Community Property Flashcards
Master community property for the California bar exam.
Basic principles - essay introduction
California is a community property state. All property acquired during the course of a marriage is presumed to be community property. All property acquired before marriage or after permanent separation is presumed to be separate property. In addition, any property acquired by gift, devise or bequest is presumed to be separate property. With these basic principles in mind, each item of property will be examined.
Quasi community property is property acquired by either spouse that would have been community property had the spouse been domiciled in California at the time of acquisition.
Basic principles - separate property
Property:
- owned by either spouse before marriage
- acquired during marriage by gift, will, or inheritance
- acquired during marriage with the expenditure of separate funds.
Also, rents, issue, and profits derived from SP
Division of CP on divorce - general rule
Pro rata; disparity in earning power can be considered only as to spousal and child support
Division of CP on divorce - exceptions
Economic circumstances: can have non-pro rata division, giving particular asset wholly to one spouse and cash out other spouse w/ other assets (each spouse gets 50% of total value)
Statutory exceptions
- Misappropriation of CP
- Educational debts
- Tort liability not based on activity for benefit of the community
- Personal injury award (is CP during marriage, but on divorce is awarded to injured spouse unless interests of justice require otherwise)
- “Negative community” (i.e., community liabilities that exceed assets)
Acquisitions on credit during the marriage
Community credit presumption: funds borrowed during marriage, and goods purchased during marriage, are presumptively community credit
Borrowed funds (and credit purchases) are classified according to primary intent of lender; inquiry is where lender is looking for satisfaction of debt
Community funds/labor used to improve SP - business - in general
Increase in value is CP
Two formulas, must know and apply both:
- Pereira
- Van Camp
Community funds/labor used to improve SP - business - Pereira
Mnemonic: Pereira = P = Personal skills
Use when spouse’s time, skill, and effort are major factors in growth of business; look for spouse who contributed creative ideas or new techniques, and/or worked long hours w/ modest salary
SP: value of business at time of the marriage w/ interest (legal rate of 10% per annum)
CP: remaining increase in value of business
Community funds/labor used to improve SP - business - Van Camp
Mnemonic: Van Camp = VC = Valuable Co.
Use where capital investment was major factor in business’s growth, spouse’s skills and efforts less so; look for spouse paid substantial salary and/or large bonuses (compensating community)
CP: FMV value of spouse’s services (what execs in similar positions would be compensated), less family expenses paid w/ community funds
SP: remaining increase in value of business
Character of assets based on asset type - pension benefits
Prorated CP
Retirement benefits accumulated during marriage, whether or not vested at divorce, are deferred compensation and are CP, subject to proration:
- Numerator: Years service while married
- Denominator: Total years employed to retirement
- Death of either spouse doesn’t affect, but ERISA may preempt (only allows living beneficiaries)
- Non-particpating spouse gets “if and when received” decree or “cashed out”
- If participating spouse doesn’t retire, court may order payment to NPS by worker or employer
Character of assets based on asset type - disability retirement benefits and workers’ compensation
CP or SP depending on when received
These are wage replacement; if received during marriage they are CP but if received after marriage they are SP.
S1 cannot elect to take disability retirement benefits in place of pension benefits to defeat S2’s right to share in pension.
Character of assets based on asset type - severance pay
Courts split, argue both:
- SP because replaces lost earnings which after a divorce or permanent separation would be SP
- OR - - CP because it arose from a collective bargaining agreement and was thus earned by employment during marriage
Character of assets based on asset type - stock options vesting after marriage
Prorated CP
- If employer awarded primarily to reward S1 for past services (deferred compensation):
- Marriage of Hug applies
- Numerator: time of denominator married
- Denominator: time from emp’t to date options exercisable - If employer awarded options primarily to encourage S1 to remain with company:
- Marriage of Nelson applies.
- Numerator: time from date options granted to divorce
- Denominator: time from options granted to exercisable
Character of assets based on asset type - goodwill
Increase in value is CP
Goodwill is qualities that generate income beyond that derived from (1) professional’s labor; and (2) reasonable return on capital and physical assets.
Primarily established by expert witness (p’ship and buyout agreements evidence but not conclusive); two methods:
- Market sales valuation: FMV of g’will in sale
- Capitalization of past excess earnings: present value of future stream of income that goodwill will generate (produces higher value; g’will lost in sale)
Character of assets based on asset type - education
Not CP, but reimbursement available
- Community entitled to reimbursement for cost of edu if substantially enhances earning capacity of edu’d spouse; outstanding edu loans assigned solely to party who incurred debt
- Equitable defenses to reimbursement:
- Community already substantially benefited from earnings of edu’d spouse (presumed after 10 yrs)
- Other spouse also received CP-funded edu
- Need for spousal support reduced as a result of edu
Character of assets based on asset type - tort recovery
Where the other spouse was the tortfeasor, tort recovery is SP
Where a third party was the tortfeasor, the tort recovery is CP until divorce or death
- Divorce: awarded entirely to injured spouse as
long as traceable and not spent, unless interests of justice, including econ need, require otherwise
- On death: recovery is CP
Character of assets based on asset type - life insurance proceeds
- Whole life insurance: proration rule applies
2. Term life insurance: source of last premium (CP or SP) determines character
Character of assets based on asset type - property insurance proceeds
- CP or SP according to character of property insured
- Right of reimbursement if CP used to pay insurance for SP
Altering character of assets by agreement - premarital agreements - in general
- Parties may opt out of the CP and SP characterizations by agreement, either as to particular assets or as to all acquisitions
- Typically, parties agree earnings will be SP
Altering character of assets by agreement - premarital agreements - requirements
- SOF, but can be overcome by: complete performance or estoppel following detrimental reliance on oral agreement
Altering character of assets by agreement - premarital agreements - limits
- PMAs invalid if:
- Promote divorce
- Involuntary (generally, indep. counsel and time to review; various exceptions)
- Unconscionable when signed and burdened party didn’t have adequate disclosure of other party’s wealth - Can limit or waive spousal support only if burdened party had indep. counsel OR not unconscionable when enforced
Altering character of assets by agreement - during marriage
Transmutation
Pre-1985: could be oral
Post-1985: must be: (1) in writing; (2) signed by spouse whose interest adversely affected; and
(3) explicitly state that change in ownership being made
- Exception for tangible personal gifts
- Statute of frauds exceptions do not apply
- Generally cannot admit wills or revocable trusts to prove
Character of assets based on how title taken - ways married couple can jointly own property
- JT: each owns undivided 1/2 interest as SP
- TIC: equal proportional ownership interests
- CP: each spouse holds undivided 1/2 interest
- CP w/ right of survivorship: CP w/ JT-like vesting on death
Character of assets based on how title taken - property in joint and equal form - at death
- Marriage of Lucas controls
- Title in joint and equal form means property is presumptively CP
- Can rebut with agreement that S1 was to have a SP interest
- Otherwise, no reimbursement even if S1’s SP used in purchase or improvement of property
Character of assets based on how title taken - property in joint and equal form - at divorce
- Anti-Lucas statutes control.
- Title in joint and equal form means property is presumptively CP, subject to equal division
- CP presumption can be rebutted by: express statement in deed or written agreement by parties
- Reimbursement right: if S1’s SP used for contributions to DIP (Down payment, Improvements, or Principal payments) of CP, S1 is entitled to reimbursement w/o interest.
- If S1’s SP deeded into SP, reimbursement right for FMV at time of deed
- No reimbursement for SP used to pay interest on mortgage, taxes,insurance, or maintenance
- The anti-Lucas statutes do not apply to receipts; need title document or deed
Character of assets based on how title taken - property in joint and equal form - married woman’s special presumption
- Pre-1975 only
- Where CP used to take title in a married woman’s name and title did not indicate CP or JT, property was presumptively wife’s SP
- Where CP used to take title in name of H and W and title did not indicate CP, JT, or “H and W as husband and wife,” property was TIC w/ wife’s half SP and husband’s half CP (so wife had 75%)
Character of assets based on how title taken - property not in joint and equal form
Can use source rule and tracing
Community funds/labor used to improve SP - CP used to pay off SP
Proration: community estate takes a pro rata portion of the property, measured by percentage of principal debt reduction attributable to expenditure of community funds
Numerator: principal debt reduction w/ CP
Denominator: purchase price
Community funds/labor used to improve SP - S1 spends CP to improve S1’s SP
Improvements become part of the property (fixtures); expenditure of CP does not change ownership character of house
S2 can bring a claim for reimbursement for the community, which greater of the CP expenditure or increase in value
Community funds/labor used to improve SP - S1 spends CP to improve S2’s SP
Split of authority (must address both sides):
- No reimbursement: presumption of gift that can be overcome only by evidence of an agreement to reimburse community estate
- Reimbursement, as with spending on own SP
Commingled funds - presumptions and tracing methods
- Available CP funds presumed to have been used for family expenses; gift presumed when SP funds used to pay family expenses
- Jointly titled commingled account presumptively CP but rebuttable absent express agreement
- Tracing methods:
1. Exhaustion method
2. Direct tracing
Commingled funds - tracing - exhaustion
At time asset purchased, CP funds in account had already been exhausted by payment of family expenses, so asset must have been purchased with SP
Commingled funds - tracing - direct tracing
At time asset purchased, if sufficient SP funds were available, and spouse intended to use SP funds to buy the asset, asset is SP
Division of CP on divorce - setting aside judgment
- CCCP 473(b)
- Liberal grounds w/in 6 mos of judgment; afterwards strict - Family Code
- Time limited in most respects, but discovery rule applies to disclosure violations
Division of CP on divorce - setting aside judgment - CCCP 473(b)
- W/in 6 mos, relief liberally granted for mistake, inadvertence, surprise, excusable neglect
- After 6 mos, only extrinsic fraud (deprived of day in court) or extrinsic mistake (unforeseeable error), and duress
Division of CP on divorce - setting aside judgment - Family Code
- W/in 1 yr, relief for fraud, perjury or mistake
- W/in 2 yrs, relief for duress or incapacity
- W/in 1 yr of DISCOVERY, relief for violation of disclosure obligations
Division of CP on death - general rule
- Married T can pass 1/2 of CP and all SP by will
- Surviving spouse entitled to 1/2 of each CP item
- If decedent spouse intestate, surviving spouse gets decedent’s 1/2 of CP and:
1. All SP if decedent had no child or parents (or issue of deceased child or parents)
2. 1/2 SP if decedent had 1 child or no child but parents (or issue of deceased child or parents)
3. 1/3 SP if decedent 2+ children (or issue of 2+ deceased children)
Division of CP on death - widow’s election will
If S1’s will purports to bequeath entire interest in a CP asset to a 3P, S2 can:
- Take under the will: receive what will provides; allow 3P to receive S2’s interest in CP asset
- Take against the will: claim S2’s 1/2 interest in all CP assets, but not receive other assets provided for in will
Division of CP on death - unauthorized inter vivos transfer
If S1 makes unauthorized IV transfer of CP and S2 doesn’t void while S1 alive, on S2’s death treated as valid transfer of S1’s 1/2 interest in CP
Quasi-CP - at death
- Survivor has 1/2 interest in decedent’s QCP
- Decedent has no interest in survivor’s QCP
Quasi-CP - during marriage
- Generally treated as SP
- Creditor may reach one spouse’s QCP to satisfy debt of other spouse
Quasi-CP - at death - illusory transfer
If S1 transfers QCP to 3P for less than substantial consideration w/o S2’s consent, on S1’s death S2 may compel 3P to restore 1/2 of property (or its value) if before death S1 retained:
- Right to income
- Power to revoke or use principal for own benefit
- Right of survivorship
Management rule - in general
Each spouse has equal management and control over all CP; thus has full power to buy or sell CP and contract debts w/o other spouse’s joinder or consent
Management rule - exceptions
- Real property: both spouses must joint
- Personal belongings: need written consent of other spouse
- Business: prior written notice to other spouse
Management rule - exceptions - real property
- Both spouses must join instrument conveying interest
- Non consenting S1 can void the transfer by S2 w/ 1 yr SOL for BFP (but otherwise no SOL)
- If transaction voided, must return purchase price
- Non consenting S1 can void security interest granted by S2 (other than family atty’s lien), but debt remains valid
Management rule - exceptions - personal belongings
S1 needs written consent of S2; non-consenting S2 can void transfer and not return purchase price
Management rule - exceptions - business
- When S1 operates business interest that is all or substantially all community personal property, can act alone in all transactions, BUT if S1 sells, leases, encumbers substantially all personal property used in business, must give written notice to S2
- S2 has remedy if behavior substantially impaired 1/2 interest in community estate but can’t void
Management rule - gifts
- General rule: S1 cannot make gift without S2’s written consent
- S2 can set aside gift in its entirety
- On divorce, S2 can take equal offsetting CP assets to recover S2’s 1⁄2 CP.
- On S1’s death, S2 can recover from donee or S1’s estate, whichever is easiest
- Also applies to CP life insurance policy that names 3P beneficiary; can recover from 3P or estate.
Management rule - duties
- Fiduciary: Spouses subject to duty of the highest good faith and fair dealing with each other.
- Deliberate dissipation and grossly negligent and reckless investment of community funds is a breach of duty
- Must bring action w/in 3 years of breach OR at death/divorce
Creditors - in general
- Creditors’ rights follow management rights; creditors can reach any property over which debtor has legal management and control
- For creditors only, QCP treated as CP during marriage
Creditors - liability
- All CP and debtor’s SP liable for debts incurred before or during marriage
- EXCEPTION: creditors seeking payment on S1’s premarital debt cannot reach CP earnings of S2 if held in separate account S1 can’t access - Non-debtor’s SP not liable for debts incurred by one spouse alone
- EXCEPTION: creditors for “necessaries” debts incurred during marriage (e.g., medical bills), can reach non-debtor spouse’s SP
Creditors - tort liability
- CP is subject to the tort liability of either spouse
- If tortfeasor spouse was performing act for benefit of community, liability satisfied first from CP and then SP
- If tortfeasor spouse was NOT performing act for benefit of community, liability is satisfied from SP then from CP
- QCP is treated as CP for liability purposes
Creditors - reimbursement rights of one spouse against another for debts
- When CP used to pay premarital spousal child support obligation of spouse who had SP available
- When S1’s SP used to satisfy S2’s liability for necessaries and S2 had CP or SP available
- When order of satisfaction of tort liability not followed
- Right must be exercised w/in 3 yrs or at divorce/death
Creditors - at divorce
- Creditor cannot reach CP awarded to a spouse unless that spouse incurred the debt or was assigned the debt by the court
Creditors - at death
- When estate goes through probate, debts characterized as separate or community and allocated against CP or SP
- When property avoids probate (set-aside law for surviving spouse), surviving spouse personally liable for debts to extent of property that avoids probate
Preemption - basic concept
In some instances, federal law preempts California from applying community property concepts to certain assets
Preemption - assets subject to preemption
1) federal homestead claims
2) military life insurance benefits
3) U.S. Savings Bonds
4) Social Security benefits
Preemption - assets not subject to preemption
1) railroad retirement benefits
2) military retirement benefits
3) copyrights
Non martial relationships - lawful marriage
Requires both legal capacity and the performance of legal procedures.
Non martial relationships - consequence of no lawful marriage
- Putative Spouse: not lawfully married but has a good faith belief that he or she is legally married.
- CP and QCP is quasi-marital property
Non martial relationships - unmarried cohabitants
- Unmarried cohabitants: persons who reside together but are neither lawful nor putative spouses
- Contract principles, rather than QMP principles, apply between cohabitants.
- Contracts upheld so long as consideration does not violate public policy, i.e., exchange of sexual services.
