Community Property

Question 1

Pereira Approach

Answer 1

The Pereira approach favors the CP estate and is primarily used by courts when the increase in value is mostly attributable to the personal skill and effort of the managing spouse.

Under this approach, the managing spouse receives the original principal value of the business, plus an annual rate of return calculated at 10% as their SP. The value remaining is CP.

Example - Restaurant purchased for $100 earns 10% for 6 years, totaling $160 as SP. If the restaurant is worth $300 at divorce, the remaining $140 is CP.

Question 2

Van Camp Approach

Answer 2

The Van Camp approach favors the SP estate and is used by courts when the increase in value is mostly attributable to the character of the business itself.

Under this approach, the community receives a reasonable value in exchange for the community labor during marriage, minus annual family expenses and any salary taken. The SP is determined by the fair market value of the business at divorce, less any CP value as previously calculated.

Question 3

Anti-Lucas Statute

Answer 3

At divorce or legal separation, all jointly titled property of the spouses is presumed to be CP, unless there is an express agreement to the contrary. If a spouse contributes SP to the purchase of the property, she has a right to reimbursement for the amount of contribution.

Mnemonic - “DIP” (down payments, improvements, and principal)

Question 4

Assignment of Debt Upon Divorce

Answer 4

Upon dissolution of a marriage, a court has discretion to assign CP debt to either spouse based on their ability to pay the debt, but debts incurred before marriage that were not for the benefit of the community will be assigned to the debtor spouse.

Question 5

Business Goodwill

Answer 5

Business goodwill is the value derived from the expectation of continued public patronage that stems from intangible qualities that generate a business income beyond that derived from a professional’s labor, the reasonable return on capital, and physical assets. To the extent the goodwill is earned during the marriage, it is CP.

Question 6

Cash-Out (Pensions)

Answer 6

If a present value can be ascertained, the non-employee spouse is awarded cash or assets equal to their CP share of the benefits.

Question 7

Child and Spousal Support Waivers

Answer 7

Child support cannot be waived be a premarital agreement. Spousal support can be waived by a premarital agreement if independent counsel represented the spouse against whom enforcement is sought at the time the agreement was signed and the provision is not unconscionable at the time of dissolution.

Question 8

CP Liability for Debt

Answer 8

CP is liable for all debts incurred before and during marriage by either spouse, regardless of which spouse has the management and control over the property and which spouse incurred the debt.

An exception applies if the earnings of the non-debtor spouse are held in a separate account of which the debtor spouse has no right of withdrawal and the funds are not commingled with other CP funds (allows non-debtor spouse to shield earnings).

Question 9

Reimbursement - SP/SP and SP/CP

Answer 9

A party will be reimbursed, without interest, for contributions or improvements that can be traced from their SP to the other spouse’s SP and was used for a down payment, improvement, or to reduce the principal of a loan, absent a written waiver of such reimbursement.

A party will be reimbursed, without interest, for contributions or improvements that can be traced from their SP to CP and was used for a down payment, improvement, or to reduce the principal of a loan, absent a written waiver of such reimbursement.

Question 10

Reimbursement - CP for SP

Answer 10

When a spouse uses CP to improve their own SP, the community is entitled to reimbursement for the cost of the improvement or the increase in the value to the SP, whichever is greater.

Question 11

Credit/Loan Presumption

Answer 11

Property purchased with borrowed funds during marriage is presumed to be CP. However, this may be rebutted by showing that a lender relied exclusively on SP when extending the credit. If the lender relied on the earning capacity, it is a CP debt because an earning capacity is a community asset (as is a credit score).

Question 12

Direct Tracing Method

Answer 12

Direct tracing requires showing a showing that at the time of the purchase sufficient SP funds were available and the purchaser intended to use SP funds.

Question 13

Disability Benefits

Answer 13

The classification of disability benefits as SP or CP depends on what the benefit is intended to replace. If the benefit is used to replace marital earnings, it is CP. If it is used to replace post-separation earnings, it is SP.

Question 14

Division in Kind (Pensions)

Answer 14

A court will reserve jurisdiction over the case until the employee spouse retires and apportion the pension at that time.

Question 15

Division of Assets Upon Divorce

Answer 15

At divorce, the community assets will be divided equally, and each spouse will retain their separate property assets.

Question 16

Educational Degrees

Answer 16

Educational degrees acquired during marriage are not treated as CP, but the community is entitled to reimbursement if CP funds were used to pay for educational costs and the earning capacity of the educated spouse was substantially improved, absent a written agreement to the contrary.

However, reimbursement may be reduced or denied if the community has already substantially benefitted from the education, which is presumed after 10 years, the other spouse also received an eduction paid for with CP funds, or the education reduced the need for spousal support for the educated spouse.

Question 17

Exception for Necessaries of Life

Answer 17

A non-debtor spouse’s SP is liable for the debts of the other spouse incurred during marriage if it was for the necessaries of life for the spouse or a child.

A non-debtor spouse’s SP is liable for debts of the other spouse, even if incurred post-separation but before divorce, for common necessaries, which are basic necessities of life.

Question 18

Exhaustion Method

Answer 18

The exhaustion method requires a showing that at the time the property was purchased, all CP funds had been exhausted by community expenses, such that only SP funds were available to purchase the property.

Question 19

Family Expenses Presumption

Answer 19

When tracing funds, there is a presumption that expenditures for family expenses were made with CP funds even if SP funds were also available.

Question 20

Fiduciary Duties

Answer 20

Each spouse owes the other a duty to act in the highest good faith with respect to the management and control of CP. Failure of a spouse to obtain consent prior to gifting or selling CP can give rise to a breach of duty, allowing the other spouse to seek a greater share of the CP.

Question 21

Form of Title Presumption

Answer 21

There is a special presumption, applicable at the death of one spouse, that the form of ownership on the title represents the interests of the spouses. This presumption is generally irrelevant since the court will trace back to the source of funds to determine title.

Question 22

Gift Exception to Transmutation

Answer 22

Transmutations are not required for personal gifts between spouses of insignificant value considering the relative financial circumstances of the marriage.

Question 23

Gifts of CP to Third Parties

Answer 23

If one spouse improperly gifts or disposes of community personal property, such as household furnishings, for less than fair value and without the other spouse’s consent, the non-consenting spouse may ratify the gift or revoke the gift and sue to recover the property.

Question 24

Joint Checking Accounts

Answer 24

Joint checking accounts are community property, regardless of any verbal agreements to the contrary, and property purchased from a joint account is presumed to be CP.

Question 25

Management and Control

Answer 25

Each spouse has equal management and control of the CP, which means both spouses must participate in decisions regarding CP transactions.

Question 26

Marital Economic Community

Answer 26

The marital economic community (MEC) begins at marriage and ends at divorce, death of a spouse, or permanent separation with no intend to resume the marital relationship.

Question 27

Married Woman’s Special Presumption

Answer 27

Property acquired by a married woman in a writing, prior to 1975, is presumed to be her separate property.

Question 28

Moore-Marsden Formula

Answer 28

The formula used to calculate the CP and SP apportionment is a pro-rata calculation is often referred to as the Moore-Marsden formula. Under this formula, the community will acquire a pro-rata interest in the property of the CP payments compared to the total purchase price, including any appreciation in value during the time of CP payments.

Question 29

Order of Debt Satisfaction (Incurred During Marriage)

Answer 29

If the debt is for a community interest, CP is used to pay the debt first, then SP of either spouse. If the debt is non for a community interest, the debtor spouse’s SP is liable first, then the CP.

Question 30

Order of Debt Satisfaction (SP Debts Before and During Marriage)

Answer 30

All CP and the debtor spouse’s SP are liable for debts incurred before marriage, but not the non-debtor spouse’s SP if held in a separate deposit account, is liable for SP debts incurred before marriage.

All CP and the debtor spouse’s SP (not the non-debtor spouse’s SP) are liable for SP debt incurred by one spouse during marriage, subject to an exception for the necessaries of life.

Question 31

Pensions

Answer 31

Pensions earned during marriage are CP. If the employee spouse is eligible for pension benefits upon divorce, a court will calculate the community-property interest in the retirement pension using the time rule. If the employed spouse is not yet eligible for retirement, the court will apply one of two methods: division in kind or a cash-out.

Question 32

Permanent Separation

Answer 32

Permanent separation occurs when the parties have a complete and final break in the marital relationship. This is evidenced by at least one spouse’s intent to end the marriage and the spouses’s conduct is consistent with that intent.

PUT THIS UNDER BASIC PRESUMPTIONS

Note - as of January 2017, living separate and apart is no longer required for a permanent separation and the law is applied retroactively

Question 33

Election Clause

Answer 33

In California, the statutory elective share does not exist. If there is an election clause in the will, then the spouse must elect whether to take the CP share in lieu of all other interests she may have under the testator’s will. When there is no election clause, the surviving spouse is entitled to a forced share of one-half of the CP and QCP, as allowing the spouse to assert both rights would be contrary to the will.

Question 34

Personal Injury Awards

Answer 34

A personal injury award recovered by one spouse stemming from an event prior to marriage will be characterized as SP, and CP if stemming from an event during marriage. However, upon dissolution, a court will generally award the recovery to the injured spouse as SP.

Question 35

Premarital Agreements

Answer 35

A premarital agreement allows parties to contract outside of community property laws and agree to the characterization of their property and may limit support obligations. A premarital agreement must 1) not promote divorce, 2, be in writing and signed by both parties, 3) be entered into voluntarily, and 4) not be unconscionable.

Question 36

Prior Child/Spousal Support Obligations

Answer 36

A child or spousal support obligation from a previous relationship shall be treated as debt incurred before marriage. The CP will be liable for the debt unless the non-debtor spouse places her earnings in a separate deposit account, inaccessible to the debtor spouse. If the debtor spouse had SP to pay the obligation and used CP instead, the non-debtor spouse can seek reimbursement to the CP.

Question 37

Putative Spouses

Answer 37

A putative marriage occurs when one or both spouses believe in good faith there is a valid marriage, but there is not. The spouse(s) holding the good faith belief in the validity of the marriage is a putative spouse.

Question 38

Exam Approach for Community Property Questions

Answer 38

1. Community Property Presumption
2. Deal with any issues pertaining to a valid marriage and/or premarital agreement or separation depending on facts
3. Take each piece of property separately and determine how it should be distributed
   STEP ONE: identify source and timing of funds used to purchase proeprty to get initial characterization
   STEP TWO: determine if the parties took any actions that could potentially change the characterization (e.g., the way they took title, transmutation, tracing, management and control, contributions, etc.)
   STEP THREE: consider any special rules that guide the characterization of the asset
4. Considering analysis above, answer the call of the question as to each piece of property

Question 39

Quasi Community Property

Answer 39

Quasi community property (QCP) is property that was acquired outside of California that would be considered community property if it were acquired in California.

NOTE: add this to the end of basic presumptions if there is a QCP issue in the question

Question 40

Quasi Marital Property

Answer 40

All property that would have been considered CP or QCP had the marriage been valid is labeled as quasi marital property (QMP). The putative spouse is entitled to a 1/2 share at the end of the putative marriage.

Question 41

Rights of Putative Spouse

Answer 41

A putative spouse may rely on CP principles and is entitled to a share of the community property upon death or divorce. However, a putative spouse’s rights stop accruing when they discover the marriage is not valid.

Example - W marries H in 2014 and discovers marriage is not valid in 2015. W is only entitled to CP from 2014-2015 when she did not know marriage was invalid

Question 42

Sale of CP Real Property

Answer 42

Both spouses must join in executing any instrument in which CP real property is sold or conveyed. An innocent spouse has one year to file an action to avoid the unilateral transfer and set aside the sale.

Question 43

Separate Property Business

Answer 43

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 and SP upon divorce using either the Pereira or Van Camp approaches, or may apply a combination of both.

Note - “reverse” Pereira and Van Camp apply when SP contributes to a CP business after separation, don’t worry too much about this but could note they exist if it comes up.

Question 44

Severance Pay

Answer 44

The classification of severance pay as SP or CP depends on what it is intended to replace. If the severance is a result of or as a reward for labor during the marriage, it is CP. If it was paid to replace future post-separation earnings, severance paid during the marriage is CP, but payments after separation are SP.

Note - bonuses treated similarly, depends on whether bonus is for work done during (CP) or after (SP) marriage

Question 45

Stock Options

Answer 45

To the extent that stock options are compensation for earnings during the marriage, the community has an apportioned interest, determined by either the Nelson formula or the Hug formula.

The Nelson formula is used when the stock options are compensation for future performance and retention. The court will calculate the amount of time between the date of the grant (“DOG”) and the date of separation (“DOS”). That number will be divided by the amount of time between the DOG and the DOV. The result is the community-property share of the stock options:

CP = (DOG – DOS) / (DOG – DOV) × # of shares
SP = # of shares – CP

The Hug formula is used if the stock options are granted to compensate an employee for past service (or to attract a new employee). The court will calculate the amount of time between the date of hire (“DOH”) and date of separation (“DOS”). That number will be divided by the amount of time between the DOH and the date the options vest (“DOV”). The result is the community-property share of the stock options:

CP = (DOH – DOS) / (DOH – DOV) × # of shares
SP = # of shares – CP

Question 46

Term Life Insurance

Answer 46

Term life insurance provides death benefit coverage for a specified term in exchange for the payment of premiums and does not accumulate a cash value. The term policy is CP or SP depending on which estate paid the premium for the latest term.

Question 47

Time Rule (Pensions)

Answer 47

If a spouse is eligible for retirement benefits, the court will apply the time rule to determine the CP and SP interests. The CP interest is calculated by dividing the number of years when the spouses were married while the pension was earned by the total number of years that the employed spouse earned the pension, times the total pension.

Example - H started working for the city in 1995 and was eligble to retire in 2020 (25 years). H married W in 2005 and they divorced in 2010 (5 years). The total retirement benefit is $100k.

Numerator = 5 years / Denominator = 25 years
CP share = 1/5 ($20k)
W is entitled to half the CP, which is $10k

Question 48

Tort Obligations

Answer 48

If the spouse who committed the tort was doing so for the benefit of the community, the liability will first be satisfied with CP, and then from the tortfeasor’s SP. The opposite is true if the tortfeasor spouse was not acting for the benefit of the community.

Question 49

Tracing

Answer 49

When property is acquired during marriage with commingled funds, a spouse may be able to trace the source of the funds used to acquire the property to SP funds. The burden of proof is on the spouse claiming SP to show the asset was acquired with SP funds.

Question 50

Transmutation

Answer 50

A transmutation is an agreement between spouses made during marriage to alter the characterization of property. A valid transmutation must be expressed in writing that clearly describes the change in ownership and consent of the adversely affected spouse.

Question 51

Unconscionability (Premarital Agreements)

Answer 51

A premarital agreement must not be unconscionable as lacking full disclosure at the time it was executed and the party against whom enforcement was sought did not have adequate knowledge or wealth of the other party and did not waive the right to disclosure in writing.

Question 52

Unmarried Cohabitatants

Answer 52

The property of an unmarried couple will be distributed based on contract principles. Express contracts setting firth the distribution of property will be enforced unless they are based on meretricious sexual services. If there is no express agreement, a court will look for an implied contract or understanding, or may distribute property based on unjust enrichment and fairness principles.

Question 53

Valid Marriage

Answer 53

A marriage under California law is a personal relation arising out of a civil contract between two persons, which requires the consent and legal capacities of both parties. To validate the marriage, the consent must be followed by formal legal procedures, including the issuance of a license, authentication, and solemnization.

Note - 18 years old is the age of consent, but can obtain court order w/ written consent of parent

Question 54

Void and Voidable Marriages

Answer 54

A void marriage is invalid and null from its inception. The grounds for a void marriage are incest and bigamy.

A marriage is voidable and may be deemed null if either of the parties were underage, of unsound mind, or the consent of either party was a obtained by force or fraud.

Question 55

Voluntariness Requirements for Premarital Agreements

Answer 55

Premarital agreements are deemed involuntary unless the court finds that the party against whom enforcement is sought was 1) represented by independent counsel at the time the agreement was signed or advised to seek independent counsel and waived it in a separate writing, 2) presented with the agreement and advised to seek independent counsel at least 7 days prior to signing it, 3) if unrepresented by counsel, the party against whom enforcement is sought must be fully informed in writing of the terms and conditions the party is giving up, in a language in which they are proficient, and 4) not under duress, fraud, undue influence, or lacking capacity.

Question 56

Where do we ALWAYS start with a community property essay?

Answer 56

Community Property Presumption

California is a community property (CP) state. All property acquired during marriage by the labor or earnings of either spouse is presumed to be CP. All property acquired before marriage or after permanent separation is presumed to be separate property (SP). In addition, any property acquired during marriage by gift, bequest, devise, or descent is presumed to be SP.

Question 57

Whole Life Insurance

Answer 57

Whole life insurance provides lifetime death benefit coverage and has an investment component that allows it to accumulate a cash value for the policy if it were to be forfeited. It is subject to a pro-rata apportionment based on the SP/CP ratio of the premium payments.

• CP interest = amount CP contributed / total amount contributed (CP + SP)
• SP interest = amount SP contributed / total amount contributed (CP + SP)
• Multiply the SP and CP percentages by the total cash value to determine their respective amounts