Community Property

Question 1

Characterization

Answer 1

To determine character of an asset as (i) separate property (“SP”); or (ii) community property (“CP”), look to:

1. When the asset was acquired;
2. How was the asset acquired, for example by labor or by gift;
3. Did either or both spouses change the asset’s character; and
4. Is there any legal presumption that may affect the character of the asset?

Question 2

Time of Acquisition

Answer 2

1. Property acquired before the marriage is SP.
2. Property acquired during the marriage is PRESUMED CP.
3. Property acquired after separation but prior to divorce is SP.
4. Property acquired after divorce is SP.
5. Property acquired after death of a spouse is SP.

Question 3

Examples of SP Acquired During Marriage

Answer 3

1. Bequest, gift.
2. Rents, issues, and profits of SP acquired before or during marriage.
3. Property acquired in exchange for separate property.

Question 4

Characterization of Property that is Difficult to Classify

Answer 4

1. Business Goodwill: CP
2. Disability Pay: CP (to extent replacing marital earnings)
3. Education: Not CP (but right of reimbursement under certain circumstances)
4. Whole life insurance cash value: Apportioned CP (with exceptions.
5. Pensions in General: Apportioned CP
6. Pensions Through Fed Government: See Federal Preemption Card.
7. SP Property Insurance Proceeds: Either CP or SP
8. Severance Pay: CP (to extent replacing marital earnings)
9. Stock Options: Apportioned CP
10. Tort Recovery Against 3rd Party: CP if cause of action arose during marriage (if divorced before final judgment, SP)
11. Tort Recovery Against Spouse: SP.

Question 5

Apportionment

Answer 5

Certain property, like pensions and stock options, are apportioned into separate SP and CP to the extent that they were acquired or earned during before/during/after the marriage.

Question 6

Education and Training

Answer 6

SP, but:

1. If community funds are used for education or to repay loan; and
2. Education or training substantially enhances the earning capacity of the party

Then you may have reimbursement.

Equitable Defenses:

1. The community has already substantially benefited (e.g., more than a decade of additional earning power)
2. Other spouse also got education; and
3. Need for spousal support is reduced as a result of education or training.

Question 7

Overcoming CP Presumption When Asset Acquired During Marriage

Answer 7

1. Statutory facts (that is, asset acquired by gift, bequest, devise or descent, or rent or income from SP.
2. Parties agree it will not be CP
3. Parties 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. Purchase funds are traced to a SP source.

TIPS: Watch for title being taken as SP WITHOUT knowledge of other spouse. Form of title irrelevant, in that case property PRESUMED CP.

Question 8

Community Property Preliminary Analysis

Answer 8

1. Organization of answer provided by the assets and/or liabilities of the parties.
2. Demonstrate knowledge and understanding of:
   (i) Basic presumptions of community property; and
   (ii) Specific rules applied to particular assets.

Question 9

Community Property Analysis Approach Steps

Answer 9

1. State basic presumptions of California community property, and, if applicable, quasi-community property.
2. Are there any issues that affect all or most items of property (e.g., transmutation) and what gave rise to this litigation?
3. Organize answer by item of property?
4. Analyze the character of each item of property as follows:
   (i) Source - General Presumptions

(a) When was asset acquired?
(b) What was the source of the funds used to acquire the asset?
(c) Where was the asset acquired?

(ii) Actions of the parties which may have changed the characterization of the asset
(iii) Special rules, cases, or presumptions
(iv) How should the property be distributed?

5. Discuss preemption issues, if any.

Question 10

California Community Property State Intro

Answer 10

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 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.

Question 11

Quasi-Community Property

Answer 11

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.

Question 12

Transmutation

Answer 12

During marriage spouses may freely change the character of any property. It requires:

1. An express writing (except for personal gifts of insubstantial value).
2. Characterization of property in a will irrelevant.
3. Characterization of property via trust not relevant unless unambiguous transmutation made clear.
4. Rebuttable presumption of undue influence when one spouse gains an advantage over the other in a property transaction. The spouse who gained the advantage has the burden of rebutting the presumption by a PREPONDERANCE of the evidence.

Question 13

General Effect of Divorce

Answer 13

At divorce, the community assets will be equally divided in kind unless some special rule requires deviation from the equal division requirement.

Question 14

General Effect of Death

Answer 14

At death, the decedent can devise all of his SP and 1/2 of CP. If the decedent dies intestate, the surviving spouse is automatically entitled to the decedents share of CP and 1/3 of all SP, depending on whether the decedent left issue or parents surviving.

Question 15

Personal Injury Awards

Answer 15

1. CP if the cause of action arose during marriage.
2. If the cause of action arose before the marriage or after separate, the award is SP.
3. At divorce, CP personal injury awards will be awarded entirely to the injured spouse unless the interests of justice require otherwise.
4. Personal injury awards against the other spouse are always the SP of the injured spouse.

Question 16

Retirement Benefits

Answer 16

1. CP if earned during the course of the marriage.
2. For retirement pensions and other retirement benefits earned before and during marriage, courts use the time rule to determine how much of the pension is attributable to CP labor and how much is attributable to SP labor.

Question 17

Disability Pay and Worker’s Comp

Answer 17

1. Either CP or SP, depending on the wages they are designed to replace.
2. To the extent disability benefits are taken in lieu of retirement benefits, disability benefits are treated as retirement benefits.

Question 18

Severance Pay

Answer 18

1. Courts are split, if it arises on the exam raise arguments on both sides.
2. Courts that treat severance as SP do so because they believe the severance pay replaces future wages that would have been received.

Question 19

Stock Options

Answer 19

1. A form of employee comp.
2. Treated as CP or SP depending on when and why they were earned.
3. Courts will prorate the options to determine the respective CP and SP shares.

Question 20

Business and Professional Goodwill

Answer 20

1. CP if earned during marriage.

Question 21

Education and Training

Answer 21

Presumption is that it is not CP, however, the community may be entitled to reimbursement if CP funds were used to pay for education or training and the education enhanced the earning capacity of the spouse.

Defenses:

1. Community has already benefited from the education or training;
2. The other spouse has also received community funded education; or
3. The need for spousal support is reduced by the education or training.

Question 22

Property Acquired with CP and SP funds

Answer 22

When property is acquired with CP and SP funds and no title presumption applies, the CP and SP interests are determined by apportioning the respective contributions.

Question 23

Property Acquired with CP and SP funds: Mortgage Example

Answer 23

A acquires a home for $100K, paying $20k down and obtaining a mortgage for $80k. A month later he marries B. During the marriage the CP funds are used to pay off $30k on the mortgage. A and B get divorced, how do we apportion the property?

SP = $20k + $80k - $30k CP contribution = $70k

CP = $30k

Question 24

Property Acquired with CP and SP funds: Improve the SP of Spouse

Answer 24

Where the CP funds are used to improve SP asset, the community does not get a pro-rata share, but is instead entitled to reimbursement.

1. When spouse uses CP to benefit the SP of the other spouse, a gift is presumed.
2. When a spouse uses CP to benefit the spouses own SP, the CP is entitled to reimbursement which is the cost of the improvement or the increase in value of the SP, whichever is greater.

Question 25

Antenuptial/Prenuptial Agreements

Answer 25

Agreements before marriage altering the character of property are enforceable but must be in a writing to satisfy the SoF.

Question 26

Transmutation (agreements during marriage)

Answer 26

Definition: A transmutation is an agreement between spouses to change the character of an asset or series of assets.

Requirements: A transmutation must be made in a written express declaration that is consented to or accepted by the spouse whose interest is adversely affected. The writing must expressly declare that a change in the ownership of property is being made.

Question 27

Taking Assets in Joint Title

Answer 27

What happens to jointly titled property differs depending on whether the property is being divided at divorce or at death.

1. First identify whether the characterization is taking place at divorce or at death.
2. Set forth the applicable rule completely:

DEATH:

(i) At death Lucas applies. Under Lucas, when a married couple takes title in joint and equal form it is inconsistent with the preservation of a SP interest in the asset.
(ii) Any SP used to acquire the asset is presumed to be a gift of the SP unless there is an ORAL OR WRITTEN agreement to the contract.

DIVORCE:

(i) At divorce, all property taken by a married couple in any joint form is presumed to be community property.
(ii) Any SP used to acquire the jointly titled asset does NOT give the SP owner a pro-rata interest, but the spouse who contributed the SP is entitled to reimbursement without interest or appreciation.

Question 28

Community Labor Enhancing the Value of SP

Answer 28

When community labor is used to enhance the value of an SP business, the community is entitled to a share of the increased value.

Question 29

Community Labor Enhancing the Value of SP: Pereira Formula

Answer 29

Pereira accounting is used when the increase in value of an SP business is primarily the result of community labor. Using Pereira, determine the value of the SP at the beginning of the business and gift it a fair rate of return over the course of the marriage. Normally, this is the legal interest rate (10% simple interest) calculated annually. The SP is given the initial value plus the fair rate of return. The remainder is CP.

Question 30

Community Labor Enhancing the Value of SP: Van Camp Formula

Answer 30

Van Camp accounting is used when the increase in a value of a business is primarily the result of the unique nature of the SP asset. Using Van Camp, determine a fair salary for the community labor. Multiply that by the years of the marriage. Subtract any salary already received and any amounts paid for community expenses. The result is the CP Share, the rest is SP.

Question 31

Basic Rule in Divorce

Answer 31

Is to divide each community asset equally in kind so each spouse is given half of each community asset.

Reasons to deviate:

1. Misappropriation;
2. Liabilities exceed assets;
3. Educational debts are assigned to the spouse who received the education;
4. Tort liabilities are assigned to the tortfeasor spouse if the liability was not for the benefit of the community; or
5. Family home may be awarded to the person who is given custody of the minor children.

Question 32

Basic Rule for Distribution at Death

Answer 32

If spouse dies with a will, the spouse is entitled to dispose of 1/2 of the CP.

If the spouse dies without a will, the CP is awarded entirely to the surviving spouse, and the surviving spouse will also get between 1/3 and all of the SP depending on whether there are issue or parents surviving.

Question 33

Quasi-Community Property

Answer 33

Quasi-Community Property is property acquired by the couple while living in another jurisdiction that would have been classified as CP had the parties been domiciled in California.

1. At Divorce: Treated exactly like CP.
2. At Death: Spouse gets a 1/2 interest in the quasi-CP titled in decedents name. The decedent does NOT have any interest in quasi-CP titled in the survivor’s name.

Question 34

Non-Marital Relationships

Answer 34

1. Lawful Marriage requires both legal capacity and the performance of legal procedures.
2. A putative spouse is one who is not lawfully married but has a good faith belief that they are. The property is treated as quasi-marital property. (Quasi-CP?)
3. Unmarried cohabitants are persons who reside together but who are neither lawful spouses nor putative spouses: (i) apply K principles; (ii) consideration upheld so long as not gross.

Question 35

Management and Control During Marriage

Answer 35

The general rule is that during the marriage the spouses have equal management and control of all community assets/property.

Exceptions:

1. Real property transfers: both spouses must join.
2. Personal belongings.
3. Spouse managing a business is given primary management and control.
4. Bank accounts in the name of one spouse alone.

Question 36

Preemption

Answer 36

Under the supremacy clause, federal law preempts inconsistent state laws. In some instances, federal law preempts California from applying CP concepts to certain assets.

a. Preempted:

(i) Federal homestead claims;
(ii) Military life insurance benefits;
(iii) U.S. Savings Bonds; and
(iv) Social Security Benefits.

b. Not Preempted

(i) Railroad retirement benefits;
(ii) Military retirement benefits; and
(iii) Copyrights.