Community Property

Question 1

General Presumption

Answer 1

CA is a CP state. All property acquired during the marriage is presumed to be CP (CP). All property acquired before marriage, after permanent separation, or during marriage by gift, will, or inheritance is SP. Rents, issues, and profits of SP are SP, even if acquired during the marriage.
In determining the characterization of assets, the court will look to the source of the funds used to purchase the asset. Then, the court will consider whether either spouse has taken any action to re-characterize the property. (Source, Action, Disposition)
The spouse who tries to rebut the CP presumption is the SP proponent and has the burden to rebut the presumption. If funds used to purchase were part CP and part SP, the court will issue a pro-rata apportionment upon dissolution. This means that the property will be divided according to the source of the funds used.
With the above principles in mind, we will look at each asset in turn.

Question 2

F.I.T

Answer 2

To determine the characterization of an asset, must consider F.I.T.

FUNDS: How was the property purchased (CP or SP money)?

INTENTIONS: What did the parties say or do?

TITLE: Whose name is the property in?

Question 3

Transmutation

Answer 3

Prior to 1985, character of property could be changed or transmuted through an oral agreement.

Any transmutation after 1985 must be an express (must contain language that expressly stated the characterization of the property is being changed), written declaration by the spouse whose interest is adversely affected. Full disclosure is required. No extrinsic evidence is allowed. A statement in a will before death is not admissible as evidence of a transmutation

Question 4

The Married Woman’s Special Presumption

Answer 4

If property was acquired prior to 1975, by a married woman in an instrument in writing, it is presumed to be her SP. It can be rebutted by showing that the husband did not intend to change the CP funds into the wife’s SP.

Question 5

Joint Tenancy

Answer 5

Property acquired during the marriage held in joint tenancy will be presumed to be CP. The presumption can only be rebutted by another agreement. After 1984, the agreement must be in writing and signed by the party adversely affected (Tenancy in Common title is identical to joint tenancy). At death, the surviving spouse gets everything unless there is an agreement to rebut the presumption. Divorce ends JT & turns it into CP, ending right of survivorship.

Question 6

Community Property Title

Answer 6

A CP title is presumed CP at divorce
Characterization: post 1987, need writing to change title
Reimbursement: post 1984: right to reimbursement based on tracing; appreciation is split between community.
A sale, lease, or transfer will be presumed valid if the purchaser, in good faith, did not know about the marriage of the spouse who sold the property.

Question 7

Management

Answer 7

Either spouse has the management and control of the CP, and neither spouse may make a gift or dispose of CP, without written consent of the other spouse. Both spouses have an obligation to make full disclosures to the other spouse of all assets the community owns or debts the community may be liable for.

Question 8

Fiduciary Duty of Care

Answer 8

Both spouses have an obligation to make full disclosures to the other spouse of all assets the community owns or debts the community may be liable for.

Question 9

Reimbursement/Apportionment:

Answer 9

If the couple uses both CP and SP to purchase something the property is part CP/SP and at divorce it is divided according to the source of the funds used.

Question 10

Family expenses:

Answer 10

Available CP funds are presumed to be used to pay for family expenses. SP funds are deemed to be used when CP funds are exhausted. SP used for family expenses has no right to reimbursement unless parties have agreed.

Question 11

Gifts

Answer 11

A gift between spouses of clothing, jewelry or other tangible articles of a personal nature, solely used by the spouse to whom gift is given, and not substantial in value will be considered SP and not subject to transmutation rule

Question 12

Right to Reimbursement

Answer 12

After 1984, if a party can show that they used SP funds toward the purchase of a joint tenancy home, they are entitled to reimbursement of their SP without interest. Prior to 1984, they needed a reimbursement agreement.
Any increase in value goes back to the community. If there is a decrease in value, reimbursement can’t exceed the net value but the SP contributor has a right to reimbursement of the full value.
There is a right to reimbursement based on tracing. This includes reimbursements for (1) down payments, (2) payments for improvements, and (3) payments that reduce the principal of a loan used to finance the purchase/improvement of the property. Excluded from contributions are (1) interest payments on the loan, and (2) payments for maintenance, insurance on, or taxes for the property.
A party may waive the right to reimbursement in writing. Reimbursement shall not exceed the net value of the property at the time of division.

Question 13

Improvements

Answer 13

Improvements are attached to the existing property. Three situations may arise:
One spouse used SP to improve the other spouse’s SP
Pre 2005: considered a gift
Post 2005: reimbursed without interest and may not exceed the net value of the property unless there is a written transmutation or waiver of reimbursement rights
A spouse uses CP to improve the other spouse’s SP
Traditional Rule: improvement is a gift
Modern Rule: creates a right to reimbursement to the community without interest
A spouse uses CP to improve their own SP
Pre 2005: if CP was spent without the consent of the other spouse, community has a right to reimbursement. If there was consent, no right to reimbursement.
Post 2005: right to reimbursement to the community without interest (injured spouse is entitled to either the amount spent or the value added , whichever is greater)

Question 14

COMMINGLING BANK ACCOUNTS

Answer 14

Commingling refers to situations where both SP and CP have been deposited into the same account.
Any available CP funds are presumed to be used for family expenses (food, rent, vacations, medical/dental care). SP funds are used for family expenses only when CP funds have been exhausted. SP funds used for family expenses have no right of reimbursement unless there is such an agreement.

Question 15

Tracing Funds: Exhaustion Method

Answer 15

SP proponent can rebut the CP presumption if, at the time of acquisition, all community income was exhausted by family expenses. Then clearly the property must have been purchased with SP funds.
When a spouse makes the choice to commingle funds, that spouse has the burden of keeping adequate records to establish the balance of community income and expenditures at the time an asset is acquired.

Question 16

Tracing Funds: Direct Tracing

Answer 16

SP proponent needs to show that SP funds were in the account and the SP proponent intended to sue the SP funds to acquire the property in question.
At divorce, contributions to joint bank accounts are presumed to be CP and can be rebutted by tracing to SP.
* Keeping adequate records without showing disposition of the funds is not sufficient proof to overcome the CP presumption.
* Example: Harry received $10k inheritance, SP, and puts it into his checking account. He also deposits $4k CP funds into the account. Then he purchases a car. The car is presumed to be CP. Under the Exhaustion Method, Harry cannot trace to SP funds because the $4k of CP funds were in the account. Thus, the car is only part SP - the part that Harry can trace to SP after CP funds are exhausted. Under Direct Tracing, Harry could prove that SP funds of $10k available and he intended to use those funds to purchase the car as his SP.

Question 17

Joint Bank Accounts

Answer 17

At divorce, the contributions to bank accounts of married persons are presumed to be CP and can only be rebutted by tracing to SP.

Question 18

SEPARATE PROPERTY BUSINESS

Answer 18

Rents and profits from SP business generated without community labor are SP. When there is labor of either spouse that plays a part in generating gain, it will be apportioned into SP and CP by one of two formulas: Pereira and Van Camp.
Effort does not change the nature of property, but if it increases the value, the increase should be attributed to the community and both spouses should share in the increase.

Question 19

Pereira

Answer 19

This formula is used if the increase in value of the SP business can be attributed to community effort. It favors CP.
The formula apportions the profits of a SP business by allocating a fair return on the SP investment (10% unless a different rate is proven appropriate) and allocating any excess to CP. The CP interest is anything that is over the reasonable (legal) rate of return.
EX: If W was the SP business owner. W would get the SP business, her reasonable rate of return, and half her CP interest. H would get the other half of the CP interest.

Question 20

Van Camp

Answer 20

This formula is used if the increase in value is not attributed to community efforts, but instead to an economic circumstance or market conditions.
This formula favors the SP owner. The formula determines the reasonable value of the spouse’s services (salary) and allocates that as CP and the remainder as SP. [Community income (salary) – community expenses = community share of profits from SP business]
EX: It is assumed that W’s community efforts were rewarded if she received a salary. If she received a salary, then that is considered what the community deserved from the SP business. If no salary, then the courts will determine a reasonable salary that someone in W’s position would have earned and will deduct community expenses

Question 21

COMMUNITY PROPERTY BUSINESS

Answer 21

A spouse who is operating or managing an interest in a business that is all or substantially all community personal property has the PRIMARY management and control of the business or interest.
The primary or managing spouse may act alone in all transactions but shall give prior written notice to other spouse of any sale, lease, exchange, encumbrance, or other disposition of all or substantially all of the personal property used in the operation of the business.

Question 22

Remedies for Failure to Give Prior Written Notice

Answer 22

Failure to give notice shall not adversely affect the validity of a transaction or of any interest transferred. [This is because there is a 3rd party relying on the validity of the transaction].
Under section 1101, a spouse has a claim against the other spouse for any breach of the fiduciary duty which results in impairment to the claimant spouse’s present undivided half interest in the community estate. Including, but not limited to a single transaction or series of transactions which have caused or will cause a detrimental impact to the claimant spouse’s undivided half interest in the CP.
Duties include: full disclosure of all material facts and information, characterization and valuation of all assets in which the community has or may have an interest, and any debts for which the community is or may be liable.

Question 23

GOODWILL

Answer 23

All assets acquired during marriage by the labor and efforts of a spouse are CP, and goodwill is no exception. The goodwill of an entity (business / professional practice) is the expectation of continued patronage and success, the expectation that the business will function the same in the future as it has in the past. In a professional business, it is the reputation of the professional.
Goodwill may be valued by (1) market value (what the business would sell for), or income (salary x10% per year).
In most cases, each party will hire experts to give opinions on the value of the business based on market value and capitalization of the business. No post-marital effort will be included in evaluating the business, because when the marriage ends, the effort that the spouse puts into the business is considered SP. [CA recognizes goodwill in the context of business and professional practices.]

Question 24

PENSIONS

Answer 24

Both vested and unvested pensions are treated as CP under CA law. If an employed spouse is eligible for pension benefits upon divorce, a court will calculate the CP interest in the retirement pension earned during marriage.
If the spouse can retire, but chooses not to, he cannot defeat the CP interest of the other spouse. In this instance, they would have to pay a share of the pension at divorce, but nothing after divorce.

Question 25

DISABILITY RETIREMENT

Answer 25

1. Compensates for the personal suffering caused by the disability;
2. Compensate for loss of earnings resulting from the disability in the future
   Typically apportioned by time (before, during, and after marriage) and apportioned by type of benefit – retirement = CP, disability = SP

Question 26

DISABILITY INSURANCE

Answer 26

If spouses intended the disability insurance was to replace lost earnings resulting from the disability, the benefits would be considered CP and split between the spouses.

Question 27

SEVERANCE PAY

Answer 27

If the benefits are earned by the employee spouse during marriage, they are CP.
If the benefits are intended to compensate for loss of future earnings and diminished earning capacity after separation, the benefits are SP.

Question 28

EARLY RETIREMENT BENEFITS

Answer 28

If offered an enhanced retirement package by the employer, and the enhancement is tied to the retirement benefits earned at least in part during the marriage, the enhancement is characterized as CP.

Question 29

DEBTS

Answer 29

A debt acquired during marriage is presumed to be CP. The SP proponent has the burden of rebutting the presumption by tracing. The community is liable for debts incurred by either spouse before or during marriage. A spouse’s SP is liable for their own debts but not the debts of the other spouse.

Question 30

Premarital Debts

Answer 30

The community is liable for debts incurred by either spouse before or during marriage. Liability lasts during marriage, excluding the period in which spouses are living separate and apart before a judgment of dissolution.
A spouse’s SP is liable for their own debts, but not the debts of the other spouse. Creditors can reach CP for the debt incurred by one spouse, but if there is no CP, the creditor can reach the SP of the debtor spouse.
Community debts are split equally, unless it can be shown that the debt was not incurred for the benefit of the community.

Question 31

LENDER INTENT

Answer 31

An individual’s credit score is CP. If the lender relied on credit score to give credit, the asset is presumed to be CP. If the lender relied solely on SP (ie: collateral) then the asset SP.

Question 32

CP REPAYMENT OF AN SP LOAN

Answer 32

CP funds paid to reduce the principal on a SP loan will result in the community obtaining a proportional interest in the property according to the formula established in Moore.
CP funds paid toward interest, taxes, or insurance on a SP loan will not be included.

Question 33

SP LIABILITY EXCEPTIONS

Answer 33

A married person is personally liable for (their SP is liable for):
1. A debt incurred for the necessaries of life when the spouses are living together [necessaries of life are based on costs that are consistent with the spouse’s station in life]
2. A debt incurred for common necessaries [required to sustain life] of life while the spouses are living separate and apart

Question 34

CP LIABILITY EXCEPTIONS

Answer 34

The earnings of a married person during the marriage are not liable for a debt incurred by the person’s spouse before marriage if:
Earnings are placed into an account where the debtor spouse has no access or right to withdrawal; and
Earnings are not commingled with any other CP

Question 35

Child Support and Spousal Support

Answer 35

Child and spousal support are treated as a debt incurred prior to marriage. The community is obligated to pay the debt. If CP is used to pay the support obligations, the community is entitled to reimbursement from the SP of the debtor spouse, IF SP was available at the time the community paid the support.
If the non-debtor spouse does not shield their earnings, the community is liable for the debt.

Question 36

TORT LIABILITY

Answer 36

If the liability is based on an act or omission that occurred during an activity for the benefit of the community, then the liability is first satisfied from CP and then from the SP of the tortfeasor.
If the liability did NOT arise while the tortfeasor spouse was acting for the benefit of the community, liability is first satisfied from the SP of the tortfeasor spouse and then from CP.
A spouse can shield their earnings from a tort debt incurred before marriage by the other spouse. The SP of the tortfeasor is liable, but the SP of the other spouse is not liable.

Question 37

EDUCATIONAL LOANS

Answer 37

Professional degrees such as law degrees or medical degrees are not CP and are not divisible at divorce. Any educational loans are the sole responsibility of the spouse who got the diploma/went to school. (with the diploma goes the debt)
When the community contributes to an educational loan, it will be reimbursed for its contributions which substantially enhances the earning capacity of that party. Reimbursement shall be with interest at the legal rate.
*Defenses to reimbursement: (1) the community has substantially benefited from the education (usually for 10 years or more); (2) the other spouse also received a community funded education, or (3) obtaining the education offset the need for spousal support.

Question 38

QUASI COMMUNITY PROPERTY

Answer 38

The property (real or personal) was acquired by either spouse while domiciled elsewhere AND
The property would have been CP if the acquiring spouse had been domiciled in CA at the time of the acquisition [because CA is a CP state] OR
In exchange for real or personal property, wherever situated, which would have been CP if the spouse who acquired the property so exchanged had been domiciled in this state at the time of the acquisition.
At death, quasi CP is treated like CP.
In Roesch, the court held that for the quasi-CP classification to apply, two prerequisites had to be met:
1) Both parties would have to change their domicile to California; and
2) Subsequent to that change, the parties would have to seek the legal alteration of their marital status in a California court
–There is a consent exception

Question 39

SEPARATE AND APART

Answer 39

The earnings and accumulations of a spouse, while living separate and apart from the other spouse are SP.
Marriage ends when spouses separate, but the community earnings will still be liable for common necessities of life [food, clothing, housing, medical care]. This duty extends until marriage is dissolved.
Look to the subjective intent of the parties. Are they living apart or acting divorced? If they are preserving the appearance of the marriage, the earnings remain CP.

Question 40

RESTRAINTS DURING DIVORCE

Answer 40

Fiduciary duties continue after separation. A TRO prohibits a spouse from encumbering, concealing, or disposing of any property, real or personal, whether CP, quasi-CP, or separate without the written consent of the other party.
Exceptions are:
1) In the usual course of business
2) For the necessities of life
3) Extraordinary expenditures
—Must give the other spouse 5 days notice and account to the court for the expenditure
4) Attorney’s fees

Question 41

DIVISION OF ASSETS & LIABILITIES AT DIVORCE

Answer 41

Property must be characterized at divorce. There is an equal division of debts and assets.
SP debts are education loans and tort liabilities that were not based on an act performed for the benefit of the community. Generally, debts are allocated based on when they are acquired.

Question 42

DEBTS AFTER SEPARATION

Answer 42

1) Common necessities of life
2) Necessities of life – necessary to the spouse’s station in life
3) Non-necessities – this will be the SP of the spouse who incurred the debt

Question 43

DIVIDING PROPERTY AT DEATH
No Will

Answer 43

If there is no will, the surviving spouse gets everything, whether the title is in CP, joint tenancy, or CP with the right of survivorship.