Characterizing Property

Question 1

What are the general community property principles?

Answer 1

California CP law divides marital property into two major categories: CP and SP.

The law requires that the community estate be divided equally if there is no written agreement to the contrary. This means that the joint obligations of the parties are subtracted from the total fair market value of the community assets, yielding the net community estate. At divorce, courts divide property using an aggregate theory of distribution, which means that each spouse must receive one-half of the net community estate, not one-half of each item of property;

Question 2

How do the marital property presumptions generally work?

Answer 2

Once a presumption applies, the party opposing the presumption has the burden to rebut the presumption. A general presumption must be rebutted by a preponderance of the evidence.

A special presumptions must be rebutted by clear and convincing evidence.

Question 3

What are the marital property presumptions?

Answer 3

two general presumptions:

1. The general CP presumption
2. The general SP presumption

three special presumptions:

1. married woman’s special presumption
2. the presumption of title that applies at death
3. the special CP presumption that applies at divorce

Question 4

What is the general community property presumption?

Answer 4

CA law defines CP as any asset acquired or income earned by a married person while living with his or her spouse in CA. All property acquired during the marriage and before the separation, other than by gift, bequest, devise, or descent, is presumptively CP.

Question 5

How can the CP Presumption be rebutted?

Answer 5

The CP presumption can be rebutted in various ways, including written title evidencing that a gift was intended, statutory evidence, purchase funds traced to a SP source, or agreements designating property as SP.

Question 6

what is the exception to the general CP presumption?

Answer 6

There is an exception for property held by a decedent whose marriage, during which the property had been acquired, had been dissolved more than four years prior to the decedent’s death.

Question 7

What is the general separate property presumption?

Answer 7

CA law defines SP as anything acquired by a spouse before the marriage, or during the marriage by gift, bequest, devise or descent.

Property obtained after death or divorce, or after the spouses are living separate and apart, is also SP; so is the ‘rents, issues, and profits’ of separate property are also separate property.

Like CP, SP does not lose its character by a mere change in form or identity.

Question 8

What is the married woman’s special presumption?

Answer 8

Before Jan 1, 1975, if a married woman was the title owner to property without her husband or if she was on the title with a third party, then the property was presumed to be her separate property.

Before 1975, only the husband had sole management and control over the community property. Therefore, if a wife was on the title by herself, it was presumed that she acquired the property with her husband’s knowledge and donative intent.

It can be rebutted by clear and convincing evidence of the husband’s lack of donative intent or waiver.

Only applies to property acquired after 1975.

Question 9

What is the title presumption?

Answer 9

The special title presumption applies only at death, and it presumes that the form of ownership on the title presumptively represents the ownership interests of the spouses. If the asset is untitled or titled in only one spouse’s name, then the asset may be considered SP IF the source of the funds used to purchase the asset is SP.

HOWEVER: an inconsistent form of title prevails over tracing for purpose of establishing a title claim. In other words, property that is titled in a manner that indicates the spouses’ intent that the property be SP cannot benefit from tracing.

EX: if a married couple holds title to property as joint tenants and one of the spouses dies, then the property is presumptively held as a joint tenancy and the surviving spouse owns the entirety as the surviving joint tenant. The special title presumption can be rebutted by clear and convincing evidence that both spouses did not intend to hold the property as stated int he title.

Question 10

What is the exception to the special Title Presumption?

Answer 10

The only exception to the special title presumption is when the spouse purchasing the asset titles the asset in his name alone; such titling is considered self-serving, and the assets will be regarded as untitled.

Question 11

What is the special CP presumption?

Answer 11

The special CP presumption applies only at divorce and presumes that jointly held property is CP. the special CP presumption was enacted to ensure that couples do not unintentionally take themselves out of the CP system at divorce.

EX:if a married couple holds title to property as joint tenants and the couple divorces, then the property is presumptively CP. The special CP presumption can be rebutted by clear and convincing evidence that both spouses did not intend to hold the property as community property at divorce. Since Jan 1, 1984, this contrary intent must be evidenced by a clear statement in the deed or another form of writing. Prior to 1984, parol evidence of the spouses’ contrary intent could be used to rebut the presumption.

Question 12

In general, how can the characterization of property be altered?

Answer 12

• contracts prior to the marriage
• transmutation
• title

Question 13

How are co-mingled bank accounts treated?

Answer 13

Commingling occurs when the SP of one spouse is mixed or combined with the SP of the other spouse or with marital property. The burden of proof is on the SP proponent to show that SP funds were used to purchase the asset. The SP proponent must be able to trace the funds back to an SP source using one of the two following methods:

• Direct Tracing
• Indirect Tracing (exhaustion method)

Question 14

what is the direct tracing method?

Answer 14

Under the direct tracing method, the SP proponent must prove that there were sufficient SP funds available at the time that the asset was purchased and that he intended to use the SP funds to purchase the asset.

Question 15

What is the indirect tracing method?

Answer 15

Under the indirect/exhaustion method, the SP proponent must prove that the CP funds in the account were already exhausted by the payment of family expenses at the time that the asset was purchased.

Family expenses, including food, clothing, housing and recreation. In addition, certain presumptions apply to family expenses when they are paid from a commingled account; these presumptions must be applied BEFORE applying the exhaustion method:

1. CP funds are presumed to be used when paying family expenses, and SP funds are used only when CP funds have have been exhausted, and
2. Any SP funds used to pay for family expenses are presumed to be a gift to the community.

Question 16

How is goodwill in a community business treated at dissolution?

Answer 16

Goodwill is the intangible value that most businesses have that is based on the expectation of future business and/or upon an established name or reputation. This goodwill generates income beyond the labor of the spouse and a reasonable return on capital assets. Goodwill is treated like CP if it was created during the marriage.

Courts use two valuation techniques to calculate the value of goodwill:

1. market sales valuation through expert testimony, or
2. capitalization of past excess earnings created by goodwill.

When covenants not to compete are included in the sale of business goodwill, the business spouse will generally contend that the value of the covenant not to compete be deducted from the value of community property b/c the covenant is, in essence, a promise to refrain from post-divorce labor. However, courts have rejected this claim when the sale is hypothetical rather than actual.

Question 17

How are educational degrees and professional licenses handled in general?

Answer 17

Educational degrees and professional licenses acquired during the marriage are not treated as community property. However, there is an equitable right to reimbursement.

Question 18

What is the equitable right to reimbursement for degrees and licenses earned during marriage?

Answer 18

In CA, when a spouse has earned an educational degree or a professional license, the community estate is entitled to be reimbursed for the costs of acquiring the degree or license. These costs are normally limited to tuition, fees, books, but not living expenses.

The community estate will only be reimbursed if:

1. CP funds were used to pay for educational costs
2. the earning capacity of the educated spouse was substantially improved
3. the married couple did not contractually waive the right of reimbursement.

Question 19

What are the defenses to the community’s equitable right to reimbursement for educational expenses?

Answer 19

the educated spouse can raise the following defenses to reimbursing the community estate for her education costs:

1. the divorce occurred more than 10 years after the education was received and the community has substantially benefited from the education during that time
2. the other spouse also received an education paid for with CP funds during the marriage, or
3. the education reduced the need for spousal support upon divorce

Upon divorce, though, any outstanding loans will be assigned to the spouse who incurred the loans.

Question 20

How are premarital educational loans dealt with?

Answer 20

Reimbursement is also available when a spouse’s educational or license was acquired before the marriage and CP funds were used during the marriage to pay back loans

Question 21

Is there a right to enhanced earning ability upon divorce?

Answer 21

No; unlike other state, CA does not give the other spouse any right to a percentage of the enhanced earning ability of the spouse who acquired the degree or license.

Question 22

How are retirement pensions characterized?

Answer 22

Both vested and unvested pensions are treated as CP under CA law. If an employed spouse is eligible for pension benefits upon divorce, then a court will calculate the CP interest in the retirement pension earned during marriage using the ‘time rule’. When the employed spouse is not eligible for retirement upon divorce, retirement plans are divided either in kind or through a cash-out.

Question 23

What is the ‘time rule’ for dividing retirement pensions?

Answer 23

This percentage is calculated by dividing the years during which the spouse was employed during the marriage by the total number of years that the employed spouse has been participating in the retirement plan.

Question 24

What is a division in kind/reservation of jurisdiction?

Answer 24

A court reserved jurisdiction to effect a division in kind. Under a division in kind, the court orders that when the employed spouse retires, the other spouse will receive a percentage of each pension check using the ‘time rule’ method. The result of that division is the CP percentage of the retirement plan.

Question 25

What is the ‘cash-out’ method of dividing retirement pensions?

Answer 25

First, a qualified actuary gives an actuarial evaluation of a retirement plan by determining its present cash clause. Through this process, the non-participant spouse in the retirement plan is cashed out upon divorce and awarded assets of equal value to the pension benefits. EX: hubby will earn 500/month at age 62 and is now 37; an actuary would determine how much money needs to go into an account to bear 500/month in 25 years. Spouse is awarded community assets to that amount.

Question 26

When characterizing retirement accounts, how are predeceased employed spouses treated?

Answer 26

If a non-participant spouse predeceases an employed spouse during the marriage, then the predeceased spouse does not have a divisible interest in the retirement benefits of the employed spouse.

Question 27

When characterization retirement pensions, how are early retirement enhanced benefits treated?

Answer 27

An employer may offer an early retirement option with enhanced benefits as an incentive to the Ee. Although these enhanced benefits may be offered after divorce, if the court has ordered a division in kind, then the ex-spouse has a CP interest in the enhanced benefits.

Question 28

What if the pensionable spouse refuses to retire?

Answer 28

If the unemployed spouse asserts his right to receive the retirement benefits due him from the employed spouse’s retirement pension, then the court may order a private employer to pay the unemployed spouse his share as long as the working spouse is eligible to retire and is choosing not to. The employed spouse must receive notice of the demand.

Question 29

How are stock options characterized?

Answer 29

The characterization of stock options depends upon the type of compensation they are designated to replace. To the extent that stock options are compensation for earnings during the marriage, the CP has an apportioned interest in them.

Question 30

How do courts apportion the community's interest in stock options to the extent that they replace earnings during a marriage?

Answer 30

Courts apportion the CP interest as earned from the time when the employed spouse started working for the company and accruing stock option rights. The percentage is calculated by dividing the years when the spouse was employed during the marriage by the total number of years before the stock option can be exercised (also known as the 'time rule').

Question 31

What if the stock options are meant to replace earnings after divorce or separation?

Answer 31

The stock options are SP

Question 32

How is disability pay characterized?

Answer 32

Disability encompasses payments made to an employee due to an inability to work because of some type of physical incapacity. The characterization of disability pay depends upon the type of compensation it is designated to replace. In particular, if disability pay is intended to replace marital earnings or retirement benefits, then it is characterized as CP; if it is intended to replace earnings after dissolution, then it is characterized as SP.

Question 33

How does CA classify worker's comp pay?

Answer 33

CA classifies worker's comp pay the exact same as disability pay (CP interest to the extent that it is designated to replace earnings during the marriage)

Question 34

How is severance pay characterized?

Answer 34

When an employee is terminated, he receives severance pay to compensate for lost earnings while the employee finds another job. Courts are divided. If it is structured similarly to retirement benefits, then it is CP. Severance after divorce is SP. The controversy exists b/c the Er is under no contractual duty to pay severance.

Question 35

How is whole life insurance characterized at divorce?

Answer 35

while life insurance has an insurance component and an investment component. At divorce, a court will characterize the proceeds as CP in proportion to the number of premium payments that were made with community funds.

Question 36

How is whole life insurance characterized at death?

Answer 36

The court will characterize the proceeds as CP in proportion to the number of premium payments made with community funds when mixed funds are used to pay the policy. If the policy was paid only with community funds, however, then the surviving spouse gets one-half of the proceeds, and the other half goes to the named third-party beneficiary.

Question 37

How is term life insurance characterized at divorce?

Answer 37

Unlike whole life, term life insurance does not have an investment component, and many courts hold that the policy has no value at divorce b/c it only covers the risk of death. However, at least one CA appellate court has held that if the insured spouse becomes uninsurable, and the community has paid the premiums, the the community has an interest in the renewal value of the policy.

Question 38

How is term life insurance characterized at death?

Answer 38

At death, courts will either look to the final premium payment to determine whether the proceeds are CP or SP, or else they will apportion the community interest in the property.

Question 39

How is property insurance characterized?

Answer 39

the proceeds of a property insurance policy are characterized as either the same as the insured asset (replacement analysis), or according to the character of the premium payments (tracing analysis).

Question 40

How is health insurance characterized?

Answer 40

The right of the divorced employee spouse to renew his health insurance coverage with payments from SP does not constitute a CP interest in the employee's health insurance benefits

Question 41

How is income from separate property businesses characterized?

Answer 41

Generally, income from an SP business is characterized as separate property. But, if a spouse contributes labor to enhance the value of the SP business, then both spouses are entitled to a share in the SP business. While the incorporation of a SP business during marriage does not change the characterization of the business, it must still be apportioned through either the Pereira approach or the Van Camp approach.

Question 42

When is the Pereira approach used?

Answer 42

Courts have discretion, but the Pereira approach is generally used if the increase in value can be attributed to personal skills and effort of the managing spouse.

Question 43

When is the Van Camp approach used?

Answer 43

courts have discretion, but Van Camp is applicable when the primary reason for the increase in value is a character of the separate property itself, rather than the spouse's labor.

Question 44

What is the Pereira approach?

Answer 44

The Pereira approach is based on the premise that earnings attributable to the personal efforts of the spouse during marriage are CP. Therefore, the approach assumes that a person's time, effort, character, energy and capacity are factors that caused an increase in the value of SP business during the marriage. Courts also look at how much or how little salary the spouse was paid to compensate the community estate. In effect, the Pereira approach favors the community property portion of the estate. You must determine how much of the increase in the value of the business was due to normal capital appreciation of the initial SP investment. To calculate, the court values the managing spouse's SP business at the time of the marriage plus a fair rate of return, using simple interest (not compound), to yield the SP portion of the business. When earnings are reinvested, compound interest is used. The remainder is classified as the CP portion of the business.

Question 45

What is the Pereira formula?

Answer 45

SP = the value of the SP business at the time of marriage + (value of SP business at the time of marriage x fair rate of return x years of marriage) CP = fair market value of business at divorce - SP

Question 46

What is the Van Camp approach?

Answer 46

Under Van Camp the question is if the community has been adequately compensated for the personal efforts of a spouse. The approach therefore focuses on the adequacy of compensation paid to the spouse from the SP business. Courts also look to other factors, such as whether the spouse earned a high salary or large bonuses, implying that the community estate has already been fairly compensated. in effect, Van Camp favors the SP portion of the SP business. This involves determining the reasonable value of the spouse's services to the business. To calculate, the court estimates the market salary for the working spouse's services to yield the CP portion of the business less any salary ever paid. The remainder is classified as SP.

Question 47

What is the Van Camp formula?

Answer 47

CP = reasonable value of services provided during marriage - salary already paid SP = FMV of the business at divorce - CP

Question 48

Reverse Pereira and Van Camp

Answer 48

On occasion, a CP business continues to be operated by one of the spouses during the separation. If the business appreciates during this time, the the court uses the Pereira and Van Camp formulas in reverse to apportion the respective CP and SP interests.

Question 49

What is the reverse Pereira formula?

Answer 49

CP = value of the CP business at the time of separation + (value of the business at the time of separation x fair rate of return x years of separation) SP = FMV of the business at divorce -CP

Question 50

What is the reverse Van Camp formula?

Answer 50

SP = reasonable value of services provided during separation - salary already paid CP = FMV of the business at divorce - SP

Question 51

How are community contributions to separate property debt apportioned?

Answer 51

When community funds are used to satisfy a separate property debt, the community gains a proportional ownership interest in the SP. If a new loan is obtained during the marriage to pay off separate property debt, then both spouses are equally liable for the debt. There is no community ownership interest when the community funds are considered a gift from one spouse to another.

Question 52

How are assets purchased with credit characterized?

Answer 52

Courts determine the character of property acquired on credit by the sellers intent. Specifically, did the seller rely on the purchaser's separate property or a community asset or income stream? Absent strong evidence, a court will generally assume that property acquired during the marriage is CP. Signatures on the loan are evidence, but not conclusive.

Question 53

Improvements: what happens when SP is used to enhance the other spouse's SP?

Answer 53

Before 2005, when a spouse used her SP to improve the other spouse's SP, the improvement was presumed to be a gift, Since 2005, spouses have a statutory right to reimbursed for the contribution unless there has been a transmutation in writing or a written waiver of the right to reimbursement.

Question 54

Improvements: what happens when SP used to improve CP?

Answer 54

Before 1984, when a spouse used her own SP to improve CP, the improvement was presumed a gift. Since 1984, spouse is entitled to reimbursement for the funds expended.

Question 55

Improvements: CP used to improve a spouse's own SP.

Answer 55

When a spouse uses CP to improve his own SP, the community is entitled to either reimbursement for the fund expended or the enhanced value of the property, whichever is greater. However, if the wife used CP to improve her own SP before 1975, then the improvement was presumed a gift.

Question 56

Improvements: CP used to improve the other spouse's SP

Answer 56

When a spouse uses CP to improve the other spouse's SP, the community is entitled to either reimbursement for the funds expended or the enhance value of the property, whichever is greater.

Question 57

How are personal injury recoveries treated at divorce if the injury was before the marriage?

Answer 57

If the injury is caused by a 3rd party tortfeasor before the marriage, then the tort recovery is SP, and the injured spouse has to reimburse the community or the other spouse's SP for any expenses caused by the injury.

Question 58

How are personal injury recoveries treated at divorce when the injury is during the marriage?

Answer 58

when the injury is cause by a third-party tortfeasor during the marriage, the tort recovery is characterized as CP. The court will award any tort recovery to the injured spouse at divorce if it has not been spent or commingled with CP funds, unless the court finds that the interests of justice warrant awarding some of the recovery to the non-injured spouse. If the damages have been commingled with CP, then they lose their protection and become part of the community.

Question 59

How are personal injury recoveries characterized at death?

Answer 59

Personal injury recovery is characterized as CP at the death of either spouse.

Question 60

How are personal injury recoveries treated when they are against the other spouse?

Answer 60

Personal injury recovery against the other spouse is SP