased under the option)

Question 21

Businesses (Specific Source Rule)

Answer 21

Goodwill: CP, to the extent earned during the marriage. Equal to the difference between the total value of the business and the value of its assembled physical assets, which courts calculate using either a market sales valuation or capitalization of past excess earnings.

Value of SP Business: If an SP business increases in value during the marriage, the community is entitled to a share of the increased value, which the court may choose to calculate using either the Pereira or Van Camp method (discuss both on essay).

Question 22

Pereira method

Answer 22

** Generally used if the managing spouse’s labor during marriage is the primary cause of the increased value. **

If an SP business increases in value during the marriage, the community is entitled to a share of the increased value, which the court may choose to calculate using either the Pereira or Van Camp method (discuss both on essay).

Pereira method:
Increased value primarily due to community labor.
Value of business at beginning + reasonable rate of return = SP, the remainder = CP

NOTE: A deduction for family living expenses must be made from the aggregate amount of CP acquired during marriage before final distribution is made.

Question 23

Personal Injury

Answer 23

Awards: If the cause of action arose before marriage or after permanent separation, the award is SP.

If injury occurred during marriage: the award is CP. Unless in the interests of justice, the award will be entirely awarded to injured spouse if traceable and not yet spent.

Liability: CP is subject to tort liability of either spouse.

If tortfeasor acted for community, funds come from CP then SP. Otherwise, SP then CP.

Question 24

Rents, Issues, and Profits

Answer 24

CP if the asset is CP, and SP if the asset is SP

Question 25

Van Camp method

Answer 25

** Generally used if the capital or nature of the business is the primary cause of the increased value **

If an SP business increases in value during the marriage, the community is entitled to a share of the increased value, which the court may choose to calculate using either the Pereira or Van Camp method (discuss both on essay).

Van Camp:
Increased value primarily due to capital or nature of the business (something other than community labor).
Fair salary for community labor x Years of marriage - amounts paid for community expenses = CP, the remainder = SP.

NOTE: A deduction for family living expenses must be made from the aggregate amount of CP acquired during marriage before final distribution is made.

Question 26

Severance Pay

Answer 26

If the right to severance pay accrued during marriage, the severance pay will be CP, regardless of when it was paid.

SP if it is replaces lost earnings that would be characterized as SP after the divorce.

Question 27

Royalties

Answer 27

If royalty-producing work was done during marriage, royalties paid after divorce will be CP absent agreement for otherwise.

Question 28

Actions affecting the classification of property

Answer 28

1. Transmutations
2. Commingling of SP and CP
3. CP Used to Improve or Reduce Debt on SP
4. Separation

Question 29

Statutory Presumptions

Answer 29

1. General Presumptions of CP
2. Married Woman Presumption (prior to 1975)
3. Joint Held Property Presumption

Question 30

Premarital Agreement

Answer 30

Parties may partially or entirely avoid the CA agreement.

Elements to a valid Prenup are as follows:
1. Writing Requirement
2. No Consideration
3. Permissible Terms (no violation of public property)
4. Lack of Defenses to Enforcement

Question 31

Marriage of Nelson Formula

Answer 31

When stock options are awarded primarily for future services as a way to encourage the spouse to stay with the company, use this formula to determine the amount of CP:

Formula:

(Years from the date options are granted to date the economic community ends / by years from the date options are granted to the date the option becomes exercisable) x (number of shares of stock that can be purchased under the option).

Question 32

Federal Entitlements (Specific Source Rule)

Answer 32

SP, under federal law, which in this case preempts state law.

IRA withdraws, self-employment taxes, US savings bonds, railroad retirement benefits, and social security benefits.

Question 33

GIfts (Specific Source Rule)

Answer 33

Property acquired during marriage by gift, devise, or bequest is SP.

Question 34

Life Insurance (Specific Source Rule)

Answer 34

Whole Life Insurance: Proceeds are apportioned according to who paid the premiums using the Pro-Rata Rule based on how many of the payments were paid with community funds and how many premium payments were made before marriage using SP.

Term Life insurance: The last premium payment determines the character.

Question 35

Defenses to Enforcement of Premarital Agreement

Answer 35

A. Agreement limits child support

B. Agreement limits spousal support, and:
1. Party challenging was not represented by independent counsel, or 2. Unconscionable at enforcement.

C. Promotes Divorce

D. Unconscionable

E. Not involuntary

Question 36

Pension Rights (Specific Source Rule)

Answer 36

CP based on what was acquired during marriage regardless of whether they are vested at divorce. To determine the CP portion, use the Time Rule.

Time Rule:
(Number of Years Worked During Marriage / by Total Numbers of years worked) x (Value of the pension)

Other rules:

Not eligible for retirement at divorce: Other spouse can elect to collect “if and when” employee spouse collects OR can “cash out.”

Eligible but chooses not to: Other spouse is still entitled to their share.

Divorce and non-employee spouse dies first: Their CP interest survives and can pass to a designated beneficiary.

Divorce and employee spouse dies first: Payments to non-employee spouse will generally end unless other plan arrangements were made. The federal Employment Retirement Income Support Act governs.

Question 37

Transmutation

Answer 37

Transmutation is a change in the character of property.

Before 1985: Express and implied oral agreements allowed.

After 1985: Writing, signed by adversely effected spouse, explicit statement of change in ownership, no consideration.

• Does not apply to personal gifts not of substantial value

Question 38

Methods of Tracing Commingled SP and CP Funds

Answer 38

Party claiming the asset is SP has the burden of tracing the asset to SP funds.
1. Direct Tracing
2. Exhaustion
3. Recapitulation

Question 39

Direct Tracing

Answer 39

If the spouse claiming the asset is SP can show they intended to use SP funds to purchase the asset, and that sufficient SP funds were available at the time of purchase, that asset is SP.

Question 40

Exhaustion

Answer 40

If spouse claiming the asset is SP can show CP funds were exhausted when the asset was purchased, the asset is SP.

Question 41

Family Expense Presumption

Answer 41

When determining whether CP funds were exhausted (under Exhaustion tracing) it is presumed that expenditures for family expenses were made with CP funds first. If SP funds were used, it is presumed to be a non-reimbursable gift to the community.

Question 42

Recapitulation

Answer 42

Over the course of marriage, community expenses exceeded community income. No specific records of expenditures are available at no fault of either spouse.

(Mirrors Exhaustion Method)

Question 43

Statutory Presumptions

Answer 43

First determine if source is CP or SP. Then apply presumptions.

1. General Presumption of CP
2. Married Woman Presumption (applies only prior to Jan 1 1975).
3. Jointly held property presumption

Question 44

Married Woman Presumption

Answer 44

Applies prior to 1/1/75.

All property acquired by a married woman prior to 1/1/75 by an instrument in writing is presumed to be her SP unless a different intention is expressed in the instrument.

Question 45

CP Pays SP Installment Purchase

Answer 45

Installment purchase is made with SP prior to marriage, CP pays down debt. The community takes a pro-rata portion of the property based on the amount (percentage) of principal debt reduction attributable to the use of CP

Question 46

Pro Rata Rule Formula

Answer 46

(Principal debt reduction attributable to community property/Total Purchase Price) x (Appreciation in Value) = CP

Question 47

Improvements to Real Property

Answer 47

CP to Improve SP: Reimbursement for fixtures

SP to Improve CP: Reimbursement for D.I.P. (Downpayment, Improvement, Principal)

Question 48

When does permanent separation occur?

Answer 48

Either spouse does not intent to resume marriage and the objective conduct of the spouse demonstrates the final breakdown of the marital relationship.

Question 49

Meretricious Spouse

Answer 49

An individual who cohabits with another person knowing the two are not married is meretricious spouse.

Distribution between meretricious spouses is governed by contract principles, not CP principles.

Contracts between meretricious spouses are generally valid if they are not based soley on sexual services. IF there is no express contract the court will look at course of conduct to determine if there is an implied contract, agreement of partnership or joint venture, or some other tacit understanding (example: raising children together).

Question 50

Ending the Marriage/economic community

Answer 50

The economic community exists during marriage and ends when:
1) divorce, 2) death of spouse, 3) permanent physical separation with an intent not to resume the marital relationship.

Question 51

Jointly Held Property Presumption

Answer 51

All property jointly held by the spouses is presumed to be CP for purposes of distribution upon divorce or legal separation.

Question 52

Lucas Gift Presumption

Answer 52

Applies to property purchased prior to 1987. One spouse dies and the other spouse is allowed to take property that may have been purchases with SP funds, but is presumptively CP.

• Applies to marriage ending in DEATH

Question 53

CA Domicile Required

Answer 53

Application of CP law requires domicile in CA at the time the property was acquired. If property was acquired outside the state then Quasi-CP principles apply.

Question 54

Anti-Lucas Legislation

Answer 54

Applies to property purchased after 1987. CP characterization can be rebutted by a written agreement or title demonstrating the asset is SP.

• Applies to marriage ending in DIVORCE

Question 55

Gift of Community Property

Answer 55

Neither spouse can make a gift of CP without the other spouse’s written consent.
If one spouse gifts CP- other spouse may set aside gift or take assets to offset the gift.

If one spouse learns about gift after death of spouse, then set aside their CP interest or recover from gift recipient or spouse’s estate.

Question 56

Goodwill

Answer 56

Goodwill is the intangible value of a business, including things such as its reputation and habitual clientele. Good earned during a marriage is CP. The value of good will is equal to the difference between the total value of the business and the value of its assembled physical assets, which courts calculate using either a market sales valuation or capitalization of past excess earnings.

Question 57

Widow’s Election Will

Answer 57

If the decedent died with a will and tried to dispose of more than their half of CP, surviving spouse may take CP rights without the will or take under the will and waive CP.

Question 58

Fiduciary Duties

Answer 58

Full Disclosure
Of material facts re: CP assets/debts and to provide equal access

Highest Good Faith and Fair Dealing

Question 59

Division of Assets

Answer 59

As a general rule, absent a property settlement agreement, all CP must be divided equally upon divorce. Upon death, each spouse may will away all of their SP and ½ interest in CP.

Question 60

Support Debt from previous relationship(s)

Answer 60

Down and Dirty: The community remains liable for all credit obligations of each individual spouse, whether acquired before or during the marriage. Separate property should be used to pay support but if Community property is used while Separate property is available then the community is entitled to reimbursement. If no seperate property is available then community property funds are being used and cannot be reimbursed.

A child or spousal support obligation of a married person that does not arise out of the current marriage shall be treated as a debt incurred before marriage, regardless of whether a court order for support is made or modified before or during marriage and regardless of whether any installment payment on the obligation accrues before or during marriage.

If money/property in the community estate is applied to the satisfaction of a child or spousal support obligation of a married person that does not arise out of the marriage, at a time when nonexempt separate income of the person is available but is not applied to the satisfaction of the obligation, the community estate is entitled to reimbursement from the person in the amount of the separate income, not exceeding the property in the community estate so applied.

Nothing in this section limits the matters a court may take into consideration in determining or modifying the amount of a support order, including, but not limited to, the earnings of the spouses of the parties.

Question 61

Support Payment and Taxes

Answer 61

Child support is never deductible and isn’t considered income.

Spousal Support: Not taxed or deductible federally but is by the state.

Question 62

Gifts of Community Property to non-spouses

Answer 62

Neither spouse can make a gift of CP without the other’s written consent. If one spouse gifts their CP to someone other than their spouse the spouse may 1) set aside the gift in its entirety or 2) upon divorce the other spouse can take equal offsetting CP assets to recover their one-half community property interests.

Question 63

Long Marriage Presumption

Answer 63

During long marriages the general community property presumption is not triggered when the source (separate or community) of acquisition is unknown. This is because the general community property presumption requires proof of acquisition. Example: You cant tell if a TV was bought before or after marriage and with what funds. So you can’t apply the general community property presumption

Thus, a court will instead use the long marriage presumption that says…

“Property possessed during a long marriage is presumed to have been acquired during marriage.”

Long marriages are determined by court and are typically ten or more years.

Question 64

Post Separation Common Necessaries

Answer 64

A non-debtor spouse’s SP is liable for debts of the other spouse, even if it was incurred post separation but before divorce if it was for common necessaries, which are basic of life appropriate to a peron’s station of life.