Community Property

Question 1

Separate property

Answer 1

Owned before marriage
Acquired by gift, will, inheritance
Acquired with separate funds

Question 2

Community property

Answer 2

Acquired during marriage
Salary or wages acquired during marriage
Assets acquired during marriage are presumptively CP

Question 3

Time Earned Versus Time Acquired

Answer 3

wages earned during marriage but received after separation are CP.

Question 4

Opener

Answer 4

California is a community state. Community property is defined as all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in the state. Separate property is property acquired before marriage or during marriage by gift, bequest, devise, or descent. “There is a community presumption, where all assets acquired during the marriage are presumptively community property.”

Question 5

When Community Ends

Answer 5

Intent not to resume marital relation
Conduct consistent with that intent

Question 6

Asset division at Divorce generally

Answer 6

Generally community property must be divided equally
Each asset and liability must be divided equally

Question 7

Equal asset division at Divorce: Economic Circumstances Exception

Answer 7

Family residence (don’t want to uproot children)
Closely held corporation (give one shares, other assets of comparable value)
Pension (all goes to one spouse and other assets of comparable value)

Question 8

Equal asset division at Divorce: Statutory Exceptions

Answer 8

One spouse misappropriated CP
Educational debt
Tort liability
Personal injury awards on divorce
Negative community (liabilities exceed assets)

Question 9

Lifetime and Testamentary Gifts of CP

Answer 9

Neither spouse can make a gift of community property without written consent
On divorce, other spouse can take equal off-setting CP assets to cover her half of the gift
Can set gift aside as to their half of gift
Can recover from beneficiary or other spouse

Federal Preemption
Cannot recover half of CP if used to buy U.S. government savings bonds

Question 10

Testamentary Gifts

Answer 10

Can devise all SP

Question 11

Testamentary Gifts: Election

Answer 11

A testator may insert a clause in their will stating that the surviving spouse must either elect to take under the terms of the will or assert their CP ownership rights. When there is no explicit election clause, a surviving spouse may assert both CP rights and rights under the decedent spouse’s will if this behavior would not upset the decedent’s testamentary plan.

If the decedent’s will attempts to pass the survivor’s one-half interest in CP, then the surviving spouse must elect between the will and their CP rights. This is called a “widow’s election.”

Question 12

Acquisitions on Credit During Marriage/Lenders Intent

Answer 12

Funds borrowed during marriage and goods borrowed during marriage are presumptively CP
But the primary intent of the lender controls
Credit and community standing = likely CP
Intended only on the SP of one spouse = could be SP

Question 13

Confidential Relationship Between Spouses

Answer 13

Raises fiduciary duty—Good faith and fair dealing
Presumption of undue influence when one spouse gains an advantage—Burden to show they did not breach fiduciary duty
Grossly negligent and reckless investment breaches duty

Question 14

Altering the Character of Assets: Timing

Answer 14

Can be altered before or during the marriage

Question 15

Transmutation

Answer 15

When the character of an asset is changed
By gift or agreement
No consideration required

Question 16

Premarital Agreements

Answer 16

Must be in writing, signed

Parties can agree to almost anything
Can’t:
Limit child support

Question 17

Premarital Agreements: Exceptions

Answer 17

Exceptions
Oral agreement executed (fully performed)
Marriage alone is not a sufficient performance
Estoppel (detrimental reliance)

Question 18

Defense to enforcement of premarital agreement: Not signed voluntarily

Answer 18

A premarital agreement will be deemed not voluntary (and thus unenforceable) unless the court finds that the party challenging the agreement:

Was represented by counsel or waived that right in writing;
Was given at least seven days to review and sign the agreement; and
If unrepresented by legal counsel, was fully informed in writing (in a language in which the party was proficient) of the terms and basic effect of the agreement.

The party must also execute a document declaring they received this information.

Question 19

Defense to enforcement of premarital agreement: Unconscionability: Spousal Support

Answer 19

A provision in a premarital agreement regarding spousal support is unenforceable on one of two grounds:

The party challenging the agreement was not represented by independent legal counsel at the time it was signed
The provision is unconscionable at time of enforcement (even if the party had independent legal counsel at the time of signing).

Question 20

Defense to enforcement of premarital agreement: Unconscionability: Other Agreements

Answer 20

An agreement about matters other than spousal support is unenforceable if it was unconscionable when made and:

A full and fair disclosure of other party’s property or financial obligations was not made;
The right to a disclosure was not waived in writing; and
The party challenging did not have adequate knowledge of the other party’s property or financial circumstances.

By statute, unconscionability is a matter of law to be decided by the court, not a question for the jury.

Question 21

Marital Agreements (Transmutation) Before 1985

Answer 21

Before 1985, oral transmutations were permitted, whether by express agreement or agreement-in-fact

Question 22

Marital Agreements (Transmutation) After 1985

Answer 22

A transmutation must:

Be made in writing
Expressly declare that a change in the ownership of property is being made
Have the consent of the spouse whose interest is adversely affected. The usual exceptions to the writing requirement (such as estoppel or partial performance) do not apply.

Extrinsic evidence is not admissible to interpret the meaning of a transmutation agreement.

Question 23

Ways a Married Couple May Jointly Hold Property

Answer 23

A married couple may jointly hold property (1) in a joint tenancy, (2) in a tenancy in common, (3) as CP, or (4) as “community property with a right of survivorship.” These forms of ownership are mutually exclusive.

Question 24

Real Estate Presumption and Improvements: Marriage of Lucas

Answer 24

By taking title as joint tenants, house is presumptively CP
Subjective intent irrelevant
Absent proof of agreement, separate property improvements of CP are not reimbursable

Question 25

Anti-Lucas Statutes

Answer 25

The California legislature passed two anti-Lucas statutes on ownership and reimbursement when similar issues arise on divorce or separation.

Applies when they have joint title

Ownership
Reimbursement

Question 26

Anti-Lucas Statutes: Ownership

Answer 26

Property acquired in joint and equal form is presumptively CP

Can be rebutted by:
Express agreement in instrument or
Separate written agreement

Question 27

Anti-Lucas Statutes: Reimbursement

Answer 27

For purposes of division on divorce:
The spouse who made contributions of SP to the acquisition or improvement of CP is entitled to reimbursement without interest for contributions to

down payments,
improvements, or
payments going to the principal on the mortgage (acronym is “DIP”).

There is no right to reimbursement for SP used to pay interest on mortgage, taxes, insurance, or maintenance.
Note: no SP ownership interest, but reimbursement

Question 28

Proration Rule for Mortgage Payments Starting Before Marriage

Answer 28

Occurs when mortgage payments made before marriage with SP and then during the marriage with CP
The community estate is entitled to a pro rata portion of the property, measured by the amount (percentage) of principal debt reduction attributable to the expenditure of community funds. In other words, the community establishes a proportional ownership interest to the extent that community payments reduce the principal debt.
Principal debt reduction attributable to CP/Purchase Price = % split
Only principal debt reduction
Appreciation is allocated in proportion to each estate’s ownership interest.

Question 29

Community Funds Used to Improve SP: Own SP

Answer 29

Expenditure of CP does not change ownership character of the asset, but the community is entitled to either reimbursement of the cost of the improvement or the amount by which the improvement increases the value of the asset, whichever is greater.

Question 30

Community Funds Used to Improve SP: Own SP: Fixtures

Answer 30

The improvements become part of the property.
Note: The anti-Lucas statutes do not apply because only expenditures of SP on CP trigger anti-Lucas.

Question 31

Community Funds Used to Improve SP: Own SP: Community Claim for Reimbursement

Answer 31

The community is entitled to either:
reimbursement of the cost of the improvement or
the amount by which the improvement increases the value of the asset, whichever is greater.

Question 32

Community Funds Used to Improve SP: Spouse’s SP

Answer 32

Split view:
1:
Considered a gift.
The gift presumption can be overcome only by evidence of an agreement to reimburse.
2:
Several intermediate appellate courts have rejected the no-reimbursement rule and reimbursed the community even absent a reimbursement agreement.

Question 33

Spouse’s SP Used to Acquire or Improve Other Spouse’s SP

Answer 33

A spouse who makes an SP contribution to the acquisition or improvement of the other spouse’s SP is entitled to reimbursement, without interest or appreciation, of their separate property contribution.

Question 34

Family Expense Presumption

Answer 34

Expenditures for family expenses (such as food, housing, clothing, or vacations) are presumed to have been made with community funds (to the extent they were available), even if separate funds were also available.

Gift to Community
Absent evidence of a reimbursement agreement, a gift is presumed when separate funds are used to pay family expenses, therefore, the paying party is not entitled to reimbursement.

Question 35

Exhaustion Tracing Method

Answer 35

This requires showing that when the asset was purchased, all community funds in the account had already been exhausted by the payment of family expenses, and therefore the asset must have been purchased with separate funds.

Question 36

Direct Tracing Method

Answer 36

This requires showing that when the asset was purchased, there were separate funds available, and the spouse intended to use those separate funds to purchase an SP asset.

This is also known as the “quick in, quick out” method. A party may show that they deposited separate funds into the account shortly before making a specific payment (especially if the payment is the exact amount of the deposit)

Question 37

Pereira Accounting

Answer 37

Personal skills and effort increased value

The SP component consists of the separate capital plus a fair rate of return thereon (for example, 10% interest on principal × 10 years). The remainder is CP.

Fair Market Value @ Dissolution – (Fair Market Value @ Marriage + Fair Rate of Return) = CP excess profits
Fair Rate of Return = Principal X Interest X Time
The FRR represents what the SP business owner would have made on his/her investment, had the value of the business been invested in reasonably safe securities (stocks and bonds) over the course of the marriage.
10% interest usually applies, unless told otherwise.
(ie. Fair Rate of Return = $100K X 4% X 10 years = $40K)

Question 38

Van Camp Accounting

Answer 38

Capital investment was main source of growth

Fair Market Value @ Dissolution – (CP Labor – Family Expenses) = SP
Labor = Annual Benchmark Salary X Years
Expenses = Annual Expenses X Years

Question 39

Pension Benefits

Answer 39

Both vested and unvested retirement pensions are CP to the extent that the right to benefits was earned during marriage. It is immaterial that benefits are in fact received after divorce.

Question 40

Pension Benefits: Proration to Apportion

Answer 40

Courts apply a “time rule” to apportion the separate and community interests of a pension earned both during and after marriage. For this proration rule, the numerator is the years of employment while married and the denominator is the total years of employment before retirement.

If the covered spouse is not yet eligible for retirement, a decree awarding benefits to the other spouse can take either of two forms:

“If and when received decree”: If and when the covered spouse receives the benefits, the other spouse gets their share

“Cash out”: This option compensates the second spouse by awarding other assets of equal value

Question 41

Effect of Death on Pension Interest

Answer 41

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 their share of any remaining benefits if the other spouse dies first. The spouse entitled to the benefit has testamentary power over their share of any continuing benefits should they die first.

However, with respect to Employee Retirement Income Security Act (“ERISA”)-regulated private sector pensions, ERISA allows benefits for living beneficiaries only, and thus ERISA preempts California law insofar as it would recognize ownership interests that survive the death of a spouse or former spouse.

Question 42

When Pensionable Spouse Eligible to Retire But Does Not

Answer 42

When the pensionable spouse is eligible to retire but does not, a divorce court may order a private employer to pay the non-employee spouse their share of benefits as though the worker had in fact retired. Under a federal law, the nonparticipant spouse can get a qualified domestic relations order (“QDRO”) and receive payments from the plan. The worker may be ordered to pay the other spouse if they have a public employer.

Question 43

Disability Pay and Workers’ Compensation

Answer 43

Disability pay and workers’ compensation are treated as wage replacement. Thus, the benefits are classified according to when they are received (not when earned).

To the extent they replace earnings during the marriage, they are CP.
To the extent that they replace separate post-divorce earnings, they are SP.

It is immaterial that the right to receive benefits may have been earned during marriage. Once again, a different rule may be applicable for certain federal disability payments.

Question 44

Severance Pay

Answer 44

Severance pay is generally understood to replace a worker’s earnings until they are able to find a new job.

There is a split of authority:

Some courts have said that severance pay is SP because it replaces lost earnings, which after a divorce or permanent separation would be SP.

Other courts have said severance pay is CP because, for example, it arose from a collective bargaining agreement, and thus it was earned by employment during the marriage.

Question 45

Stock Options

Answer 45

A stock option gives an employee the choice to purchase shares of the company’s stock at a set price on a specific date in the future. Typically, these options are not vested, and the employee must be employed by the company when the options become exercisable

A stock option is a form of compensation. If it becomes exercisable (vests) during marriage, it is CP.

However, if it is awarded during marriage but not exercisable until after the marital community has ended, then the portion considered CP is determined using a proration rule based on the primary intent of the employer in granting the option (that is, whether it is characterized as compensation for past services, future services, or both).

Use: Marriage of Hug or Marriage of Nelson

Question 46

Stock Options as Award for Past Service: Marriage of Hug

Answer 46

If the divorce court determines that the stock options were awarded primarily to reward the employee for their past services, as a form of deferred compensation, then the court should employ the Marriage of Hug proration formula.

Years from the date of employment to date economic community ends/ Years from date of employment to date options become exercisable
Multiplied by shares
=CP amount

Question 47

Stock Options to Encourage Continued Employment: Marriage of Nelson

Answer 47

If the divorce court determines that the stock options were awarded primarily to encourage the employee to remain with the company, then the court should employ the Marriage of Nelson proration formula. For this formula, the starting point for both the numerator and denominator of the fraction is the date the options are granted.

Years from the date the options are granted to date economic community ends / Years from date options granted to date options become exercisable
Multiplied by shares
=CP amount

Question 48

Goodwill of Professional Practice

Answer 48

To the extent that goodwill is earned during marriage, California treats it as CP. Goodwill is defined as the qualities that generate income beyond that generated from the professionals’ labor and a reasonable return on capital and physical assets.
Courts generally use one of two valuation techniques:
Market sales valuation
Capitalization of past excess earnings The value of goodwill is generally established using expert witness testimony.

Question 49

Educational Expenses

Answer 49

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:

Community funds are used either to pay for education or training or to repay a loan related thereto, and
The education or training substantially enhances the earning capacity of the party.

Loans still outstanding at divorce are assigned solely to the educated spouse

Question 50

Educational Expenses: Equitable Defenses

Answer 50

The community has already substantially benefited from the education or training (presumed if more than 10 years have elapsed since the degree was awarded, but can be rebutted)
The other spouse has received community-funded education
The need for spousal support is reduced as a result of education or training

Question 51

Tort recovery: spouse was tortfeasor

Answer 51

Tort recovery is SP

Question 52

Tort recovery: 3P was tortfeasor

Answer 52

Tort recovery is CP
But will be awarded to injured spouse on divorce or legal separation
Result unless interest of justice or other economic need requires otherwise

Answer 53

3P was tortfeasor
Tort recovery is CP
But will be awarded to injured spouse on divorce or legal separation
Result unless interest of justice or other economic need requires otherwise

Question 54

Tort Liability

Answer 54

CP is subject to tort liability of either spouse
If spouse acted for benefit of the community or other spouse supported, then CP first then SP.

Question 55

Management Rules

Answer 55

Each spouse has the exclusive management and control of their SP. Quasi-CP is SP for purposes of management and control.
Subject to certain exceptions, each spouse has equal management and control of CP. Either spouse acting alone may buy, sell, spend, or encumber all CP.

Question 56

Management Rules: Personal Belongings Exception

Answer 56

One spouse cannot sell or encumber personal property used in the family dwelling without written consent of the other spouse
Transaction voidable at any time during or after the marriage and need not return the transferee’s purchase price.

Question 57

Management Rules: Business Exception

Answer 57

The managing spouse may act alone in all transactions, but must give prior written notice to the other spouse of any sale, lease, or exchange of all, or substantially all, of the personal property used in the operation of the business.
If the required notice is not given, the nonmanaging spouse has a remedy only if the managing spouse’s behavior has substantially impaired her one-half interest in the community estate.
The nonmanaging spouse may not void the transfer

Question 58

Management Rules: Real Property

Answer 58

Both spouses must join in executing any instrument by which community real property is sold, conveyed, or leased for more than a year.
Generally, neither spouse can transfer or encumber their ½ interest in real CP.
No SoL if buyer knew or should have known

Question 59

Creditor’s Rights

Answer 59

The general rule is that a creditor may reach any property over which the debtor has the legal right of management and control. For purposes of creditors’ rights, quasi-CP is treated as CP.
One spouse’s SP cannot be reached to satisfy the other spouse’s separate debt (that is, spouses are not personally liable for the other spouse’s debts).

Question 60

Creditor’s Rights Exception: Doctrine of Necessities

Answer 60

The Family Code provides that each spouse has the duty to support the other spouse and the minor children. This means that each spouse is personally liable for the other spouse’s contracts for necessaries, including food, clothing, and medical bills.
If CP funds are available, a spouse whose SP was used to pay for the other spouse’s necessaries (including medical bills) can be reimbursed from the community estate.
Counts until they get divorced

Question 61

Creditor’s Rights Exception: After Divorce

Answer 61

After divorce, creditor cannot reach CP awarded to a spouse:
That spouse incurred the debt or
Was assigned the debt by the court

Question 62

Quasi-Community Property

Answer 62

Property acquired by a married couple while they were domiciled in a non-CP state that would have been classified as CP had it been acquired under the same circumstances in California is quasi-CP. Quasi-CP retains its SP nature when the parties become domiciled in California. The quasi-CP label only becomes significant at divorce or death.

Note, other CP states grant CP not QCP

Question 63

Quasi-Community Property: On Divorce

Answer 63

QCP treated the same as CP on divorce
Even if no control over foreign land, court can grant entire property and make it up with other assets to other spouse, or force conveyances

Question 64

Quasi-Community Property: On Death

Answer 64

Survivor generally has one-half interest in decedent’s QCP
Foreign real property controlled by location
For QCP protection, non-acquiring spouse must survive acquiring spouse

Question 65

Common Law Marriages

Answer 65

CA does not recognize common law marriages
Exception: When validly contracted in another state
Only spouses and registered domestic partners get CP
So they own as “tenants in common”

Question 66

Unmarried Cohabitants

Answer 66

California applies general contract principles to agreements between unmarried cohabitants. The contract cannot be based solely on sexual services.
If there is no express contract, a party may prove an implied contract based on the behavior of the parties and may employ the doctrine of quantum meruit and apply equitable remedies such as a constructive or resulting trust. Even if the cohabitants later marry, contract principles will apply for property acquired during cohabitation. If they later divorce, only property acquired during marriage is distributed according to CP rules.
With respect to claims against third parties and the government, cohabitants have no legal basis for asserting rights that flow from marital status.

Question 67

Putative Spouse

Answer 67

Spouse must have subjective belief of lawful marriage