[COMM PROP] • 15 • Community Property Presumption (Guiding Principle) •
California is a community property state . All property acquired during the course of marriage is presumptively community property (CP) . Separate property (SP) includes (1) property acquired prior to marriage or after separation ; (2) a gift, devisee, or bequest ; (3) property acquired with separate funds , and (4) profits from separate property. To determine the character of any asset, courts will trace back the source of funding used to acquire the property. A mere change in the form of a property will not change its characterization. At divorce , all community property is divided equally between the spouses, and a spouses separate property remains his or her own . With the above principles in mind, we can now turn to the specific items of property involved.
[COMM PROP] • 6 • Quasi-Community Property •
Quasi community property (QCP) is property acquired in another state that would be considered community property if it were acquired in California. At divorce , QCP is treated like CP. At death , the surviving spouse has a 1/2 interest in QCP titled in decedent, but the decedent does not have an interest in QCP titled in the survivors name.
[COMM PROP] • 6 • End of the Economic Community • Permanent Separation
The economic community ends when spouses are permanently separated , that is, when they are permanently living apart and they do not intend to continue the marriage .
[COMM PROP] • 2 • Married Woman's Special Presumption •
The married womans special presumption gives the wife a presumption of SP if (1) t itle is taken in her name alone AND (2) the property was acquired before 1975.
[COMM PROP] • 2 • Fiduciary Duties •
Each spouse owes the other fiduciary duties of care and loyalty regarding community funds. A grossly negligent or reckless investment, OR a gain in financial advantage at the expense of the other, is a breach of those duties, and the responsible spouse's SP can be used to reimburse the community.
[COMM PROP] • 2 • Payment for "Spousal Necessities" Incurred During Marriage •
The community is obligated to pay for a spouses necessities (food, shelter, and medical expenses) during marriage. When separated, the community is ONLY obligated to pay for a spouses necessities in emergency situations .
[COMM PROP] • 1 • Debts • Characterization of Personal Loans
Whether a loan is considered CP or SP depends on what the creditor relied on for satisfaction of the loan. If it relied on the personal credit of both spouses it is CP.
[COMM PROP] • 1 • Debts • Distribution of Community Debts at Divorce
Generally, at divorce, each spouse gets 1/2 of each community asset UNLESS the court determines that the interests of justice require a different division. Additionally, certain statutory and economic exceptions apply that will change the division of assets, including: (1) Misappropriation by one spouse; (2) Separate debt (debt incurred before or after marriage, or incurred not for the communitys benefit); (3) Educational debts are assigned to the spouse who received the education; (4) Tort liabilities are assigned to the tortfeasor spouse if the liability was not for the benefit of the community; (5) The family home may be awarded to the person who is given custody of the minor children; and (6) Closely held corporations.
[COMM PROP] • 6 • Property Creditors May Reach to Satisfy Debts •
Creditors may reach CP to satisfy debts incurred before or during the marriage (including child and spousal support). A non-debtor spouses earnings (generally CP) are protected IF the debt occurred before the marriage AND the earnings were held in a separate account to which the debtor did not have access and no comingling occurred. Creditors CANNOT reach CP awarded to a spouse after divorce UNLESS that spouse (1) incurred the debt or (2) was assigned the debt by the court.
Generally, a persons SP can only be reached to satisfy personal debt including debt incurred after marriage . However there are exceptions where both CP and SP may be reached, including debts incurred for (1) Necessities ; and (2) Tort liability . If the debtor was acting to benefit the community when the tort occurred, then all of CP must be used before reaching SP. When title is taken in the form of joint tenancy, SP only constitutes 1/2 of the property interest. However upon divorce a different debt allocation may be required in the interests of justice to protect creditors.
[COMM PROP] • 3 • Rights to Manage Property • Equal Rights of Spouses
Each spouse has equal management and control of CP and may buy or sell CP, and contract debts without the others consent. However, if one spouse is managing a business , he/she is given primary management and control over the business, but is obligated to provide prior written notice to the 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.
[COMM PROP] • 4 • Transfers of Community Property to Third Parties •
Since each spouse has equal rights to manage and control CP, a spouse may sell, encumber, or otherwise dispose of CP without the others consent. Exceptions include: (1) community personal property transfers for less than fair and reasonable value require written consent ;(2) if one spouse is managing a business , he/she is given primary management and control over the business; (3) community real property transfers require joinder by both spouses i f one spouse sells or encumbers community real estate without consent, the non-consenting spouse may void the transaction (must be voided within one year if sold to a bona-fide purchaser, otherwise it is avoidable at any time); and (4) inter vivos gifts of CP require written consent . W here one spouse gifts CP to a third party without consent, the other spouse may void the gift during the donors lifetime , or may void 1/2 of the gift after the death of the donor.
[COMM PROP] • 1 • Property Acquired with Community and Separate Funds • The Moore Principle
When property is acquired with both CP and SP funds, and there is no title presumption, courts will determine CP and SP interests using the Moore principle. Under Moore, CP and SP are divided based on contributions. When CP is used to pay the principal on SP property, the community is entitled to a proration share of the property measured by the principal debt reduction attributable to CP/purchase price. Where CP is used to improve the other spouses SP , courts are split; either the funds will be presumed a gift , OR the community will be reimbursed . Where CP is used to improve a spouses own SP , the community is entitled to reimbursement , either the cost of improvement or the increase in value of SP.
[COMM PROP] • 3 • Anti-Lucas Statute •
Generally, jointly titled property is presumptively CP at divorce. However, where one spouse made SP contributions to the acquisition or improvement of the property , that spouse may be reimbursed without interest for (1) down payment ; (2) improvements ; AND (3) principal payments , but NOT mortgages, taxes, insurance or maintenance payments.
[COMM PROP] • 3 • Goodwill of Business •
Goodwill is the intangible value of the business reputation beyond personal skill or value of the assets . When goodwill is generated by community labor, it is CP. Goodwill is valued by either the market value method (what a willing buyer would pay for the business) OR the capitalization of excess earnings method (capitalizing the future stream of income to a present fixed sum).
Buy/sell options in a partnership agreement created by a spouses firm will not control the valuation of that spouses interest at divorce because of the risk of abuse.
[COMM PROP] • 4 • Value of Business • Van Camp vs. Pereira Tests
If a SP business is enhanced by community labor during marriage , courts will determine CP and SP interests at divorce using either Pereira or Van Camp . When business growth is mostly due to the spouses labor and abilities , courts apply Pereira : the owning spouse receives the original principal value of the business, plus an annual rate of return calculated at 10%, and the remaining value of the business is CP . When business growth is mostly due to the character and nature of the business itself, courts apply Van Camp : the community receives a reasonable salary in return for the community labor, reduced by any community expenses, and the remaining value of the business is SP of the owning spouse.
[COMM PROP] • 1 • Life Insurance • The Buy-In Rule
In order to determine the CP interest in a life insurance policy that was paid for with CP and SP funds, courts use the buy-in rule (number of premium payments made with CP DIVIDED BY the total number of premium payments). Term life insurance is designated CP or SP according to the characterization of the last payment made.
[COMM PROP] • 1 • Stock Options • Time Rule
Stock options are a form of employee compensation, and are CP ONLY IF they become exercisable during marriage .
If they become exercisable after marriage , then their character depends on how they were earned and the intent of the employer .
+ If the options were awarded primarily to reward for past services , then the Marriage of Hugtime rule applies: CP = The time employed during the marriage the time employed until the date the option becomes exercisable.
+ If the options were awarded primarily to encourage the employee to remain with the company , then the Marriage of Nelsontime rule applies: CP = The time from the date the option was granted to the date the economic community ended the time from the date the option was granted to the date the option becomes exercisable.
[COMM PROP] • 5 • Tort Settlements and Judgments •
If the cause of action arose during marriage, tort settlements and judgments are CP . However, at divorce, they are assigned entirely to the injured spouse , UNLESS the injured spouse already has the funds OR the interest of justice require otherwise. If the cause of action arose before or after marriage , then the award is SP of the injured spouse. Personal injury awards against a spouse are always SP of the injured spouse.
[COMM PROP] • 13 • Transmutations •
A transmutation is an agreement between spouses to change the character of an asset (either from SP to CP or vice versa). No consideration is necessary for transmutation to occur. Prior to January 1, 1985, oral (express and implied) and written transmutations were valid. After January 1, 1985 , transmutations are only valid if (1) in writing; (2) signed by the spouse whose interest is adversely affected; AND (3) it expressly states that a change in ownership is being made. The requirements above DO NOT apply when spouses exchange relatively insubstantial personal gifts.
[COMM PROP] • 2 • Reimbursements • Child Support and Alimony Payments
CP should not be used to make child support payments from a prior marriage UNLESS SP is not available. Where SP is available, but CP was used, the community may be entitled to a reimbursement upon divorce.
[COMM PROP] • 3 • Reimbursements • Education Expenses and Professional Degree Exception
Professional degrees acquired during marriage are SP of the acquiring spouse. However, the community is entitled to reimbursement when: (1) CP funds are used to pay educational expenses (including loans); AND (2) the education enhanced the spouses earning capacity .
However, reimbursement is NOT REQUIRED where: (a) the community has substantially benefited from the education (after 10 years a benefit is presumed); (b) the other spouse received community funded education; OR (c) the education lessens the need for spousal support.
[COMM PROP] • 2 • Reimbursements • Medical Expenses
A spouse is entitled to reimbursement when he/she expends SP on the medical expenses of the other spouse IF (1) CP was available OR (2) if the debtor spouse had available SP.
[COMM PROP] • 2 • Prenuptial Agreements •
Prenuptial agreements allow parties to contract out of community property laws , and are valid if in writing and signed by both parties . However, oral agreements are enforceable if: (a) made orally and fully performed; OR (b) if the party detrimentally relied on the agreement. Agreements concerning spousal support are not per se unenforceable. To prevent enforcement of a prenuptial agreement, a party may argue that the agreement was involuntary or unconscionable .
[COMM PROP] • 2 • Meretricious Relationships •
Under the Marvin case, courts may enforce express agreements between those in a meretricious relationship (cohabiting couples that are not married), as long as they are not expressly based on performance of illicit sexual acts. Courts may also consider factors that indicate implied agreements in order to protect the parties expectations. All funds kept in a separate account of a person in a meretricious relationship, which are not commingled, are separate property.
[COMM PROP] • 3 • Putative Spouse •