Community Property Flashcards
General Presumption
CA is a CP state. All property acquired during the marriage is presumed to be CP (CP). All property acquired before marriage, after permanent separation, or during marriage by gift, will, or inheritance is SP. Rents, issues, and profits of SP are SP, even if acquired during the marriage.
In determining the characterization of assets, the court will look to the source of the funds used to purchase the asset. Then, the court will consider whether either spouse has taken any action to re-characterize the property. (Source, Action, Disposition)
The spouse who tries to rebut the CP presumption is the SP proponent and has the burden to rebut the presumption. If funds used to purchase were part CP and part SP, the court will issue a pro-rata apportionment upon dissolution. This means that the property will be divided according to the source of the funds used.
With the above principles in mind, we will look at each asset in turn.
F.I.T
To determine the characterization of an asset, must consider F.I.T.
FUNDS: How was the property purchased (CP or SP money)?
INTENTIONS: What did the parties say or do?
TITLE: Whose name is the property in?
Transmutation
Prior to 1985, character of property could be changed or transmuted through an oral agreement.
Any transmutation after 1985 must be an express (must contain language that expressly stated the characterization of the property is being changed), written declaration by the spouse whose interest is adversely affected. Full disclosure is required. No extrinsic evidence is allowed. A statement in a will before death is not admissible as evidence of a transmutation
The Married Woman’s Special Presumption
If property was acquired prior to 1975, by a married woman in an instrument in writing, it is presumed to be her SP. It can be rebutted by showing that the husband did not intend to change the CP funds into the wife’s SP.
Joint Tenancy
Property acquired during the marriage held in joint tenancy will be presumed to be CP. The presumption can only be rebutted by another agreement. After 1984, the agreement must be in writing and signed by the party adversely affected (Tenancy in Common title is identical to joint tenancy). At death, the surviving spouse gets everything unless there is an agreement to rebut the presumption. Divorce ends JT & turns it into CP, ending right of survivorship.
Community Property Title
A CP title is presumed CP at divorce
Characterization: post 1987, need writing to change title
Reimbursement: post 1984: right to reimbursement based on tracing; appreciation is split between community.
A sale, lease, or transfer will be presumed valid if the purchaser, in good faith, did not know about the marriage of the spouse who sold the property.
Management
Either spouse has the management and control of the CP, and neither spouse may make a gift or dispose of CP, without written consent of the other spouse. Both spouses have an obligation to make full disclosures to the other spouse of all assets the community owns or debts the community may be liable for.
Fiduciary Duty of Care
Both spouses have an obligation to make full disclosures to the other spouse of all assets the community owns or debts the community may be liable for.
Reimbursement/Apportionment:
If the couple uses both CP and SP to purchase something the property is part CP/SP and at divorce it is divided according to the source of the funds used.
Family expenses:
Available CP funds are presumed to be used to pay for family expenses. SP funds are deemed to be used when CP funds are exhausted. SP used for family expenses has no right to reimbursement unless parties have agreed.
Gifts
A gift between spouses of clothing, jewelry or other tangible articles of a personal nature, solely used by the spouse to whom gift is given, and not substantial in value will be considered SP and not subject to transmutation rule
Right to Reimbursement
After 1984, if a party can show that they used SP funds toward the purchase of a joint tenancy home, they are entitled to reimbursement of their SP without interest. Prior to 1984, they needed a reimbursement agreement.
Any increase in value goes back to the community. If there is a decrease in value, reimbursement can’t exceed the net value but the SP contributor has a right to reimbursement of the full value.
There is a right to reimbursement based on tracing. This includes reimbursements for (1) down payments, (2) payments for improvements, and (3) payments that reduce the principal of a loan used to finance the purchase/improvement of the property. Excluded from contributions are (1) interest payments on the loan, and (2) payments for maintenance, insurance on, or taxes for the property.
A party may waive the right to reimbursement in writing. Reimbursement shall not exceed the net value of the property at the time of division.
Improvements
Improvements are attached to the existing property. Three situations may arise:
One spouse used SP to improve the other spouse’s SP
Pre 2005: considered a gift
Post 2005: reimbursed without interest and may not exceed the net value of the property unless there is a written transmutation or waiver of reimbursement rights
A spouse uses CP to improve the other spouse’s SP
Traditional Rule: improvement is a gift
Modern Rule: creates a right to reimbursement to the community without interest
A spouse uses CP to improve their own SP
Pre 2005: if CP was spent without the consent of the other spouse, community has a right to reimbursement. If there was consent, no right to reimbursement.
Post 2005: right to reimbursement to the community without interest (injured spouse is entitled to either the amount spent or the value added , whichever is greater)
COMMINGLING BANK ACCOUNTS
Commingling refers to situations where both SP and CP have been deposited into the same account.
Any available CP funds are presumed to be used for family expenses (food, rent, vacations, medical/dental care). SP funds are used for family expenses only when CP funds have been exhausted. SP funds used for family expenses have no right of reimbursement unless there is such an agreement.
Tracing Funds: Exhaustion Method
SP proponent can rebut the CP presumption if, at the time of acquisition, all community income was exhausted by family expenses. Then clearly the property must have been purchased with SP funds.
When a spouse makes the choice to commingle funds, that spouse has the burden of keeping adequate records to establish the balance of community income and expenditures at the time an asset is acquired.
Tracing Funds: Direct Tracing
SP proponent needs to show that SP funds were in the account and the SP proponent intended to sue the SP funds to acquire the property in question.
At divorce, contributions to joint bank accounts are presumed to be CP and can be rebutted by tracing to SP.
* Keeping adequate records without showing disposition of the funds is not sufficient proof to overcome the CP presumption.
* Example: Harry received $10k inheritance, SP, and puts it into his checking account. He also deposits $4k CP funds into the account. Then he purchases a car. The car is presumed to be CP. Under the Exhaustion Method, Harry cannot trace to SP funds because the $4k of CP funds were in the account. Thus, the car is only part SP - the part that Harry can trace to SP after CP funds are exhausted. Under Direct Tracing, Harry could prove that SP funds of $10k available and he intended to use those funds to purchase the car as his SP.
Joint Bank Accounts
At divorce, the contributions to bank accounts of married persons are presumed to be CP and can only be rebutted by tracing to SP.
SEPARATE PROPERTY BUSINESS
Rents and profits from SP business generated without community labor are SP. When there is labor of either spouse that plays a part in generating gain, it will be apportioned into SP and CP by one of two formulas: Pereira and Van Camp.
Effort does not change the nature of property, but if it increases the value, the increase should be attributed to the community and both spouses should share in the increase.
Pereira
This formula is used if the increase in value of the SP business can be attributed to community effort. It favors CP.
The formula apportions the profits of a SP business by allocating a fair return on the SP investment (10% unless a different rate is proven appropriate) and allocating any excess to CP. The CP interest is anything that is over the reasonable (legal) rate of return.
EX: If W was the SP business owner. W would get the SP business, her reasonable rate of return, and half her CP interest. H would get the other half of the CP interest.
Van Camp
This formula is used if the increase in value is not attributed to community efforts, but instead to an economic circumstance or market conditions.
This formula favors the SP owner. The formula determines the reasonable value of the spouse’s services (salary) and allocates that as CP and the remainder as SP. [Community income (salary) – community expenses = community share of profits from SP business]
EX: It is assumed that W’s community efforts were rewarded if she received a salary. If she received a salary, then that is considered what the community deserved from the SP business. If no salary, then the courts will determine a reasonable salary that someone in W’s position would have earned and will deduct community expenses
COMMUNITY PROPERTY BUSINESS
A spouse who is operating or managing an interest in a business that is all or substantially all community personal property has the PRIMARY management and control of the business or interest.
The primary or managing spouse may act alone in all transactions but shall give prior written notice to other spouse of any sale, lease, exchange, encumbrance, or other disposition of all or substantially all of the personal property used in the operation of the business.
Remedies for Failure to Give Prior Written Notice
Failure to give notice shall not adversely affect the validity of a transaction or of any interest transferred. [This is because there is a 3rd party relying on the validity of the transaction].
Under section 1101, a spouse has a claim against the other spouse for any breach of the fiduciary duty which results in impairment to the claimant spouse’s present undivided half interest in the community estate. Including, but not limited to a single transaction or series of transactions which have caused or will cause a detrimental impact to the claimant spouse’s undivided half interest in the CP.
Duties include: full disclosure of all material facts and information, characterization and valuation of all assets in which the community has or may have an interest, and any debts for which the community is or may be liable.
GOODWILL
All assets acquired during marriage by the labor and efforts of a spouse are CP, and goodwill is no exception. The goodwill of an entity (business / professional practice) is the expectation of continued patronage and success, the expectation that the business will function the same in the future as it has in the past. In a professional business, it is the reputation of the professional.
Goodwill may be valued by (1) market value (what the business would sell for), or income (salary x10% per year).
In most cases, each party will hire experts to give opinions on the value of the business based on market value and capitalization of the business. No post-marital effort will be included in evaluating the business, because when the marriage ends, the effort that the spouse puts into the business is considered SP. [CA recognizes goodwill in the context of business and professional practices.]
PENSIONS
Both vested and unvested pensions are treated as CP under CA law. If an employed spouse is eligible for pension benefits upon divorce, a court will calculate the CP interest in the retirement pension earned during marriage.
If the spouse can retire, but chooses not to, he cannot defeat the CP interest of the other spouse. In this instance, they would have to pay a share of the pension at divorce, but nothing after divorce.
