Community Property Flashcards
CP Intro Paragraph
California is a CP state. All property and earnings obtained during the marriage is considered CP.
All property acquired outside of marriage, or after permanent separation, or by gift, devise, or bequest, is considered SP
To assess the status of property, courts will trace the funds used to acquire assets
On divorce, all CP will be shared equally unless a rule applies, or the parties agree in writing or by oral stipulation in open court.
Quasi CP
All property acquired during marriage while domiciled in a different state, but would have been CP if the couple had been domiciled in CA, is quasi CP.
Marital Economic Community
The MEC begins on marriage and ends upon permanent separation
Permanent separation occurs when the couple is actually separated and at least one party has communicated their intention not to resume the marriage
Separate Property
All property acquired during marriage is presumed CP unless acquired by gift, bequest, devise, or is the rent, issue, and profit of a spouse’s SP, or is property acquired in exchange for SP
Transmutation
Discuss under each asset
A transmutation occurs where one spouse changes the status of the CP to SP. Pre 1985, oral transmutations allowed.
To be valid, needs to be in writing, explicitly stating change of ownership, and signed by the spouse whose interest is adversely affected
*Gift Exception: if gift is of substantial value, taking into account financial circumstances of marriage, transmutation will only occur if there is a writing
Exception to the writing requirement in a Transmutation
Spouse may make a gift of personal property to another spouse if it is used solely by that spouse and it is not valuable, taking into consideration the financial circumstances of the marriage
Settlement Proceeds - PI Recovery
Asset - Special Rule
3P Tortfeasors:
Personal injury settlements acquired by one spouse will be CP if the claim arose during marriage.
Tort claims: COA arose, not settlement
Before or after marriage: SP
Not 3P (against spouse): SP
Stock Option Profits
Asset - Special Rules
At divorce, earnings will remain CP. However future earnings or stock options of a spouse to be earned at a later date after divorce will be shared pro rata
Debts and Liabilities before Marriage
Debts and liabilities of a spouse existing prior to the marriage will become liabilities of CP during the marriage
A creditor can reach the community if CP funds were used to acquire the debt or the community benefitted
At divorce, if payments were made with CP, the community may be reimbursed to the extent that SP was available at the time of the payments
Prenuptial Agreement
Requirements
Under Bonds, written agreements on how to characterize salary or assets that are attained during the marriage can only be enforceable upon divorce if they meet the requirements in CA
- Must be VOLUNTARY
- Represented by independent counsel at the time or waived in separate writing fully informing person of terms and basic effect of the agreement
- Given at least 7 days to sign
Moore Principle
Special Rule
Under Moore, any CP funds used to purchase or improve separate real property assets will be reimbursable to the community
Tracing
Discuss under each asset
Tracing is used by courts to determine the characterization of assets through following the funds used to acquire the asset
Commingling funds makes it harder to trace and leads to a finding of CP
Fiduciary Duties in Marriage
In CA, a marriage is held to be a fiduciary relationship that obligates each spouse to a duty of care and loyalty to one another
Under the duty of loyalty, a spouse cannot take actions to steal funds from the other or make purchases without informed consent. The spouse must make decisions in the interest of the community
Repercussions for Breach of Fiduciary Duties
A court will penalize a spouse’s breach of fiduciary duty usually by giving property purchased solely in the name of one spouse to the other or the community if done with CP
Joint Tenancy
Property held in joint form is presumed CP. When the title to the property is held in joint form and it is not congruent to the source of the funds, it is presumed a gift unless rebutted
Presumption of Undue Influence/Unfair Advantage
Spouses have a fiduciary duty to each other. When one party gains an unfair advantage or benefit from a transaction, it is presumed undue influence
Court may find transmutation invalid or unenforceable
Source and Tracing of Funds
Discuss for each asset
An asset is characterized as either CP or SP depending on the source of funds that were used to purchase the asset. Each spouse is entitled to trace the funds used to purchase the asset. Once characterized, the other spouse may rebut the presumption
Exhaustion Method - Commingled Funds
Special Rule
Spouse may recover SP when, at the time asset was purchased, community funds in the account had been exhausted to pay family expenses
Title Alone Presumption
Discuss under transmutations or actions
If a spouse takes title to an asset in his/her name alone, this will not change the nature of the property, if the source was community property.
Separate Property Business
Special Rule
Generally, income from a SP business is SP. However, if a spouse contributes labor (which is CP) to the SP business, a court must determine how much of the business is CP upon divorce and how much is SP.
Enhancement due to community labor: Pereira
Enhancement due to character of the business itself: Van Camp
Van Camp Method
Special Rule
Enhancement due to character of business itself
CP = (reasonable value of services – annual family expenses) × years of marriage
SP = The fair market value of the business at divorce – CP value as calculated above
Pereira Method
Special Rule
Enhancements due to community labor
SP = value of SP business at time of marriage + (value at time of marriage × fair rate of return [use 10% on the exam for fair rate of return] × years of marriage)
CP = The fair market value of the business at divorce – SP value as calculated above
Reverse Van Camp or Pereira
Special Rule
Courts will apply reverse VC or Pereira methods if the business generates additional revenue after permanent physical separation. The community receives the value of the business at the time of separation plus a reasonable rate of return. The residual becomes the SP of the managing spouse
Debt acquired during marriage by either spouse
Debt acquired by either spouse during the course of the marriage is presumed to be a liability of the community. However, courts will look at the intent of the creditor oftentimes to determine where he was looking to satisfy the debt
Debt within marriage - installment debts
In the event of installment debts, such as a loan, when an installment debt is paid with community funds, the community will acquire ownership right on the asset in proportion to the percentage of the loan’s principal that was paid with CP
Spouse’s credit/loans
Special Rules
Considered a community asset absense evidence that purchaser relied on SP’s credit in obtaining the asset
Property acquired via JT
When property is acquired via JT, the CP’s reimbursement to the property depends on whether the marriage ended in divorce or the marriage ended when a spouse died
Courts will use Lucas and anti-Lucas to determine
Community Business
Special Rule
Any business or profit goodwill earned during marriage = CP
Upon dissolution of the marriage, the CP’s share will be determined via the goodwill of the business
“Goodwill” beyond professional spouse’s labor and the value of assets in the business
Two methods to determine how assets divided:
Market Sales: court will evaluate the profits from the sale of the business or interest in the business
Capitalization of excess earnings: court will evaluate the present value of future stream of income that the spouse’s goodwill developed during the marriage
Unmarried Couples
Marital Economic Community
Property acquired before marriage would be distributed based on their contract/agreement or based on contract principles. The property acquired during marriage would be governed by community property principles.
If no k, court will examine conduct as to whether an implied k existed and court may grant equitable remedies
Putative Spouse
Marital Economic Comminity
A putative marriage occurs when one or both spouses have a good faith belief that there is a valid marriage. The spouse(s) who have a good faith belief in the validity of the marriage is a putative spouse.
A putative spouse may rely on community property principles. However, the putative
spouse’s rights stop accruing when he/she discovers the marriage is not valid.
Putative Spouse Rights
MEC
QMP: All property that would have been considered CP or Quasi-CP had the marriage been valid would is labeled “Quasi-Marital Property” and the putative spouse is entitled to 1/2 at the end of the putative marriage.
SP: A putative spouse has the same rights as a surviving spouse to the other spouse’s separate property
If a person has a legal spouse (valid marriage) and a putative spouse (not a valid marriage), the two spouses split the person’s estate.
Prenup Agreements: Basis for Unenforceability
Courts will not enforce pre-nup if it promotes divorce, is unconscionable, or involuntary
Unconscionable:
1. Unconscionable when made
2. No full and fair disclosure of other person’s finances/property
3. Right to disclosure not waived in writing
4. Party challenging lacked adequate knowledge of wealth/finances
5. Party challenging lacked adequate disclosure of other party’s wealth
Presumptions
Discuss under each asset
Community Property
Separate Property
Special Community Property
Special Community Property (Lucas)
Presumptions
Applies only at divorce and presumes that jointly held property is CP
Anti-Lucas: After 1987, all jointly held property (joint tenancy, tenancy in common, tenancy by the entirety) acquired during marriage is presumed to be CP upon divorce. This presumption can be rebutted by an express writing evidencing the spouses’ intent to hold the property as SP. If a spouse contributes SP to the purchase of the property, she/he has a right to reimbursement for the amount of contribution (but not any increase in value).
Lucas: Before 1987, property taken in joint form (joint tenancy, tenancy in common, tenancy by the entirety) was presumed to be CP upon divorce. This presumption could be rebutted by evidence that the spouses did not intend to hold the property as CP. Any SP used to purchase the property was presumed to be gift and there was no right to reimbursement (unless there was an agreement).
Equal Rights and Management Over CP
Discuss under transmutations/actions occured
Each spouse has equal management and control over CP. Both spouses must participate in decisions regarding CP personal and real property. If a spouse gifts personal property that is CP or sells/leases real property that is CP, there are specific rules that apply
Gifts to 3P: If one spouse gifts or otherwise disposes of personal CP for less than fair/reasonable value without the other spouse’s written consent, the non-consenting spouse can ratify (affirm/approve) the gift, or revoke the gift and sue to recover the gift.
Sale or Lease of CP Real Property: Both spouses must participate in the sale or lease of real property for more than one year. If title to the CP real property is held in one spouse’s name only and an innocent party does not know of the other spouse, the innocent party’s purchase of the property will be presumed valid. The innocent spouse has one year to file an action to void the transfer.
Fiduciary Duties
Discuss under transmutations/actions
Duty to act in the highest good faith and respect in the management and control of the CP.
Failure of a spouse to obtain the consent of the other spouse when making gifts or selling/leasing property, gives rise to a breach of duty. The innocent spouse can seek a greater share of CP due to the breach.
In CA, spouses have equal management and control over CP, and at the same time owe each other a fiduciary duty not to improperly sell, encumber, or gift CP.
Commingled Bank Accounts
Special Rule
A commingled bank account occurs when the SP of one spouse is mixed or combined with the SP of the other spouse or with CP. If a spouse wants to claim that an asset purchased with funds from the account is his own SP, the burden is on him to trace the asset back to his SP funds in
the account
Direct and Exhaustion tracing
Failure to trace: if tracing fails, entire commingled account and assets purchased are treated as CP
If account is jointly held, presumed CP unless tracing
Direct Tracing - Commingled Funds
Special Rule
Spouse can recover SP when, at the time asset was purchased, SP funds were available and they were intended to be used to purchase a SP asset
Education and Training
Asset - Special Rule
Generally, education and training are not property but the person who received the education and training may have to reimburse the community. There is an equitale right to reimbursement if:
- Community funds were used to pay for education/training or loan repayment and
- The education/training substantially enhances the earning capacity of the party
Defenses - A spouse has no duty to reimburse when:
1. Community has already substantially benefitted from the education/training
2. The need for spousal support was reduced as a result of the education/training
Pensions
Assets - Special Rule
Pensions are CP to the extent that the right to benefits was earned during the marriage
Court will apportion a pension to what was earned during marriage
Spouse’s interest in pension is not termintated upon death
Disability and Worker’s Comp
Asset - Special Rule
Disability and worker’s comp are CP if recieved during marriage
SP after marriage
Severance
Asset - Special Rule
Courts are split. Some say SP becuase its lost earnings. Others say CP becuase it arises from collective bargaining agreement and earned by employment during marriage
Life Insurance
Asset - Special Rule
Term Life: estate that paid most recent premium is the owner of the policy or the policy proceeds
Whole Life: if has current monetary value, the cash value is CP
Gifts to Community
Asset - Special Rule
Presumed CP unless substantial in light of financial situation of the community, then needs to be in writing
SP Funds to Enhance CP
Asset - Special Rule
Split
Some presume gift, presumption overcome by evidence of an agreement to reimburse the community estate
Other jdxs do not presume gift and require reimbursement
Distribution at Divorce/Separation/Death
Distribution
Equal Division of CP unless otherwise found to be not CP
CP Debt Incurred After Separation + Exception
Discuss under Debts/Liabilities
Dets acquired after permanent separation are SP and debtor spouse will be liable to his creditors for such debt
Exception: Necessaries of Life
Spouse can be liable for post-separation but pre-divorce debts if it is a “necessity of life”
Child Support Payments
Debts/Liabilities
Spouse’s child support obligations from previous marriage = debts incurred before marriage
How to Protect CP Earnings from Liability
Debts
Non-debtor spouse must deposit earnings into a separate bank account from which the debtor spouse has no right to withdraw from.
If no separate earnings, community is liable for all obligations
Non-debtor spouse can seek reimbursement for the CP estate from debtor’s SP if the debtor spouse had SP to pay the debt
Credit Debts
Debts
If one spouse incurs debt during marriage, creditors can reach CP unless the non-debtor spouse kept funds separate and the other spouse had no right to withdraw
Tort Liability
Debts
Tortfeasor acting in his own benefit: SP then CP
Tortfeasor acting in community benefit: CP then SP of tortfeasor
Incurred at the time tort incurrs
Fiduciary Duties re: Debts
Debts
Highest GF and FD to each other. A managing spouse must fully disclose al material facts re dets for which the community may be laible
Remedy for breach: larger portion of CP
Gifts to 3P
Each spouse has equal management and control over community property, which means that both spouses must participate in decision regarding major personal property transactions. If one spouse improperly gifted or disposed of community personal property, such as household furniture or furnishings, for less than fair and reasonable value without the other spouse’s written consent, then the non-consenting spouse has the right to either (i) ratify the gift or (ii) revoke the gift and sue to recover all of the property.
Appreciation after Permanent Separation
Because the value of the CP business increased threefold while W continued to manage it after their separation, the court may use the Pereira and Van Camp formulas in reverse to apportion the respective CP and SP interests in the increased value. When the increase in the value of an accounting business is likely the result of the personal skills and effort of the managing spouse as opposed to the natural appreciation of the initial CP investment, the court is likely to apply the Pereira approach to determine W’s share of the post-separation increase in the business’s value, unless the court finds that W has already been adequately compensated by her post-separation salary. When the increase in the value of the business is likely the result of the character of the property itself, the court is likely to apply the Van Camp approach to determine W’s share of the post-separation increase in the business’s value.
