Community Property Flashcards
Basic principle re community property
California is a community property state, which means that all property acquired by the labor of either spouse during marriage is community property unless character of the asset has been altered by the parties agreement, the parties’ conduct, or how title was taken.
What is considered “separate property”?
Property owned before marriage or acquired after separation is SP.
Property owned before marriage
Property acquired by gift will or inheritance
Property acquired by separate funds
Rents issues and profits from separate property
When does economic community end?
What do you do next?
(1) death
(2) divorce
(3) intent not to resume marital relation (only need intent of one party) AND conduct consistent with intent
Once it’s met, classify the assets:
(1) purchased after economic intent ends? SP
(2) purchased before economic intent ends with both their earnings? CP
How is CP handled on divorce? What are the two exceptions to pro-rata division?
Absent a property settlement agreement, all CP must be divided. Each and every community (and liability) must be divided 50/50 pro rata.
Disparity in earning power can be considered only as to spousal support (alimony) and child support.
Economic circumstances: can have non-pro rata division giving a particular asset wholly to one spouse and “cash out” the other spouse with other assets (with each spouse getting 50% of total value). Examples: family residence, closely held corporation, pension.
Statutory exceptions: can have non-pro rata division on divorce:
(1) one spouse misappropriates CP
(2) one spouse incurred educational debt
(3) one spouse incurred tort liability NOT based on activity for benefit of the community
(4) personal injury award is CP but is awarded to spouse unless interests of justice require otherwise
(5) “negative community” - community liabilities exceed assets; relative ability of spouses to pay debt is considered (concern to protect creditors)
Is pension community property? How to calculate?
What happens at the death of either spouse? Under state law? Under federal law?
Employee retirement benefits accumulated during marriage, whether or not vested at the time of divorce, are community property (form of deferred compensation).
Proration rule:
years of service while married / total years employed to retirement.
A spouse’s ownership interest in a pension earned during marriage is not terminated by the death of either spouse. Thus, unless otherwise prohibited by law, a spouse is entitled to her share of any remaining benefits if the other spouse dies first and she has testamentary power over her share of any continuing benefits should she die first.
However, with respect to ERISA-regulated private sector pensions, ERISA allows for living beneficiaries only, and preempts CA law as it would recognize ownership interests that survive the death of a spouse or former spouse.
Pension - if the participant spouse is not yet eligible for retirement on divorce, what should the court decree take the form of when awarding the nonparticipant spouse a share of the benefit?
- “if and when received” she gets her share (ONE HALF of [years of service while married / total years employed to retirement])
- “cash her out” by awarding assets of equal value
When the pensionable spouse is eligible to retire but does not, what will the divorce court order?
Court may order a private employer to pay the nonemployee-spouse her share of benefits as though the worker had in fact retired. The worker may be forced to pay himself if he has a public employer.
How are disability retirement benefits and workers’ comp treated?
Disability retirement benefits and workers’ compensation benefits are treated as wage replacement and thus are classified according to when received, not when earned. To the extend that disability pay and workers’ compensation are intended to replace marital earnings, they are CP. To the extend that they are intended to replace separate postdivorce earnings, they are SP. It is immaterial that the right to receive benefits may have been during marriage.
How is severance classified?
Severance pay: no clear rule, court of appeals are split. Argue both ways:
- H’s severance is SP because it replaced his lost earnings which after a divorce or perm sep would be H’s SP; OR
- H’s severance is CP because it arose from a collective bargaining agreement and was thus earned by employment during marriage.
What is a stock option and how are they divided upon divorce?
A stock option gives an employee (typically an executive) an option to purchase shares of the company’s stock at a set price on a certain date in the future. Stock options typically provide that they are not “vested” and that the option-holder must be employed by the company as of the date the option becomes exercisable for the option to vest.
If the option is awarded during marriage but does not vest until after the economic community has ended, the proration formula that is used in determining what portion of the option is CP and what portion is SP depends on the primary intent of the employer in granting the option.
If the divorce court determines that the stock options were awarded primarily to reward Hank for his past services, as a form of deferred compensation, the court should employ Marriage of Hug proration formula: CP = [years from the date of employment to date economic community ends / years from date of employment to date options become exercisable]
IF the divorce court determines that the stock options were awarded primarily to encourage Hank to remain with the company, the court should apply the Marriage of Nelson proration formula:
CP = [years from date options are granted to date economic community ends / years from date options granted to date options become exercisable]
How is goodwill of a professional practice treated and what is it?
Goodwill of professional practice (to extent acquired during marriage) is CP subject to division on divorce.
Goodwill are those qualities that generate income beyond that derived from (1) the professional’s labor; and (2) reasonable return on capital and physical needs.
How are educational expenses treated? What are some defenses to reimbursement of educational expenses?
Education and training acquired during marriage are not treated as divisible property. But at divorce, unless the parties sign an agreement to the contrary, there is an equitable right of reimbursement, with interest, to the community when:
(1) community funds are used either to pay for education or training or to repay a loan related thereto, or
(2) education or training substantially enhances the earning capacity of the party.
Defenses:
(1) community has already substantially benefitted from the earnings of the educated spouse
(2) other spouse has received community-funded education
(3) the need for spousal support is reduced as a result of education or training
What is whole v. term life insurance and how are they classified (SP/CP) on death?
- Term insurance insures against the risk of death for a defined period.
- Whole life insurance combines term insurance with a savings plan.
o Whole life insurance plan is first applied to term insurance; remainder is saved and invested by insurance company, building up cash value that can be redeemed or borrowed by the policy owner.
Rule for term insurance is that the last premium determines the character of whether it’s CP or SP.
Whole life: To the extent that a policy has a current cash value, that cash value is CP in proportion to the percentage of premiums paid by the community. When an insured dies, the cash value of the policy before his death should be apportioned according to the premiums paid by each estate and ownership of the remainder of the proceeds (the portion attributable to term insurance) should be determined by the final premium rule.
Rule re presumption of CP and marriage that ended 4 years prior
No presumption of CP when title is held by person at death and marriage during which it was acquired ended four years prior
How to overcome CP Presumption when asset acquired during marriage:
(1) statutory facts (acquired by gift bequest devise, or descent or rent was income from SP)
(2) parties agreed property would not be CP
(3) both spouses knowingly took joint title in a form other than CP
(4) one spouse took title in a form that evidences a gift to the other spouse,
(5) the purchase funds are traced to SP source, in which case the separate estate is an owner in proportion to its contribution to the purchase price
Prenupital agreements
What are the requirements
What are the defenses
Parties can avoid CP system by agreement. The agreement can be made before marriage. They can limit property rights and within limits support obligations to each other.
Premarital agreement must be in writing, signed by both parties. Oral agreements are invalid. Exceptions: (1) oral agreement is executed (fully performed) and (2) estoppel based on detrimental reliance.
Defenses: (1) not signed voluntarily
2001 statute requires:
- spouse rep by independent counsel at time agreement was signed or waived in separate writing;
- given 7 days to sign;
- if not rep’d by separate counsel, fully informed in writing of terms and basic effect of agreement
(2) unconscionability
SPOUSAL SUPPORT
- waiving of spousal support in uncon if - (1) party challenging it was not rep’d by ind counsel at the time signed; or
(2) provision uncon at time of enforcement
ANYTHING ELSE
- anything else - agreement unenforceable if uncon when made AND (i) no full and fair disclosure of other party’s property or financial obligations; (ii) right to disclosure not waived in writing; and (iii) party challenging had no adequate knowledge of other party’s property financial circumstances
Transmutation - what is it, what is required to form (exceptions? defenses)
Are statements in will or revocable trust admissible as evidence of transmutation?
During marriage, spouses may change the status of any of their property from SP to CP, from CP to SP, or from one spouse’s SP to the other spouse’s SP. These changes are “transmutations.”
Before 1985
Oral trans permitted, by express agreement or agreement-in-fact
After 1985
Trans must be:
(1) in writing
(2) signed by spouse whose interest is adversely affected; and
(3) must explicitly state that a change in ownership is being made
exception to writing requirement: - gifts of tangible personal property of a personal nature and not of substantial value (according to family’s financial situation)
Defenses to writing writing requirement do not apply
Defense of undue influence may upset formally acceptable transmutation. Rebuttable presumption of undue influence when one spouse gains an advantage over the other in a property transaction. Must rebut by prep of ev.
Statements in will or revocable trust are not admissible as evidence of transmutation
When marriage is terminated by death - joint title
When marriage is term by death of a spouse, the form of title controls. The surviving spouse take the entire asset by virtue of the JT right of survivorship. SP funds used to purchase or improve the property are presumed as gifts absent agreement to contrary.
When marriage is terminated by divorce - joint title
Ownership: All property held by spouses in joint form is presumed to be CP for the purposes of distribution at divorce or legal separation. Presumption overcome by written agreement.
Reimbursement: SP funds used to make Down Payment, Improvements, and Principal payments on mortgage can be reimbursed.
What are the rules for commingled bank account? What is the presumption for family expenses?
The mere fact that SP funds are commingled with CP doesn’t transform or transmute them into CP. but burden of proof is on H to show that each asset was purchased with SP funds.
There is a family expense presumption – it is presumed that expenditures for family expenses (food, housing, clothing, recreation) were made with community funds (to the extent they were available) even though separate funds were available. No reimbursement.
To defeat, you have to show:
(1) exhaustion method
(2) direct tracing method
What are the two apportionment tests for determining how to designate business appreciation? How to pick?
Van Camp accounting
Use where capital investment was the major factor in the business’s growth, and spouse’s skills and efforts were less of a factor. Manager’s services are valued at going market salary. CP is market salary for years of marriage minus the family expenses that were paid from business earnings during those years. The rest is SP.
Pereira Accounting
Use where spouse’s skills, time, and effort are major factors in growth of business.
SP consists of the manager’s separate capital [investment] plus a fair rate of return thereon [for the number of years].
So, if 10% increase for 10 years, and you originally invested $100,000 –> ($100K + $100K) SP is $200,000. Which is 5% if the company is now worth $4M.
whichever formula achieves substantial justice will be employed
Community payments used to pay off purchase price of SP – how to allocate
If there is an installment purchase before marriage and payment with CP funds after marriage, the community estate takes a pro rata portion of the property, measured by the amount (percentage) of principal debt reduction attributable to the expenditures of community funds.
CP = [principal debt reduction attributable to CP / purchase price]
Rule for community funds used to improve own SP
When one spouse uses CP to improve his own SP, the community is entitled to reimbursement for the greater of the COST of improvements, or ENHANCED value.
Rule for community funds used to improve other spouse’s SP
Courts are split - some say there is no reimbursement because of presumption of a gift, some say that there is no presumption of a gift and grant reimbursement.
