Community Property

Question 1

General Presumption

Answer 1

CA is a CP state. All property acquired during marriage is presumed CP. All property acquired before marriage or after legal separation is presumed to be SP. In addition, any property acquired by gift, will, or inheritance, or acquired during marriage from SP funds, is presumed to be SP.

Question 2

General Presumption - Characterization

Answer 2

The characterization of an asset as either CP or SP depends on three factors: 1) the source of the assets, 2) any statutory characterization presumptions that may apply to the asset, and 3) any actions by the parties that may have altered the character of the asset. A mere change in form of an asset does not change its characterization.

Question 3

Tracing Mixed CP/SP - Jointly Title w/SP

Answer 3

Title held jointly is presumed to be CP when it lists both spouse names. However, if both SP and CP were used to purchase title, the characterization of the assets could be altered at death or divorce.

Question 4

Tracing Mixed CP/SP - Jointly Title w/SP - Lucas

Answer 4

At death, the property is presumptively CP regardless of the source of the purchase funds. However, the presumption can be overcome by evidence of an agreement to the contrary.

Question 5

Tracing Mixed CP/SP - Jointly Title w/SP - Anti-Lucas Post 1984

Answer 5

At divorce, the spouse who made SP contributions to the CP is entitled to reimbursement without interest for 1) down payments 2) improvements 3) principal payments on a mortgage made with SP. Here,

Question 6

Tracing Mixed CP/SP -Married Woman’s Presumption

Answer 6

Prior to 1975, if a woman took property in her name alone it created a rebuttable presumption the property is the wife’s SP. Property taken only in the name of the husband does not change the character of the property as CP. However, if there is evidence that the W intended that the property be a gift solely to the the H, then it would be held by H as SP. Here,

Question 7

Tracing Mixed CP/SP -ProRata Rule: CP funds to pay down SP

Answer 7

When property is acquired prior to marriage, but uses CP funds to pay off the mortgage, the Moore formula is used to determine a pro-rata portion of SP and CP used to pay down the principal. The portion is measured by principal debt reduction, not mortgage interest, taxes, or insurance.

Here, the CP paid ____ toward the purchase price of ______. Therefore, the property is ____/____ CP and _____/_____ SP.

Question 8

Tracing Mixed CP/SP - Reimbursement Rule: CP funds to improve SP

Answer 8

When CP is used to improve SP, the CP does NOT obtain a pro-rata ownership interest in the asset, but may be entitled to reimbursement. When a spouse uses CP to benefit the SP of the other spouse a gift is presumed. When a spouse uses CP to benefit the spouse’s own SP, the CP it entitled to reimbursement of the cost of the improvement or the increase in the value of the SP, whichever is greater.

Question 9

Tracing Mixed CP/SP - Commingled Account

Answer 9

Placing SP funds in a joint account does NOT automatically change the SP to CP. But, the burden of proof is on the spouse claiming SP to trace each asset to a SP source. Family expenses (food, housing, clothing) are presumed to be made with CP funds even if SP funds are available.

Question 10

Tracing Mixed CP/SP - Commingled Account - Tracing

Answer 10

There are two methods used to trace funds in a commingled account: Exhaustion and Direct. Under the Exhaustion method, H could show that the CP funds in the account had already been exhausted from the account when he put his SP in the account. Under the Direct method, H must show the funds were “quick in quick out”, meaning there was sufficient separate funds available at all times and that he intended to use SP funds to buy the asset. Here,

Question 11

Tracing Mixed CP/SP - Business as SP enhanced by Community Labor

Answer 11

When community labor is used to enhance the value of a SP business, the community is entitled to a share of the increased value of the SP. Both Periera and Van Camp formulas are used to calculate the community’s interest and courts will apply whichever will yield the most fair result. Here,

Question 12

Tracing Mixed CP/SP - Business as SP enhanced by Community Labor - Pereira

Answer 12

The Pereira accounting method is used when the increase in value of a business is due primarily to the managing spouses labor. The SP investment is given a reasonable rate of return (10%) and the remainder is deemed community property. Here, if Pereira accounting were used…

Question 13

Tracing Mixed CP/SP - Business as SP enhanced by Community Labor - Van Camp

Answer 13

The Van Camp accounting method is used when the increase in value of a business is due primarily to the unique nature of the SP asset or external circumstances beyond the spouse’s labor. The community will receive a reasonable salary for the spouse’s labor multiplied by the years of the marriage and subtract any salary already received. The remainder of the interest in the business will be then owned as the spouse’s SP. Here, if Van Camp accounting were used…

Question 14

Special Characterization Presumptions:

Answer 14

personal disability retirement severs options for good education in life

Question 15

Personal Injury Award

Answer 15

PI awards and settlements are CP if the cause of action arose during the marriage. If the cause of action arose before marriage or after permanent separation, then the award or settlement is SP of the injured spouse. PI awards against the other spouse are always the SP of the injured spouse. Here,

Upon divorce, CP personal injury awards are assigned entirely to the injured spouse, so long as they have not commingled and the interest of justice do not required otherwise. Here,

Question 16

Disability

Answer 16

Disability and workers compensation benefits are treated as wage replacement, so it is characterized as CP if received during marriage or as SP if received after divorce. However, if a spouse has an option between regular retirement pension and disability retirement they cannot elect disability to defeat CP interest. Here,

Question 17

Retirement Benefits

Answer 17

Retirement benefits are CP if earned during the course of marriage. When retirement benefits are earned both during and after and/or before marriage, then the courts will apply the time rule to determine how much of the retirement benefits are CP and SP. Here,

Question 18

Retirement Benefits - Time Rule

Answer 18

The community’s share is calculated by determining the number of years the retirement benefits were earned while married divided by the total number of years the retirement benefits were earned. If the participant spouse is not eligible for retirement at the time of divorce, the court has the option to award funds “if and when” the retirement is received or “cash out” by awarding other assets of equal value and allowing he participating spouse to keep the pension. Here,

Question 19

Severance

Answer 19

Courts are split on how to handle severance pay. Some view it as SP as if it were replacing lost earnings. Others view it as CP as if it were earned by employment during marriage. Here,

Question 20

Stock Options

Answer 20

Stock options are a form of compensation. Stock options that are awarded and vest during the course of marriage are CP. But, for stock options that do not vest until after marriage, courts will look to the primary intent of the employer in granting the options, i.e. is it a reward for past service or an encouragement to remain with the company? The formula for past services is: years from employment to community end/total years employed until vested. The formula for encouraging future employment is: years from when stock option given to community end/years from option given to when it vests. Here,

Question 21

Goodwill

Answer 21

Goodwill is the value in a business beyond labor and physical assets. Goodwill includes factors such as the reputation and client-base of a business. Goodwill, to the extent it was acquired during marriage, is considered a CP asset. Because all sources of labor and capital are community property, Pereira and Van Camp do not apply.

The value of Goodwill is established by expert witness testimony using either the Market Sale or Capitalization method. Market Sale valuation is the price the goodwill would command in a sale of the business. Capitalization method considers the present value of future income attributed to the goodwill. Here,

Question 22

Education Expenses

Answer 22

A professional degree is not property subject to division at divorce and the community has no interest in it. However, if CP funds were used to pay education expenses, and if the education increased the spouse’s earning capacity, the community would be entitled to reimbursement at the time of divorce. Here,

Question 23

Education Expenses - Defense to Reimbursement: Community Benefited from Spouse’s Education

Answer 23

Reimbursement may be reduced or modified if the community has already substantially benefited from the education or training. There is a rebuttable presumption that the community has already benefited if more than 10 years has elapsed between the contributions and the initiation of divorce. Here,

Question 24

Education Expenses - Defense to Reimbursement: Other Spouse Also Received an Education

Answer 24

Reimbursement may be reduced or modified if the other spouse has also received a community funded education. Here,

Question 25

Life Insurance

Answer 25

Upon death of an insured spouse, where CP was used to pay all the Whole Life premiums on the policy, the proceeds are CP regardless of the named beneficiary. If, however, the deceased spouse has named a beneficiary other than the surviving spouse, the deceased spouse is deemed to have made a disposition of his 1/2 CP interest in the policy. Thus, the beneficiary will take 1/2 and the surviving spouse will take 1/2. If the premiums were paid with both SP and CP, pro-rata rules apply. Here,

Question 26

Term Life Insurance

Answer 26

Character of term life insurance is determined by the last premium payment. e.g. if the last payment was made with SP, then the term policy is SP. Here,

Question 27

Alter Character - Pre-Marital Agreement

Answer 27

A premarital agreement MUST be 1) in a signed writing 2) voluntarily entered into, and 3) it must not be unconscionable. The agreement will be considered involuntary if one of the parties was not represented by counsel, unless that party was advised to get an attorney and at least 7 days passed before signing and at least 7 days passed before signing and the spouse expressly waived the right to independent counsel. An agreement is unconscionable if a judge finds it was unfair and the objecting party was not fully informed of the other party's financial status at the time of signing. An oral agreement is valid only where 1) the promise was fully executed by the promisor or 2) the promisee detrimentally relied upon the agreement. Here,

Question 28

Alter Character - Transmutation

Answer 28

A transmutation is an agreement between spouses during marriage to change the character of an asset. A transmutation must be made in a written agreement accepted by the spouse whose interest is adversely affected. An oral transmutation agreement is valid if made before 1985. Here,

Question 29

Management

Answer 29

During marriage, spouses have equal management powers and control of all community assets. Therefore, either spouse has the power to buy or sell all CP and is free to contract without the other spouse's joinder or consent.

Question 30

Management - Personal Belonging Exception

Answer 30

One spouse cannot sell or encumber personal property used in the family dwelling (furniture, clothes) without written consent from the other spouse. Here,

Question 31

Management - Business Exception

Answer 31

If a spouse operates a business that is substantially a CP asset, the spouse can act alone in the transactions of the business but cannot sell or encumber the business property without consent from the other spouse. Spouse can seek reimbursement but cannot void a transfer. Here,

Question 32

Real Property Conveyance

Answer 32

Whenever community Real Property is sold or conveyed, both spouses must join in the execution of the instrument. A transfer to a BFP without knowledge of the marriage relationship is presumed valid, but if the non-consenting spouse brings an action to void the transaction within the one-year statute of limitations, the BFP will have to vacate the property and will be reimbursed his purchase money. Here,

Question 33

Creditor Rights

Answer 33

A creditor may go after all CP, QCP, or QMP, even if debt was incurred before marriage. However, earnings of a non-debtor spouse cannot be reached for premarital debts if held in a separate account and not commingled. The order of satisfaction depends on whether the tortfeasor spouse was acting for the benefit of the community: if so, creditor must satisfy the judgment from CP first and then the tortfeasor's SP. Here,

Question 34

Creditor Rights: Necessities of Life

Answer 34

A creditor may reach ALL CP and ALL SP from both spouses if the debts are considered to be necessary for life. Such necessities include debt for food, clothing, shelter, and medical expenses. This holds true even if the non-debtor spouse has held her SP in a separate account and remains after permanent physical separation of the spouses. Here,

Question 35

Creditor Rights: Necessities of Life - Reimbursement

Answer 35

When non-debtor spouse's SP is used to satisfy the debts of the other spouse's necessities and CP or the debtor's SP were available, the non-debtor spouse is entitled to reimbursement. Here,

Question 36

Creditor Rights: Child Support

Answer 36

A spouse's child support obligations from a prior relationship are treated as debts incurred before marriage. Where a debt is incurred before marriage, all of the CP and the debtor's SP are liable for the debt, but not the other spouse's SP. Here,

Question 37

Creditor Rights: Child Support - Reimbursement

Answer 37

When CP is used to satisfy child support claims arising out of a prior relationship and at the time the CP was applied, SP income of the debtor was available but was not applied to satisfy the obligation, the community is entitled to reimbursement. Here,

Question 38

Distribution - Legal Separation

Answer 38

The marital economic community begins at marriage and ends at one spouse's death or permanent physical separation. A permanent physical separation occurs when there is an actual physical separation and an intent not to resume the marital relationship. Here,

Question 39

Distribution at Divorce

Answer 39

At divorce, the community assets are divided equally, unless special circumstances allow for an unequal distribution, (e.g. misappropriation by a spouse, education debt, tort liabilities, family home may be awarded to spouse with custody)

Question 40

Distribution at Death

Answer 40

If the spouse dies with a will, the spouse is entitled to dispose of all his or her SP and 1/2 of the CP. If the spouse dies without a will, the CP is awarded entirely to the surviving spouse and between 1/3 and all the SP will go to the surviving spouse depending on whether there are issue or parents surviving. Here,

Question 41

Quasi Community Property

Answer 41

QCP is property acquired by either spouse that would have been community property had the spouses been domiciled in CA at the time of the acquisition. The quasi community property label typically only becomes significant at divorce, death, or for purposes of creditor rights. Here,

Question 42

Quasi Community Property - Real Property

Answer 42

On divorce, real property in a different state is considered QCP and subject to a 50/50 division. But, on death, the real property is governed by the laws of the state its in, CA does not have jurisdiction. Here,

Question 43

Distribution - Co-Habitation

Answer 43

Property acquired during cohabitation will be treated according to general contract principles. Express contracts (other than for sexual services) and implied contracts created by behavior will be enforced. Here,

Question 44

Distribution - Putative Spouse (Quasi Marital Property)

Answer 44

A putative spouse is not lawfully married, but has a good faith belief based on objectively reasonable grounds that she is lawfully married. In CA, a putative spouse is treated as a legal spouse and takes according to quasi-marital property principles. All property that would otherwise be CP or QCP under CA law will be labeled QMP. However, if one partner is a good faith putative spouse, but the other knows of the defect in the marriage, it is not clear whether the non-good-faith spouse may make any claim to QMP accumulated by the good-faith spouse. The CA Supreme Court has left this question open, but has suggested that it might treated the spouses equally despite the partner's lack of good faith. Thus, each partner is entitled to 1/2 of the QMP.

Question 45

Preemption

Answer 45

In some instances, Federal Law preempts CA law from applying CP concepts to certain assets. These preemptions that allow the assets to remain SP include military life insurance benefits, US government disability, US saving bonds, and Social Security Benefits.