Community Property

Question 1

CP: State the general rule you should add on any community property essay

Answer 1

California is a community property state. All property acquired during a marriage is presumed to be community property (CP) meanwhile all property acquired before marriage or after permanent separation, or by gift or inheritance (including the rents, issues and profits therein) is presumed to be SP.

Question 2

CP: What are the two most common categories of community property?

Answer 2

1. salary or wages earned during marriage

2. income from community assets

Question 3

CP: When does the economic community end?

Answer 3

When there is (i) intent by ANY party to end the marital relation and (ii) conduct consistent with that intent.

Question 4

CP: What is general rule for how community property is distributed upon divorce?

Answer 4

At divorce, the CP assets will be equally divided in kind unless some special rule requires deviation.

Question 5

CP: What are the “economic circumstances” exceptions to equal division upon divorce?

Answer 5

A court may deviate from equal division if:award a community-owned assets entirely to one spouse when equal division will diminish value of assets or jeopardize one spouse’s earning capacity, loss of the family home would uproot couple’s minor children, the asset is intimately related to one spouse, or the asset is a risky investment.

(i.e Family home, Closely held corporation, Pension)

Question 6

CP: What are the five statutory exceptions to equal division upon divorce?

Answer 6

No equal division when

1. educational debt
2. spouse misappropriated CP
3. tort liability from conduct not for the benefit of Comm
4. personal injury award
5. negative community (i.e., where debt exceeds assets)

Question 7

CP: Inter Vivos Gift of CP

Answer 7

A spouse may not make a gift of CP without the written consent of the other spouse.

Question 8

CP: What remedies are available if one spouse makes a lifetime or testamentary gift of CP without the consent of the other spouse?

Answer 8

During the donor’s lifetime, the nonconsenting spouse may revoke gift in entirety. Once the donor dies, the gift is treated as an valid testamentary gift of the donor’s oneself interest.

Federal law allows for gift of U.S. Saving Bonds without consent

Question 9

CP: What is the widow’s will election?

Answer 9

If will violates the rules on gifts/devises of community property, the injured widow must elect to take under the will OR against the will. Can’t cherrypick.

Question 10

CP: What is the community credit presumption?

Answer 10

Funds borrowed, and goods purchased on credit, during the marriage are presumed to be debts of the estate. However, borrowings are classified according to lender intent - and if lender is extending credit based on one spouse’s SP - debt will be considered SP.

Question 11

CP: Is there a fiduciary duty in marriage?

Answer 11

Yes, spouses owe one another a duty to act with the highest good faith and fair dealing towards one another. Presumption of undue influence arises where one spouse gains an advantage over the other through a transaction.

Question 12

CP: What is Transmutation?

Answer 12

A transmutation is an agreement between spouses to change the character of an asset. Before 1985, oral agreements were valid. Modernly, a transmutation is valid only if in writing, signed by the spouse who interest is adversely affected, and the writing expressly states the change in characterization.

Question 13

CP: Gift Exception to Transmutation in Writing Requirement

Answer 13

A writing is not required for items of personal nature that are insubstantial in value, considering the financial circumstances of the marriage.

Question 14

CP: What is a Pre-martial Agreement?

Answer 14

Parties may opt out of the community property and separate property characterization by through a premarital agreement, that is in writing and voluntarily signed by both parties. The writing requirements can be waived either by full performance or estoppel based on detrimental reliance.

Question 15

CP: When is Premarital Agreement Involuntarily Signed

Answer 15

PMA deemed involuntarily, unless

• –opposing spouse was repped by independent counsel
• –had at least seven days to review and sign
• –if unrepresented, fully informed in writing about basic effect of the agmt and party must execute writing that they received this information.

Question 16

CP: When is a Premarital Agreement Unconscionable?

Answer 16

A premarital agreement is unconscionable if a party was not provided a fair and reasonable disclosure of the property or financial obligations of the other party, the party did not voluntarily or express waive, in writing, any right to disclosure of the property, or the party did not have, or reasonably could not have had an adequate knowledge of the property or financial obligations of the other party.

Question 17

CP: When is a waiver of spousal support in a premarital agreement unenforceable?

Answer 17

Spousal support waivers are unenforceable if opposing party was not represented by independent counsel at the time of signing or the provision is unconscionable at the time of enforcement.

Question 18

CP: When is a waiver of child support in premarital agreement enforceable?

Answer 18

Never.

Question 19

CP: What presumption follows when a couple takes property in joint and equal form, and one spouse dies?

Answer 19

Per Marriage of Lucas, upon death jointly owned property will be treated as community property and thus divided equally. There will be no right to reimbursement with respect to such property, unless a spouse can establish that there was an agreement to reimburse or SP interest.

Question 20

CP: What is the result when a couple takes property in joint and equal form, and then the couple divorces?

Answer 20

If a married couple takes title to an asset in joint tenancy after 1984, the asset is presumed to be CP for the divorce purposes unless an express statement in the deed (not only saying as joint tenants) or a written agreement indicates that the property is SP.

At divorce, any SP contributions to purchase or improve property shall be reimbursed, without interest or appreciation.

Question 21

CP: What result when spouse makes an installment purchase of property that begins before marriage?

Answer 21

When a spouse acquires property prior to marriage but uses CP funds to pay off the mortgage, the community acquires a pro rata ownership interest measured If by the percentage of principal debt reduction attributable to the expenditure of community fund. CP= principal debt reduction attributable to CP/purchase price.

Question 22

CP: What result does community have on life insurance policy?

Answer 22

Term insurance has no cash value. The estate that paid the most recent premium is the owner of the police or the policy proceeds.

Whole life insurance builds up cash value. 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.

Question 23

CP: What result when a spouse uses CP to fund her OWN SP?

Answer 23

When a spouse uses CP funds to benefit its own SP, the community is entitled to reimbursement equal to the cost of the improvement or the increase in value of the SP, whichever is greater.

Question 24

CP: What result when a spouse uses CP to fund the OTHER SPOUSE’s SP?

Answer 24

Traditionally, when a spouse uses CP funds to benefit the other spouse’s SP, a gift is presumed unless agreement to the contrary. But modernly, reimbursement will happen even if no agreement.

Question 25

CP: What are the commingling presumption?

Answer 25

Mere fact that SP is commingled with CP does not transmute SP to CP.

Consumables are presumably paid by the CP funds.

If SP funds are used to pay family expenses, it is presumed to be a gift to the community.

Question 26

CP: How do you overcome the commingling presumption?

Answer 26

Tracing

Exhaustion Method
If, when the asset was purchased, the CP funds in commingled account were exhausted by payment of consumable family expenses, the SP proponent can meet its burden of proving the asset was purchased with SP funds.

Direct Tracing (Quick In and Out) 
If, when the asset was purchased, there were SP funds available and the SP proponent intended to use those funds to purchase a SP asset, then the property is SP.

If tracing fails, entire commingled fund will be CP.

Question 27

CP: What result if divorce following growth of a business owned during marriage?

Answer 27

When community labor is used to enhance the value of a SP business, the community is entitled to a share in the increased value of the SP. The courts use either the Van Camp or the Pereira accounting approach to determine the community’s interest.

Question 28

CP: What is the Pereira Test?

Answer 28

Pereira accounting is used if the SP business increase is primarily the result of a spouse personal skills and efforts. The SP value will be determined by adding the fair rate of return during the marriage (% x years of marriage) and the value of the SP at the beginning of the business. The CP will be the value of the value of the business minus the value of the CP.

SP = capital investment at DOM + fair rate of return (% x years during M).

Question 29

CP: What is Van Camp test?

Answer 29

Van Camp accounting is used if the SP business increase is primarily the result of the unique nature of the SP asset. The community’s interest will be determined by multiplying the fair annual salary for the community labor by the years of marriage, and subtracting any salary already received and any amount paid for family expenses. The result is CP. SP will be the value of the SP business minus the CP.

CP = value of services x years during M (less community expenses).

Question 30

CP: What is the general rule of how pension benefits are treated?

Answer 30

Retirement benefits earned during the marriage are CP. Courts use the time rule (present value of pension multiplied by number of contributions during marriage/ total number of pension contributions) to determine how much of the pension is attributable to CP. A divorce court may retain jurisdiction to divide an unvested pension “when and if the pension vests.”

Note: If a spouse elects not to retire when a pension vests, that spouse must pay the nonemployee spouse the share that would have been received if retirement was elected.

Question 31

CP: What are the two possible results where a pension is not vested at the time of divorce?

Answer 31

1. If and When Received Decree: divorced spouse takes 50% when the benefit is RECEIVED
2. Cash Out: divorced spouse is cashed out with assets equal to the amount of her entitlement

Question 32

CP: What is ERISA?

Answer 32

Generally, a nonparticipant spouse’s ownership interest in a pension is not terminated at nonparticipant spouse’s death. However, ERISA preempts California state law.

A nonparticipant spouse in a qualified pension plan can get a QDRO and receive payment from plan, even if they divorce the participant spouse.

However, if the nonparticipant spouse dies before participant, then no interest.

Question 33

CP: How are disability benefits and workers comp classified?

Answer 33

To the extent that disability benefits are intended to replace marital earnings, the disability pay is CP.

Question 34

CP: How is severance pay treated?

Answer 34

There are two lines of authority, and you must argue both.

1. SP, on the theory that severance replaces lost earnings
2. CP, on theory that it arose from collective bargaining agreement and was earned by employment during marriage

Question 35

CP: How do you divide stock options that vest after marriage ends? Need to argue both approaches.

Answer 35

Marriage of Hug: where options are for past services, they are deferred comp. CP = (total years of employment / years from date of employment to date right to exercise) x number of options

Marriage of Nelson: where options to encourage staying, the CP = (Years Since Grant / Years from Grant to Right to Exercise) x Number of Options

Question 36

CP: How do you treat goodwill of a professional practice

Answer 36

Goodwill or qualities that generate income beyond that generated from professional’s labor is CP if acquired during marriage.

Question 37

CP: Is degree earned during marriage CP? How treat educational expenses?

Answer 37

Professional degree earned during marriage is NOT CP. However, upon divorce, if CP was used to pay for education or loan and the education enhances the spouse’s earning capacity, the economic community is entitled to reimbursement.

Question 38

CP: What are defenses to the reimbursement rule on educational expenses?

Answer 38

1) community already substantially benefited from education (10-year presumption)
2) other party received CP-funded education
3) need for spousal support is reduced.

Question 39

CP: Where your own spouse is a tortfeasor, how do you classify tort recovery?

Answer 39

If one spouse commits tort against the other, the recovery is SP.

Question 40

CP: Where tortfeasor is a third party, how do you classify tort recovery?

Answer 40

CP. But upon divorce or legal separation, recovery will be treated as injured party’s SP if it can be traced and has not been spent unless interest of justice requires otherwise.

Question 41

CP: What funds can be used to satisfy a tort judgment against a spouse?

Answer 41

Two theories:

If the activities giving rise to the tort were to benefit the community, first CP then SP.

If not, First SP and then CP.

Question 42

CP: What is general rule regarding management of community property?

Answer 42

Each spouse has equal management and control of the community property.

Question 43

CP: What are the exceptions to general rule regarding management of community property?

Answer 43

Personal Belongings in family dwelling (requires written consent to transfer, spouse can void)

Personal Business with substantial CP (may act alone but must give notice prior to sale, lease, exchange of all, or substantial part of property, spouse cannot void)

Real Property (need both parties to join in executing instrument, but consider family attorney real property lien, non consenting spouse has 1 year to bring action to void if sold to bfp w/o notice)

Bank Account (exclusively for benefit of account holder)

Question 44

CP: What can a creditor reach?

Answer 44

Creditor may reach any property over which debtor has legal right of management.

Note:
Pre-Marital Debts (CP can be reached to pay premarital debts, but non debtor spouse’s earnings can be protected in separate bank account)

Contracts for Necessity
Each spouse is personally liable for other spouse’s contract for necessaries (i.e. food, medical bills).

Following Divorce
At divorce, each spouse is personally liable for the debts they incurred and creditor cannot reach CP awarded to other spouse unless spouse incurred debt or spouse was assigned debt at divorce by the court.

Question 45

CP: what is quasi community property?

Answer 45

property acquired while the couple was domiciled in a non-community property state that would have been classified as CP had it been acquired under same circumstance.

At divorce, QCP is treated exactly as CP.

Question 46

CP: how is quasi community property distributed at death?

Answer 46

At death, only a surviving spouse has 1/2 interest in decedent’s QCP.

Question 47

CP: what is the putative spouse rule?

Answer 47

If at least one of the spouses has a subjective good faith believe that she is lawfully married, or in a domestic relationship, but the union is actually void the property acquired during the union, which would have been community property, would be quasi-marital property and shall be divided equally upon separation.