Community Property

Question 1

Community Property- MEMORIZE!

Answer 1

California is a Community Property state. In California, there is a presumption that all property acquired during marriage is community property. Separate Property is property (1) owned by either spouse before marriage, or (2) acquired during marriage by gift, will, or inheritance, or (3) acquired during marriage with the expenditure of separate funds, or (4) the rents, issues and profits derived from separate property. The characterization of an asset as community property or separate property depends on three factors: (1) the source of the item, (2) actions of the parties that may have altered the character of the item [i.e. form of title], and (3) any statutory presumptions affecting the item.”

Question 2

Transmutation- MEMORIZE!

Answer 2

“Absent an agreement to the contrary, the statutory definitions of SP and CP control. However, California allows spouses to opt out of SP and CP characterizations by agreement, either as to a particular asset or as to all acquisitions. Agreements made before marriage are governed by the Uniform Premarital Agreement Act. Agreements made during marriage to change the character of an asset are called Transmutations.”

Question 3

CP Presumption

Answer 3

All property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is CP.

Rebuttable Presumption – Spouse may overcome the presumption by a preponderance of the evidence by tracing the separate property acquisition of the property.

Question 4

Commingled Funds

Answer 4

Can use either exhaustion or direct tracing method to overcome the presumption of CP.

i. Exhaustion – All of the CP funds have been exhausted from the account.
1. Family Expense Presumption – Presumption that expenditures for family expenses were made with CP funds.
ii. Direct Tracing Method – (1) Sufficient SP funds were available, and (2) Spouse intended to use SP funds to buy the asset.

Question 5

Separate Property

Answer 5

2. Separate Property (SP):
   a. (1) Property owned by either spouse before marriage, or

b. (2) Property acquired during marriage by gift, will, or inheritance; or
i. The increase in value of a SP inheritance/gift or that item was kept in CP location does not change the character of the property (absent a writing to the contrary)

c. (3) Property acquired during marriage with the expenditure of separate funds, or
i. Ex: when W inherits money from her mother’s estate and uses that inheritance to purchase stock, the stock is SP because she used the inheritance. This is called “tracing.”

d. (4) The rents, issues, and profits derived from separate property.

Question 6

Valid Marriage

Answer 6

[Four Requirements] (1) Capacity, (2) License, (3) Witnessed ceremony, (4) Registered with the county recorder.

Same-sex marriages in CA
1. Exception – CA recognizes same sex marriages as valid that occurred after the In re Marriage Cases but before the effective date of Proposition 8. i.e. the same sex couples may claim CP rights as “Spouses,” not Domestic Partnerships

Question 7

Domestic Partnership

Answer 7

All laws pertaining to married persons apply to DP’s. CP system applies.

i. Filing – Declaration of Domestic Partnership with the Secretary of State
ii. Available to – (1) Same sex couples, or (2) Elderly opposite-sex couples who receive social security benefits.

Question 8

QCP

Answer 8

-property acquired during a putative marriage which would have been community property if the marriage was NOT void. (Treat as CP)

Question 9

Putative Spouse

Answer 9

When a spouse has an objectively reasonable and good faith belief that they are married but through no fault of their own they are not, they will be treated as spouses for purposes of property division.

Question 10

Marvin Action

Answer 10

Courts should enforce express contracts between non-marital partners, unless the contract is founded on illegal sexual services. If no contract exists, courts look to see if the parties’ conduct demonstrates a tacit understanding of an implied contract.

Question 11

Date of Separation

Answer 11

Irretrievably Broken – The economic community ends when there is:

1. (1) Permanent physical separation, AND
2. (2) Intent NOT to resume the marital relationship
   a. Only need intent of one party
   b. Look to whether the parties are maintaining the facade of marriage. If parties are holding themselves out to the world as being married, court will likely find that they have not shown intent not to resume the marital relationship.
3. Note – Parties may agree as to the date of separation.

Question 12

Education Expenses

Answer 12

Rule statement: Education and training acquired during marriage are NOT treated as CP. Instead, the CA Family Code creates an equitable right of reimbursement, including interest, when:

a. (1) community funds are used to pay for education or training, and
b. (2) the education substantially enhanced the spouse’s earning capacity; OR
c. If the expenses were incurred before marriage and the loans were paid with community funds after the marriage.
d. Typically the community is permitted to receive reimbursement not only for direct educational expenses, such as books or tuition, but also living expenses.

Question 13

Education Expenses Rebuttable Presumption

Answer 13

e. Rebuttable presumptions / Defenses to reimbursement of community estate for educational expenses:
i. Reimbursement may be reduced or modified if the community has already substantially benefitted from the earnings due to the education or training. There is a rebuttable presumption that the community has substantially benefitted if more than 10 years have elapsed since the degree was awarded and the initiation of divorce, meaning that unless presumption is rebutted, no reimbursement; OR
ii. There is a rebuttable presumption that the community has already benefitted if the education or training enables its recipient to engage in gainful employment that substantially reduces the need the recipient would otherwise have for spousal support.

Question 14

QCP from another state

Answer 14

a. Divorce– CA Courts treat QCP same as true CP and divide it 50-50.
b. Death – The surviving spouse has a one-half interest in the decedent’s quasi community property. Decedent has NO rights in the survivor’s quasi community property.
c. Property Acquired in another CP State – Treated as California CP and not as QCP.
d. Jurisdiction – CA court has personal jurisdiction over the spouse and may order him to execute any conveyance necessary, or could award the out of state land to the acquiring spouse and order assets of equal value to the other spouse.

Question 15

Married women presumption

Answer 15

Property acquired BEFORE 1975, that was acquired during marriage in (1) married woman’s name alone or in (2) her name and a 3rd party, is presumed to be the wife’s SEPARATE property.

Presumption may be rebutted by:

i. Express statement in a deed or other documentary evidence of Title stating SP, OR
ii. Written Agreement declaring that the property is meant to be SP

Question 16

Preamble to prenups and transmutations- MEMORIZE!

Answer 16

“Absent an agreement to the contrary, the statutory definitions of SP and CP control. However, California allows spouses to opt out of SP and CP characterizations by agreement, either as to a particular asset or as to all acquisitions. Agreements made before marriage are governed by the Uniform Premarital Agreement Act. Agreements made during marriage to change the character of an asset are called Transmutations.”

Question 17

Prenups

Answer 17

1. Premarital Agreements (Uniform Premarital Agreement Act)
   a. Scope of Agreement
   i. Can waive nearly ANY right and asset (i.e. spousal support and property rights) EXCEPT:
2. Child custody, visitation or support, OR
3. Anything that violates public policy (i.e., that which encourages divorce)

Question 18

Prenup Reqs

Answer 18

Must be (1) in Writing and (2) Signed by both parties. Oral agreements are invalid.

1. Exceptions:
   a. (1) Where oral agreement is executed/fully performed, or
   i. Note: marriage alone is not sufficient performance to make it an exception to the writing requirement.
   b. (2) Estoppel based on detrimental reliance.
   i. When one spouse relies on the other spouse’s oral promise, the breaching spouse will be estopped from asserting the writing requirement.

Question 19

Defenses to Enforcement of Prenup

Answer 19

i. Voluntariness – A prenuptial agreement must be entered into voluntarily in order for it to be valid. Voluntariness requirements:
1. The agreement must be written in the language in which the party challenging the agreement is proficient; AND
2. Challenging party was given at least 7 days to sign it; AND
3. Must be represented by independent legal counsel at the time it was signed. OR, if party was not represented by independent legal counsel, was fully informed in writing of the terms and basic effect of the pre-nuptial agreement.
ii. Unconscionability – Two Areas: (1) spousal support, and (2) anything else
1. Spousal support – A provision in a premarital agreement regarding spousal support is unenforceable if:
a. (1) The challenging party was not represented by independent legal counsel at the time it is signed, OR
b. (2) The provision is unconscionable at the time of enforcement. (i.e. not fair to someone who is in need of spousal support)
i. Unconscionability will be determined at the time of trial
ii. Thus, there is essentially NO waiver of spousal support
2. Anything Else – Agreement is unenforceable if:
a. Unconscionable when made, AND
b. No full and fair disclosure of other party’s property or financial obligations, AND
c. Right to disclosure not waived in writing, AND
d. The party challenging had NO adequate knowledge of the other party’s property or financial circumstances.
3. By statute, unconscionability is a matter of law to be decided by the court, not a question for the jury.

Question 20

Transmutation

Answer 20

A transmutation is an agreement between married persons that changes the character of property owned by one of the parties, or the parties jointly, during marriage.

c. AFTER 1985 (Two Step Analysis) – Oral transmutations not permitted.
i. FIRST STEP – Analyze Elements
1. There must be a WRITING, (other than a will prior to death)
2. SIGNED by spouse whose interest is adversely affected, AND
3. The writing must EXPLICITLY STATE that a change in ownership is being made
a. i.e. an unequivocal intent to give up all rights and interest to the property.
4. Gifts Exception – Gifts of tangible property of a personal nature, which are not substantial in value, taking into account the circumstances of the marriage, do NOT have to be in writing. (i.e. jewelry, clothes)
ii. SECOND STEP – Undue Influence Presumption
1. Rule – A presumption of undue influence arises when one spouse has gained an advantage over the other in a transaction.
2. To overcome the presumption, the spouse who gained has the burden of proving that the non-gaining party knew what they were doing and did so voluntarily.

Question 21

SP Reimbursement upon Death

Answer 21

Lucas Case (Death) – If you put SP into a joint asset, it is presumed to be a gift to CP. The only way to overcome this presumption is by a writing to the contrary.

Question 22

SP Reimbursement upon Divorce

Answer 22

ii. Anti-Lucas Legislation (Divorce) – Two anti-Lucas statutes on the ownership and reimbursement issues when the issue arises on divorce or separation
b. REALIZE that if property is NOT taken in joint and equal form, the anti-Lucas statutes DO NOT apply

Reimbursement – For purposes of division on divorce or legal separation, a spouse who deeds SP into jointly titled property is entitled to a right of reimbursement for the fair market value of the property at the time it was deeded into joint form. The reimbursement will be without interest for contributions to down payment, improvements, or principle reduction of that property. But NO reimbursement for SP used to pay interest on mortgage, taxes, dividends, insurance, or maintenance.

Reimbursement applies, dollar for dollar, and back off the top (spouse gets his money back from a declining value asset). UNLESS there is a waiver, this is applicable.

Question 23

Business

Answer 23

iRule Statement: Pereira and Van Camp established the two accounting methods used by the courts when community funds or labor enhance the value of one spouse’s SP. They only apply when one spouse brings a SP business into the marriage and devotes community labor to the management of the business.
Bar Tip: If the business is established after DOM, then it’s presumed CP. Mention Pereira/Van Camp but do not do analysis; indicate that those cases do not apply.

Question 24

Pereira

Answer 24

(Personal Skills plus Efforts)

Rule Statement: Under the Pereira accounting method, in which the increase in value of a business is due to the managing spouse’s labor, the SP investment is given a reasonable rate of return and the remainder is deemed CP.

When to apply: Where spouse’s time, skill, and effort are major factors in growth of business. Look for instances where spouse contributed creative ideas to develop new techniques, and/or worked long hours and only drew modest salary.

Formula – Pay interest (legal rate of 10% annum) on value of business at time of the marriage to SP, the rest to CP.

Ex: W owned a software company worth $100,000 at time of marriage. At divorce, company worth $4 million. Here, if H and W were married for 10 years, W is entitled to the initial $100,000 (value of business at time of marriage) + $100,000 in interest (10 years x 10,000 (interest at 10%)). Therefore, the business is 5% her SP ($200,000 / $4,000,000) and the balance is CP.

COMMUNITY WILL ULTIMATELY BENEFIT!!!

Question 25

Van Camp

Answer 25

[Valuable Company or asset]

Rule Statement: Under the Van Camp accounting method, where the increase in value of the business is not due to the managing spouse’s services but the character of the business, the community receives a fair market salary less any family expenses already paid and the remainder is SP.

When to Apply – Use where capital investment was the major factor in the business’s growth, and the spouse’s skills and efforts were a lesser factor. Look for instances where the spouse was paid a substantial salary or bonuses (i.e. meaning the community has already been compensated)

Formula – Reasonable value of your services per year while working (x) the # of years the spouse worked while married (–) the compensation the community has already received = community component

a. Reasonable value – How much would executives in similar positions make.

Ex: W owned software company worth $100,000 at time of marriage. At divorce, company worth $4 million. If H and W were married for 10 years, and the market rate for executives in comparable positions was $100,000 and living expenses were $80,000/year, the value of the community component would be $200,000. The business would be 5% CP ($200,000 / $4,000,000) and the balance would be W’s SP.

$100,000 x 10 years = $1,000,000 value of community labor
- $80,000 x 10 years = - $800,000 family expenses paid from CP
community component: $200,000

SEPARATE PROPERTY WILL ULTIMATELY!!!

Question 26

Stock Options

Answer 26

Determining what portion of the option is CP and what portion is SP depends on the primary intent of the employer in granting the option.

Need to choose which of TWO FORMULAS to use:

Hug Formula
i. CP% = Date of Employment (–) Date of Separation/
Date of Employment (–) Date of Vesting
ii. When used: Stock options were awarded primarily to reward participating spouse for his past services as a form of deferred compensation. The idea is that this was due to performance in past or a community effort.

Nelson Formula:
i. CP % = Date of Granting (–) Date of Separation/
Date of Granting (–) Date of Vesting
ii. When used: Stock options awarded primarily to encourage participating spouse to remain with the company.

Question 27

Debt

Answer 27

Before Marriage (pre-marital debts) – Community estate is liable for ALL debts created before or during the marriage.

Question 28

Fiduciary Duties – EVERY CASE will include a breach of FD!!!

Answer 28

Spouse’s Fiduciary Duty – spouses are subject to fiduciary duties that arise from their confidential relationship, imposing a duty of the highest good faith and fair dealing with each other.

a. Undue Influence – If a spouse gains an advantage from a transaction, a presumption of undue influence arises. That spouse has the burden to prove that she did not breach her fiduciary duty.
b. Investments – A grossly negligent and reckless investment of community funds is a breach of a spouse’s fiduciary duty. (i.e. investing in a start-up company)
c. Note – No rule to act in a practical manner (i.e. May blow all CP on Johnny Walker Blue)

Question 29

Fiduciary Duty Owed While Suing One Another

Answer 29

Each spouse owes fiduciary duties to each other from the DOS to the date of distribution of assets to all activities that affect the assets and liabilities of the other party
a. Disclose all assets and investment opportunities

Question 30

Remedy for Breach of FD

Answer 30

a. Offsetting Payment – A non-breaching party is entitled to one-half of, or an amount equal to one half of, any asset undisclosed or transferred in breach of the fiduciary duty, plus attorneys fees and court costs for any breach.
b. Punitive Damages – If a spouse can prove by clear and convincing evidence that a party breached a fiduciary duty with fraud, malice or oppression, he may recover punitive damages

Question 31

Will containing change of character of a property of alive person

Answer 31

By statute, in any proceeding commenced before the death of the person who made the will or created a revocable trust in which the person makes a statement regarding a change in the characteristic of the property, a statement in a will or revocable trust as to the character of the property is not admissible as evidence of transmutation.