Community Property 1 Basic Principles “answer according to California Law” • Separate Property (SP) o =Property owned by either spouse before or after the marriage o =property acquired during marriage by gift, will, or inheritance. • Community Property (CP) o All assets acquired during marriage are PRESUMPTIVELY community property. Absent an agreement or title stating that property was taken in another form, the presumption is that it is CP • Termination of the Economic Community (Marriage) o Requirements Permanent Physical Separation Intent Not to Resume Marital Relations (just one spouse) • Intent= factual question. Look at the facts. o For community property not divided on divorce, the court retains continuing jurisdiction • Divorce o All CP must be divided equally: 50-50, unless there is a property settlement agreement. Disparity in earning power can only be considered as to Alimony. o General Rule: Each and every CP asset (and liability) must be Divided Equally. o Exceptions Economic Circumstances Exception • If economic circumstances warrant awarding certain assets WHOLLY TO ONE SPOUSE (and each spouse ends up with 50% of all CP in terms of total economic value. • Examples: Family Residence; Shares of a Closely-Held Corp; Pension Statutory Exceptions • = when one spouse ends up with more than 50% in total value. • Examples: (1) Misappropriation of CP by one spouse; (2) Educational Debts; (3) One spouse incurred tort liability not based on activity for benefit of community; (4) Personal injury award is given to injured spouse; (5) negative community-CP liabilities exceed CP assets-relative ability of spouses to pay the debt is considered (to protect creditors). • GIFTS: Lifetime & Testamentary gifts of CP o RULE: neither spouse can make a gift of community property without the other spouse’s written consent. Remedy= non-gift-giving spouse can SET GIFT ASIDE in its entirety Or can take equal offsetting CP assets to recover her ½ CP. If spouse didn’t learn of gift until after spouse’s death; can set gift aside as to her ½ CP. o RULE: Each spouse has the power of testamentary disposition over all of his or her SP, but over only one-half of the CP. • Preemption o Using $20k of CP, W buys a US Saving Bond in the name of W, pay on the death to C.” H cannot recover because Federal Law trumps Cal CP law. • Acquisitions on Credit During the Marriage o RULE: funds borrowed during marriage, and goods purchased on credit during marriage are Presumptively CP. HOWEVER, borrowed funds are classified according to Intent of the Lender. (where lender was looking in satisfaction of the debt—subjective intent). Where lender relied on General Reputation & Standing in the community=CP* Community Property 2 o Subsequent actions of the parties in paying off the mortgage loan may change the character of the asset under the buy-in rule. • Fiduciary Duty o Spouses are subject to fiduciary duties that arise from their confidential relationship, imposing a duty of the highest good faith and fair dealing with each other. If one spouse gains an advantage from a transaction, a presumption of UNDUE INFLUENCE arises, and that spouse has the burden of proof to show that he did not breach. o A Grossly Negligent or Reckless Investment of CP is a breach of spouse’s fiduciary duty Altering the Character of Property • =Transmutation Agreement o Whneby agreement during the marriage the character of an asset is changed from CP to SP, or SP to CP, or from one spouse’s SP to other spouse’s SP. o Can be a gift. o **No consideration is required. • Premarital Agreements o Must be in WRITING, SIGNED by BOTH parties. o Exceptions: (1) where oral agreement is executed—fully performed. (but marriage alone is not enough) (2) estoppel based on detrimental reliance. o What can they Agree to? (1) that each party’s salary and wages are their own SP; (2) that neither will claim a family allowance in other’s estate; (3) disposition of property on separation, divorce, or death; (4) disposition of life insurance policies; (5) spousal support o What can they NOT Agree to? Limiting Child Support Payments o Defenses*** Not Signed Voluntarily (independent counsel; 7 days to sign; if not represented, fully informed in writing.) Unconscionability: if unconscionable (1) when made AND (2) no reasonable disclosure or adequate knowledge of other party’s property or financial obligations. • Marital Agreements o Before Jan 1, 1985: oral transmutations were allowed. o On or after Jan 1, 1985: must be IN WRITING; SIGNED; and must EXPRESSLY STATE THAT A CHANGE IN OWNERSHIP IS BEING MADE. Exception: gifts of tangible property of a person nature (e.g. clothing, jewelry, camera) which are not substantial in value taking into account the circumstances of the marriage. o In any proceeding commenced before the death of the person who made the will, a statement in a will as to the character of property is NOT ADMISSIBLE. Community Property 3 Married Woman’s Presumption: Property Acquired Before 1975 • When CP was used to take written title in a married woman’s name before 1975, and the title didn’t indicate community property or a joint tenancy was intended, the property is presumptively the wife’s separate property. o Usually, the presumption is rebuttable between H & W. o Not rebuttable if a BFP who buys an asset from W in reliance on the fact that it is titled in W’s name. • Applies When: o Title taken in W’s name alone before 1975 o Title taken in name of W and H before 1975 but not taken in JT form or as “husband and wife” or “Mr. and Mrs” o Title in name of W and some third party before 1975 • Examples (remember: before 1975) o “to Winikie Gates” or “to Winkie Gates, a married woman” =MWP applies o “to Winkie Gates and Sam Slade (winkie’s brother)” = MWP applies o “to Hobie Gates and Winkie Gates, husband and wife” = MWP does not apply o “to Hobie Gates and Winkie Gates, as JTs with right of survivorship= MWP does not app o “to Hobie Gates and Winkie Gates” = MWP APPLIES. Here you would have a Tenancy In Common. Hs ½ = CP; W’s ½= SP. So W = ¾ and H = ¼ LUCAS & ANTI-LUCAS • = when SP funds are expended on CP • ***Does not apply to Joint Bank Accounts (anti-lucas statutes are in the Family Code; bank accounts are governed by the probate codes) • H & W buy home for $60,000 $15k=W’s SP. $45k= CP. Title taken as “H&W”. W later contributes $10,000 of her separate funds for improvements. • IF DEATH: follow LUCAS= taking title in a form that raised a presumption of community property was inconsistent with the idea that W intended to preserve a separate-property ownership interest. o Therefore, merely tracing a portion of the purchase price to W’s SP did not, by itself, overcome the presumption of CP. o Overcoming the Presumption: Unless an Agreement that W was to have an SP interest, by taking title in CP form, W has no separate ownership interest and NO right to reimbursement. o W’s subjective intent is immaterial o Important!!: Title property is taken If title is taken as “H & W” or “Mr. and Mrs. H” or “H & W, Husband and Wife”= presumption is created. If title is taken as “H & W as joint tenants”= joint tenancy. If title is taken as “H & W as CP with right of survivorship= CP with right of survivorship • IF DIVORCE: follow ANTI-LUCAS STATUTES= (1) taking property in joint and equal form is presumptively community property (and can be rebutted by and express statement in the deed or a written agreement) & (2) Spouse who made Post-1984 contributions of SP to the acquisition or improvement of CP is entitled to REIMBURSEMENT without interest for contributions to Downpayments, Improvements, Principal payments on mortgage (DIP) o Purchase: Property acquired during marriage in joint and equal form is presumptively community property. Community Property 4 Overcoming the presumption: (a) an express statement in the deed that the property is SP and not CP; (b) A written agreement by the parties that the property is SP and not CP. o Contributions: Contributions of SP to the acquisition or improvement of CP with SP is entitled to Reimbusement; without interest for contributions to DIP. **no reimbursement for SP used to pay interest on the mortgage, taxes, insurance, and maintenance. • H & W purchase home with $25k CP and $25k of H’s SP. On divorce, house is worth $90k: o If deed names “H & W, husband and wife”property= CP, and H is entitled to reimbursement of $25k SP (no interest for DIP) for his share of the down-payment. o If deed names “H” as granteeproperty = ½ CP & ½ SP, because Lucas does not apply. The money can be traced and it is not inconsistent with the title form. CP = $45k, SP= $45k. o Remember-must be in Joint and Equal Form. Installment Purchase Before Marriage; Debt Paid Down with CP after Marriage • Mortgage-apply TIME RULE o RULE: the community estate takes a pro rata portion of the property, measured by the amount (%) of PRINCIPAL DEBT REDUCTION attributable to the expenditure of CP. o (Principal Debt Reducation Attributable to CP /Purchase Price) = CP%. W bought house for $100,000. Put $20,000 down payment and reduced mortgage by $10,000. W marries H, pays off the mortgage during marriage. SP%= 30k/100k= 3/10; CP% = 70k/100k = 7/10. If house is worth $400k, CP = 280k. • Life Insurance o RULE: for Whole Life (Cash Value) Life Insurance policy; same rule. H took out life insurance policy for $100k, naming his mother as beneficiary. H makes 6 annual payments of $2k each, for total of $12k. Marries W, makes 4 more annual payments ($8k), then dies. CP%= 6/10 = 3/5 (or 12k/20k); SP%= 4/10=2/5 (8k/20k). o RULE: for Term Policy (pure insurance with no investment feature and no cash surrender value): Last premium determines character of the policy. (Each premium buys 1 year of insurance). So if last premium is paid while H is married, the entire policy is CP. If last premium is paid while H is not married, entire policy is SP. IMPROVEMENTS: • =when CP funds are expended on SP • Use CP on your own SP o Community has a reimbursement claim for greater of cost of improvements or enhanced value. • Use CP on your spouse’s CP-Split of Authority o Rule 1: No reimbursement claim because of presumption of gift to spouse. o Rule 2: Community claim for reimbursement should be recognized. • Use own SP funds on CP- At Divorce: triggers Anti-Lucas; reimbursement without interest for DIP. o At Death: Lucas applies; where title was taken in joint and equal form, the expenditure of SP to improve CP, no claim for reimbursement unless proof of an agreement to reimburse. Community Property 5 Commingled Bank Accounts • The mere fact that SP funds are commingled with CP funds does not transform or transmute the SP into CP. o However, the burden of proof is on him to show each asset is acquired with SP • Family Expense Presumption: it is presumed that expenditures for family expenses (food, housing, clothing, recreation, etc.) were made with community funds (to the extent available), even though it is known that separate funds also were available. o When Family Expenses may gave been paid with SP funds, the presumption is that it is a gift to CP. • Direct Tracing o Two requirements: (1) funds were available; (2) intent to use SP o $15k in the bank. H deposits $15k of SP funds; two days later withdrew $12k. o ***Anti-Lucas does not apply to Joint Bank Accounts between H & W. (NO RIGHT TO REIMBURSEMENT). The Anti-Lucas Statutes are in the Family Code; bank accounts are governed by the Probate Code, which is why tracing is permitted even thought he account is titled in both spouses’ names. • Exhaustion o Amount in bank account dropped to $3k, H deposited $20k, used $5k to pay daughter’s tuition (exhausting CP) and then withdrew $10k to buy stocks. BUSINESS OWNED BEFORE MARRIAGE INCREASES IN VALUE DURING MARRIAGE • Approach the question where Separately owned business greatly increases in value during the marriage. Discuss BOTH the Van Camp and Pereira tests. Then, after discussing both tets, make a judgement as to whether the major factor in the business’ grown was capital investment (VanCamp) or personal skills and labor (Pereira) • W owned a business worth $100,000 in 1986 when she got married to H. She drew a modest salary, worked long hours, and when they got divorced in 1996, the business was worth $4,000,000. H stayed home to watch their daughter and practice the violin • 2 Tests (discuss Both in the essay) o PEREIRA • Personal Skills and Effort • Pereira favors the CP estate, because the spouse gets only interest on initial value of business. • Use where spouse’s time, skill and effort are major factors in growth of business. • E.g. Spouse contributes creative ideas or develops new manufacturing technique; spouse worked long hours; drew modest salary. • Formula: Pay Interest (10%) on value of the Business at the time of marriage = SP. The rest is CP • W gets $100,000 (value at time of marriage) plus simple interest. If H & W had been married for 10 years, W is entitled to the initial $100,000 value + Interest (10%) each year (=$10,000) for 10 years = $100,000 for a total of $200,000. o VAN CAMP • Valuable Community Labor • VanCamp formula favors the spouse’s separate property. • Use where Capital Investment was a major factor in business’s growth, and spouse’s skills and efforts were less of a factor. • E.g. Spouse was paid substantial salary and drew large bonuses • Formula: Value of Community Labor = CP. The rest is SP. Community Property 6 • Value of Community Labor = Value of Spouse Services at Mkt Rate (not actual) – Family Expenses Paid from CP = CP. The rest is SP. • W and H were married for 10 years. The market rate for executives in comparable positions was $100,000/year, and living expenses were $80,000/year. CP = (100k-80k) x 10 years marriage = $200,000. CP = $200,000. • ***Use whichever test gives substantial justice. PENSION BENEFITS • Rule: Employment retirement benefits accumulated during marriage, whether or not vested at time of divorce, are CP. o = (Years of Service During Marriage/Total Years of Service until retirement)=CP% o H worked at Shell for 10 years, married W, divorced 10 years later, and is eligible to retire in 10 years. (1/3=CP%). o Form W should take • (1) When & If Received Decree: when H actually gets it, court retains jurisdiction • (2) Cash Her Out: giver her portion now, offset. o Cannot defeat spouse’s present right to ½ of CP component by REFUSING TO RETIRE. (Spouse can still get her lump sum payment now). • FEDERAL LAW: If Non-participant spouse divorces participant spouse, her CP is recognized, and she can get a QDRO (Qualified Domestic Relations Order), and receive payments from the plan. BUT, if Non-Participant spouse dies before participant spouse, her CP is not recognized. (If she divorces, and then dies, she does not have a devisable interest in remaining payments under the QDRO.) Preemption. • Disability Retirements; Severance Pay o RULE: Disability retirement payments and workman’s compensation benefits are treated as Wage Replacement; thus they are classified according to when received; not when earned. o Severance Pay: Argue it both ways; ask if it is used to replace lost wages or compensate for past work. • Military Retirements: a spouse has a CP interest in a military retirement plan under USFSPA. Stock Options • RULE: stock options awarded during marriage are CP. • Apply Time Rule. • In 1995, W, married to H, is awarded stock options that are exercisable if she is still employed with the company in 2001. In 1999, H & W divorce. (4 years she worked while married, she needs to work 2 more years to get option). CP%= 4/6; SP%= 2/6. Good Will of Professional Practice • “Good Will” of a professional practice (to the extent acquired during marriage) is CP subject to division on divorce. • How to value? Hire an expert witness (or capitalization of “excess” earnings) • Goodwill= those qualities that generate income beyond that derived from (1) labor and (2) reasonable return on capital and physical assets. Community Property 7 Educational Expenses • Educational Degree ≠ Property & cannot be divided. • Education LOANS are assigned solely to the spouse who incurred the debt. (this is an exception to the Equal Division rule) • Education Expenses paid with CP during marriage o CP is entitled to reimbursement IF the education enhanced earning capacity. • Defenses to Reimbursement of Community Estate for Educational Purposes o If more than 10 years have elapsed since the decree was awarded, presumption is that the community has substantially benefited, meaning that unless presumption is rebutted, no reimbursement. • If community benefits from the education, there is no reimbursement for CP funds paying educational expenses. TORT LIABILITY • Where other spouse was the tortfeasor o Recovery = SP (why? Otherwise he would benefit from his wrongful act) • Damages recovered from a 3rd Party o Recovery = CP At Divorce, the award goes ENTIRELY TO INJURED SPOUSE so long as the amount as not been expended, or commingled with CP funds. (UNLESS interests of justice, including economic need, require otherwise) At death, treated as CP. • Tort Liability of Either Spouse o If caused from an act for benefit of the community: satisfied from CP, and then from SP. o If caused from an act NOT for the benefit of the community: satisfied from SP, and then from CP. o ***Creditor cannot reach other spouse’s CP. CONTRACT LIABILITY • General Rule: Each Spouse has equal management and control over all CP, and thus have full power to BUY OR SELL CP & CONTRACT DEB11:58:01 PMS without the other spouse’s joinder or consent. • Exceptions o Business Exception: Spouse who operates a business interest that is all or substantially all community personal property has primary management and control of the business. Must give spouse written notice of any sale, lease or encumbrance of all or substantially all of personal property used in the business. o Personal Belongings Exception: one spouse cannot sell or encumber personal property used in family dwelling (furniture, furnishings, etc.) or clothing without written consent of other spouse. Transaction is voidable by the other spouse at any time (no SoL!!!) o Conveyances of CP Real Property: JOINDER OF BOTH SPOUSES IS REQUIRED. • RULE: neither spouse can transfer or encumber “my one-half interest in CP”. Only the entire interest in CP can be transferred or encumbered. o Exception: “Family Law Attorney Real Property Lien”: can give a ½ mortgage on CP to a family law attorney representing her in a divorce action. • Creditors: Reaching Other Spouse’s CP & SP o Rule: CP can be reached if the debt was incurred before the marriage. Community Property 8 Exception: Earnings of nondebtor spouse cannot be reached for premariltal debts IF held in a separate account (in which other spouse had no right of withdrawal) and not commingled with other CP funds. o Rule: other spouse’s SP cannot be reached by creditors Exception: Necessities. Each spouse is personally liable for other spouse’s contracts for necessaries so they can reach her SP. • I.e. medical expenses, etc. If CP funds were available to pay medical bill, other spouse can be reimbursed from CP to her SP that used to pay spouse’s bills. ***If debt for medical bills was incurred AFTER SEPARATION, Other Spouse’s SP is still liable because they are STILL MARRIED. (This is an exception to the economic community ending. Governed by the Family Code, which says you have to support your spouse).**** MULTISTATE PROBLEMS • Personal Property Acquired While Domiciled in a Non-CP State: o Upon Divorce = QCP On divorce, QCP is treated the same as true CP, and is divided 50-50. o Upon Death of Acquiring Spouse= QCP So even if acquiring spouse bequeaths “all my property” to someone other than spouse, the surviving spouse gets ½ of community property as QCP. o Upon Death of Non-acquiring Spouse = look to foreign state So if the non-acquiring spouse bequeaths “all my property” to someone other than spouse, the property that would be QCP had the acquiring spouse died is NOT her property. QCP does not give the non-acquiring spouse ownership interest. That would be unconstitutional (you don’t lose property rights by moving from one state to another). • Real Property in another state Acquired While Domiciled in a Non-CP State o Upon Divorce = QCP If property is in other state, given land to acquiring spouse and other assets of equal value to non-acquiring spouse, because Cal Courts don’t want to divide up land not in a different state. Court is relying on Personal Jurisdiction o Upon Death = Cal court cannot adjudicate. o Upon Death of Spouse when Real Property Bought with CP = Foreign Law controls In a common law state, how title is held determines ownership. So if the deed named the deceased spouse as grantee, he owns it and can devise it. Surviving spouse should seek a remedy recognizing her one-half ownership interest under: (1) resulting trust or (2) constructive trust (from Wills & Trusts). • Personal & Real Property Acquired While Domiciled in a CP State o Upon Divorce = CP o Upon Death = CP • Creditorstreat QCP the same as CP. Property Acquisitions Outside the Marital Relationship • Common Law Marriage: California DOES NOT recognize common law marriage; Except where it is validly contracted in another state (i.e. Texas, Idaho). Community Property 9 o Common Law Married people DO NOT hold title in CP. They can hold it in TinC. (Only married people and domestic partners hold property in CP.) • Marvin Agreement o Occurs when people live like married people, but aren’t married and KNOW they aren’t married. o Rule: a Contract is created from Express or Implied Conduct. Governed by K law. o Rule: contract cannot be based solely on sexual services. o Ex. Girl cooks, cleans, provides other services, and share all of the benefits of marriage, without actually getting married. • Putative Spouse o When two people live as a married couple, believe they are married, but in fact are Not. o Test: Objectively Reasonable & Good Faith belief that she was lawfully married, treated as a putative spouse. o Property created= Quasi-Marital Property Treated the SAME as CP. o Unaware? Must be Both Parties. If 1 party is aware that they were not lawfully married, treat them as Unmarried Cohabitants under a Marvin Agreement. Community Property 10 PROPERTY IN OTHER STATES Living Action ____________________ Type of Property Cal Cal Time of Acquisition CP No CAL Time of Action QCP No 1 Cal, 1 No Time of Acquisition depends Cal No Time of Acquisition Cal wouldn’t have this in court PROPERTY IN CALIFORNIA Living Action ____________________ Type of Property Cal Cal CP No Cal (but parties don’t depends Live here-probate) No No depends (even though prop is in Cal) Cal No Opposite of #2 above, depends on what other state does, if like Cal, they’d apply their own rules.