Community Property Flashcards
COMMUNITY PROPERTY
- Community Property
COMMUNITY PROPERTY
- Community Property
California is a community property state. All property acquired by either spouse during marriage and before permanent separation, while domiciled in California, is presumptively community property. Community property derives from the earnings of either spouse from their skill, labor, and talent.
Separate property is property acquired before marriage, after permanent separation, or acquired during marriage by gift, bequest, devise, or descent, including the rents, issues and profits therefrom.
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California is a community property state. All property acquired by a married person during marriage and before a permanent physical separation, while domiciled in California, is presumptively community property (CP), owned equally by both spouses.
Separate property (SP) is defined as: (1) property owned before marriage; (2) property acquired after permanent separation;(3) property acquired during marriage by gift, bequest, devise, or descent; and (4) the rents, issues, and profits derived from SP.
Key Issues:
- Time of Acquisition: The date of acquisition is crucial. Earnings during marriage are CP; earnings before marriage or after separation are SP.
- Source of Acquisition: The ‘source rule’ traces the character of property to its origin.
- Commingling: If SP and CP funds are mixed in an account, the funds may become hopelessly commingled and the entire account may be treated as CP, unless the SP component can be traced. Direct tracing and exhaustion are two methods.
- Transmutation: Spouses can change the character of property (from CP to SP, SP to CP, or one spouse’s SP to the other’s SP) by agreement. For transmutations after 1984, a written express declaration is required (Family Code § 852).
- Community Presumption: Property acquired during the marriage is presumed CP.
- Special Presumptions: Special rules apply to certain types of property (e.g., personal injury awards, business interests, education/training, real property in other states). Jointly titled property has special presumptions.
- Permanent Separation: Requires both physical separation and intent not to return to the marriage.
The burden of proof is on the party claiming that property acquired during marriage is not CP to rebut the community property presumption.
COMMUNITY PROPERTY
- Separate Property
COMMUNITY PROPERTY
- Separate Property
California is a community property state, but each spouse also has separate property. Separate property is defined as:
- all property owned by the spouse before marriage;
- all property acquired by the spouse during marriage by gift, bequest, devise, or descent;
- all property acquired after permanent separation; AND
- the rents, issues, and profits derived from separate property.
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California is a community property state, but each spouse retains separate property. Separate property is defined by California Family Code § 770 as:
- All property owned by the person before marriage.
- All property acquired by the person during marriage by gift, bequest, devise, or descent.
- The rents, issues, and profits of separate property.
- All property acquired by the person after permanent separation.
Key Considerations:
- Presumption: Property acquired during marriage is presumptively community property. The spouse claiming it is SP has the burden of proof (preponderance of the evidence).
- Tracing: To rebut the community property presumption, the spouse claiming SP must trace the property to a separate property source (e.g., pre-marital funds, inheritance).
- Commingling: If separate property funds are mixed with community property funds and it becomes impossible to trace the separate property contribution, the entire asset may be treated as community property.
- Transmutation: Spouses can change the character of property (SP to CP, CP to SP) by agreement. For transmutations after 1984, a written express declaration is required (Family Code § 852).
- Special Situations: Specific rules apply to personal injury awards, disability payments, business interests, and other types of property.
- Characterization: Depends on when the property right arose.
The characterization of property as separate or community has significant consequences for division upon divorce, debt liability, and management and control.
COMMUNITY PROPERTY
- Characterization of Property
COMMUNITY PROPERTY
- Characterization of Property
The characterization of an asset as CP or SP depends on the time of acquisition, the source of funds used to acquire it, and any actions by the parties that may have altered its character.
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Characterization Process: Determining whether an asset is CP or SP involves analyzing:
- Time of Acquisition: Was it acquired before marriage (SP), during marriage and before separation (presumptively CP), or after separation (SP)?
- Source of Acquisition: Was it acquired with CP funds, SP funds, or a combination? Tracing is used to determine the source.
- Actions of the Parties:
- Commingling: Mixing SP and CP funds. If SP funds can be traced, they retain their SP character. If tracing is impossible due to commingling, the entire asset is generally CP.
- Transmutation: Spouses can change the character of property by agreement. Post-1984 transmutations require a written express declaration (Family Code § 852).
- Presumptions Property acquired during the marriage and before separation is presumptively CP.
- Special Rules Apply to education, personal injury, etc.
The party asserting that property acquired during marriage is SP has the burden of rebutting the community property presumption by a preponderance of the evidence.
COMMUNITY PROPERTY
- Source Rule
COMMUNITY PROPERTY
1. Source Rule
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- Property acquired with:
- community property = community property
- separate property = separate property
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- CA applies the ‘source rule’ to determine the character of property.
- Under this rule, property acquired with community property funds is community property, and property acquired with separate property funds is separate property.
- The character of the funds used to acquire the asset determines the character of the asset.
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CA’s community property system relies heavily on the ‘source rule’ to determine the character of assets. The source rule dictates that the character of an asset (as community property or separate property) is determined by the character of the funds used to acquire it.
Key Principles:
- Community Funds: Assets acquired with CP funds are CP.
- Separate Funds: Assets acquired with SP funds are SP.
- Mixed Funds: Assets acquired with a combination of CP and SP funds are characterized pro rata, in proportion to the contributions from each source.
- Tracing: To establish a separate property interest, the party claiming SP must trace the asset back to a separate property source (eg, pre-marital funds, inheritance, gift).
- Commingling: If SP and CP funds are mixed in an account, the SP retains its character if it can be traced. If tracing is impossible due to commingling, the entire asset is treated as CP.
- Time of Acquisition
Examples:
- A car purchased with earnings during marriage (CP) is CP.
- A car purchased with funds inherited by one spouse (SP) is SP.
- A car purchased with a down payment from an inheritance (SP) and a loan paid off with community earnings (CP) would have both SP and CP interests, determined pro rata.
The source rule operates in conjunction with the general presumption that property acquired during marriage is community property. The burden is on the party claiming separate property to rebut this presumption by tracing to a separate property source.
COMMUNITY PROPERTY
- Tracing
COMMUNITY PROPERTY
1. Tracing
- A spouse claiming that an asset acquired during marriage is SP has the burden of rebutting the CP presumption by tracing the asset back to a SP source.
- Requires demonstrating, through adequate records, that SP funds were used to acquire the asset.
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A spouse claiming that an asset acquired during marriage is SP has the burden of rebutting the CP presumption by a preponderance of the evidence. This is most often done through tracing the asset back to a SP source.
Tracing Methods:
- Direct Tracing: The preferred method. It requires clear and convincing evidence (documentary records) showing a direct link between the SP funds and the purchase of the asset. Requires sufficient records and SP funds being available.
- Exhaustion Method: Used when direct tracing is impossible due to commingling (mixing of SP and CP funds). It requires showing that all CP funds in the account were exhausted by CP expenses at the time of the asset’s purchase, leaving only SP funds available. Family expenses are presumed to be paid from CP funds first.
Commingling: If SP and CP funds are mixed in an account, the SP funds retain their character if they can be traced. However, if the funds are so commingled that it is impossible to trace the SP contribution, the entire asset is treated as CP. Mere commingling, alone, does not automatically transmute SP into CP; it’s the inability to trace that leads to the CP characterization.
Burden: The burden is on the spouse claiming SP to provide sufficient evidence to trace the asset to a SP source. Recitals in deeds or titles are generally not sufficient, alone, to overcome the CP presumption.
COMMUNITY PROPERTY
- Commingling
COMMUNITY PROPERTY
1. Commingling
- Commingling occurs when SP and CP are mixed, such as in a bank account.
- Mere commingling does not automatically change the character of SP.
- However, if the SP and CP contributions are so intermixed that it is impossible to trace the SP funds, the entire commingled asset is presumed to be CP.
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- Commingling is the mixing of SP and CP funds or assets.
- This often occurs when funds are deposited into a single bank account or when SP and CP are used to purchase an asset.
California law adheres to the following principles regarding commingling:
- Commingling Alone Does Not Transmute: The mere act of mixing SP and CP does not automatically change the character of the SP. The SP retains its character if it can be traced.
- Tracing is Key: The crucial issue is whether the SP contribution can be identified and traced.
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Tracing Methods:
- Direct Tracing: The preferred method. It requires clear documentary evidence (eg, bank statements, receipts) showing a direct link between the SP funds and the specific asset or portion of an asset.
- Exhaustion Method: Used when direct tracing is impossible. It requires demonstrating that all CP funds in the commingled account were exhausted by community expenses at the time of the relevant transaction, leaving only SP funds. The family expense presumption (that family expenses are paid first from CP funds) is crucial here.
- Burden of Proof: The party claiming a SP interest in a commingled asset has the burden of proving, by a preponderance of the evidence (though some cases suggest a clear and convincing standard for direct tracing), that the SP contribution can be traced.
- Presumption of CP: If tracing is impossible due to inadequate records or the nature of the mixing, the entire commingled asset is treated as CP. This is a consequence of the general presumption that property acquired during marriage is CP.
Example: If a spouse deposits an inheritance (SP) into a joint account containing community earnings, and numerous deposits and withdrawals are made over time without clear records, it may become impossible to trace the original SP contribution. In such a case, the entire account would likely be deemed CP.
COMMUNITY PROPERTY
- Family Expenses Presumption
COMMUNITY PROPERTY
- Family Expenses Presumption
When determining whether separate or community property funds were used to pay for family expenses, California applies a presumption that family expenses are paid with community property funds first. Only if community funds are exhausted are separate property funds presumed to have been used.
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In California community property law, a crucial presumption arises when analyzing commingled funds and expenditures: the family expense presumption. This presumption states that expenses for family living expenses (food, housing, clothing, recreation, medical care, etc.) are presumed to be paid from community property funds first, before any separate property funds are used. This presumption applies even if both community and separate funds are available in a commingled account.
Purpose: The presumption reflects the policy that community earnings are primarily intended to support the family.
Rebuttal: The presumption can be rebutted by the party claiming separate property was used. This typically requires demonstrating, through clear and convincing evidence (often through the exhaustion method of tracing), that all community property funds in the account were exhausted at the time the specific expense was paid. Simply showing that separate property funds were available is not sufficient.
Examples:
- If a commingled account contains both CP and SP, and a family vacation is paid for from the account, the vacation is presumed to have been paid for with CP funds first.
- If a spouse claims a car purchased from a commingled account is SP, they might attempt to use the exhaustion method to show that all CP funds had been spent on family expenses before the car was purchased, leaving only SP funds available.
Connection to Tracing: The family expense presumption is often crucial in applying the exhaustion method of tracing. The party claiming SP must show not only that SP funds were available, but that CP funds were not available because they had been used for family expenses.
COMMUNITY PROPERTY
- Transmutation
COMMUNITY PROPERTY
- Transmutation
Under California law, spouses may change the character of property (transmute it) from separate to community, community to separate, or from one spouse’s separate property to the other spouse’s separate property. However, strict requirements apply to ensure the validity of such transmutations.
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California Family Code § 852 governs the transmutation of property – changing its character from separate to community, community to separate, or from one spouse’s separate property to the other’s.
Requirements (Post-1984 Transmutations):
- Writing: The transmutation must be in writing.
- Express Declaration: The writing must contain an express declaration of intent to change the character of the property. This requires clear and unambiguous language showing that the adversely affected spouse understands they are giving up property rights.
- Consent/Acceptance: Made, joined in, consented to, or accepted by the spouse whose interest is adversely affected.
Exceptions and Limitations:
- Gifts: Section 852 does not apply to gifts of clothing, wearing apparel, jewelry, or other tangible articles of a personal nature that are used solely or principally by the recipient spouse and are not substantial in value, taking into account the circumstances of the marriage (Family Code § 852(c)).
- Wills: A statement in a will is not admissible as evidence of transmutation before the death of the testator (Family Code § 853).
- Fraud, Duress, Undue Influence: Even a validly executed written transmutation can be set aside if it was obtained through fraud, duress, or undue influence.
Pre-1985 Transmutations: For transmutations that occurred before January 1, 1985, the law was much more lenient. Oral agreements and even implied transmutations based on conduct were potentially valid. However, the bar exam is far more likely to test the post-1985 rules.
Policy: The strict requirements of § 852 are designed to prevent fraud, undue influence, and disputes over the character of marital property.
COMMUNITY PROPERTY
- End of the Economic Community
COMMUNITY PROPERTY
- End of the Economic Community
The period during which property is presumptively community property ends when the economic community ends. This requires: (1) permanent physical separation of the spouses; and (2) intent by at least one spouse not to resume the marital relationship. Both elements must be present.
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The economic community in California ends, terminating the accumulation of community property, when there is a final break in the marital relationship. This requires both:
- Permanent Physical Separation: The spouses must be living apart. While separate residences are strong evidence, they are not absolutely required. The key is whether the parties’ conduct demonstrates a physical separation.
- Intent Not to Resume the Marital Relationship: At least one spouse must have the present, subjective intent to end the marriage permanently. This intent must be objectively manifested through words or actions. A mere contemplation of separation or a temporary separation is not enough.
Factors: Courts consider various factors to determine the date of separation, including:
- Date spouse expressed intent to end marriage to the other spouse
- Statements and conduct of the parties.
- Living arrangements (separate residences, separate bedrooms).
- Cessation of sexual relations.
- Commingling of funds (or lack thereof).
- Filing for divorce or legal separation.
- Notifying friends and family of the separation.
Consequences: Once the economic community ends, the earnings and accumulations of each spouse are their separate property. The date of separation is a crucial finding of fact with significant consequences for property division.
COMMUNITY PROPERTY
- Property Creditors May Reach to Satisfy Debts
COMMUNITY PROPERTY
- Property Creditors May Reach to Satisfy Debts
Community property is liable for all debts incurred by either spouse before or during the marriage, regardless of which spouse incurred the debt. A spouse’s separate property is generally liable only for that spouse’s debts. However, a spouse’s separate property may be liable for debts incurred by the other spouse for the necessaries of life.
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In California, the liability of community and separate property for debts depends on when the debt was incurred and, in some cases, the nature of the debt:
- Community Property (CP): CP is liable for all debts incurred by either spouse before or during marriage, regardless of which spouse incurred the debt or controls the property (Family Code § 910). This includes both contract and tort debts.
- Separate Property (SP): A spouse’s SP is generally liable only for that spouse’s debts.
Exceptions and Special Rules:
- Premarital Debts: CP is liable for a premarital debt of either spouse. However, the earnings of the non-debtor spouse during marriage are protected from the other spouse’s premarital debts if those earnings are held in a separate account to which the debtor spouse has no access and are not commingled (Family Code § 911).
- Necessaries of Life: A spouse’s SP is liable for debts incurred by the other spouse for “necessaries of life” (food, shelter, medical care, etc.) while living together (Family Code § 914). This is a form of personal liability.
- Tort Liability:
- If the tort occurred while the debtor spouse was acting for the benefit of the community, the liability is first satisfied from CP, and then from the debtor spouse’s SP.
- If the tort occurred while the debtor spouse was not acting for the benefit of the community, the liability is first satisfied from the debtor spouse’s SP, and then from CP.
- Child/Spousal Support: Specific rules govern the use of CP and SP to satisfy support obligations.
- Reimbursement: In some cases, if CP is used to satisfy a SP debt (or vice versa), the non-debtor spouse or the community may be entitled to reimbursement.
The order in which property is levied upon to satisfy a debt often depends on the timing and character of the debt. A creditor’s ability to reach certain property may also be affected by exemptions under state and federal law.
COMMUNITY PROPERTY
- Quasi-Community Property
COMMUNITY PROPERTY
- Quasi-Community Property
California’s quasi-community property statute (Family Code § 125) applies to property acquired by spouses while domiciled in a non-community property state that would have been community property if acquired while domiciled in California. Upon divorce or death, quasi-community property is treated as if it were community property.
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California Family Code § 125 defines quasi-community property (QCP) as all real or personal property, wherever situated, acquired by either spouse while domiciled outside of California that would have been community property had the acquiring spouse been domiciled in California at the time of acquisition. This concept protects spouses who move to California from common-law property states, ensuring they receive similar property rights upon divorce or death as they would have had if they acquired the property in California.
Key Elements:
- Acquired Outside California: The property must have been acquired while the couple was not domiciled in California.
- “Would Have Been” CP: The crucial test is whether the property would have been classified as CP if acquired in California. (e.g., earnings during marriage).
- Applies at Divorce/Death: QCP is treated as CP only for purposes of division upon dissolution, legal separation, or death of the acquiring spouse. It does not become CP during the marriage for other purposes (e.g., management and control).
- Real Property Limitation: Out of state real property may be considered quasi-community property, where court will make orders to transfer.
Examples:
- Wages earned by a spouse while living in New York (a common-law property state) are QCP.
- A house purchased in a common-law state with earnings during marriage is QCP.
- Property owned by a spouse before marriage remains that spouse’s separate property, even if the couple moves to California; it is not QCP.
- Property acquired by gift or inheritance during marriage is separate property, even if acquired while living outside California; it is not QCP.
The non-acquiring spouse has a mere expectancy in quasi-community property during the marriage, which vests upon dissolution, legal separation, or death of the acquiring spouse.
COMMUNITY PROPERTY
- Equal Rights of Spouses to Manage Property
COMMUNITY PROPERTY
- Equal Rights of Spouses to Manage Property
California Family Code § 1100(a) provides that each spouse has equal management and control of community personal property, with full power of disposition. Family Code § 1102 generally requires both spouses to join in transactions involving community real property.
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California Family Code §§ 1100 and 1102 establish the principle of equal management and control of community property. This means both spouses have equal rights to manage, control, and dispose of community assets.
Specific Rules:
- Community Personal Property (§ 1100): Each spouse has full power to manage and dispose of community personal property as if it were their separate property.
- Community Real Property (§ 1102): Generally, both spouses must join in any transaction to lease (for more than one year), sell, convey, or encumber community real property. A unilateral conveyance by one spouse is voidable by the other spouse within one year.
- Business Exception (§ 1100(d)): A spouse operating a business that is all or substantially all community personal property has primary management and control of that business, but must give prior written notice to the 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.
- Gifts (§ 1100(b)): Neither spouse may make a gift of community personal property, or dispose of community personal property for less than fair and reasonable value, without the written consent of the other spouse.
Fiduciary Duty (§ 721): Spouses owe each other a fiduciary duty in the management and control of community property, akin to the duty between business partners. This includes duties of loyalty, care, and full disclosure.
Remedies for Breach: If one spouse violates the rules of management and control, the other spouse may have various remedies, including:
- An accounting.
- A claim for breach of fiduciary duty.
- Setting aside the unauthorized transaction (especially in real property cases).
- Reimbursement to the community.
- Attorney’s fees and costs.
Policy: The equal management and control rules are designed to ensure that both spouses participate in decisions affecting community assets and to protect each spouse from the unilateral actions of the other.
COMMUNITY PROPERTY
- Transfers to Third-Parties
COMMUNITY PROPERTY
- Transfers to Third-Parties
California Family Code § 1100(a) gives each spouse management and control over community personal property, generally allowing either spouse acting alone to transfer it. However, Family Code § 1102 requires both spouses to join in transfers (sale, lease for over a year, encumbrance) of community real property. Furthermore, neither spouse may make a gift of community property without the written consent of the other spouse (Family Code § 1100(b)).
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California law balances the principle of equal management and control of community property (CP) with the need to protect each spouse from unauthorized transfers of CP to third parties. The key statutes are Family Code §§ 1100, 1102, and 721.
- Community Personal Property (§ 1100): Either spouse acting alone generally has full power to manage, control, and dispose of community personal property.
- Exception - Gifts (§ 1100(b)): A gift of CP, or a disposition for less than fair and reasonable value, requires the written consent of the other spouse. The non-consenting spouse can set aside the gift during the marriage, or, after the marriage ends, can recover their one-half interest in the property (or its value).
- Exception - Business (§ 1100(d)): A spouse operating a community personal property business has primary management, but must give prior written notice to the other spouse for major transactions (sale, lease, etc.) involving substantially all the business personal property.
- Community Real Property (§ 1102): Both spouses must join in any instrument leasing (for more than one year), selling, conveying, or encumbering community real property.
- Remedy: A unilateral transfer by one spouse is voidable by the non-consenting spouse, typically within one year of the recording of the transfer. The non-consenting spouse can sue to set aside the transaction.
- Fiduciary Duty (§ 721): Spouses owe each other the highest duty of good faith and fair dealing in the management and control of CP. A breach of this duty can lead to various remedies, including an accounting, damages, and setting aside the transaction.
Policy: These rules protect the non-consenting spouse’s interest in community property while also providing some flexibility for ordinary transactions. The stricter rules for real property reflect its greater value and permanence.
COMMUNITY PROPERTY
- Personal Injury Awards & Settlements
COMMUNITY PROPERTY
- Personal Injury Awards & Settlements
Personal injury damages received by a married person in California are characterized based on when the cause of action arose. If the cause of action arose during marriage and before separation, the damages are generally community property. If the cause of action arose before marriage, after separation, or during marriage but was a gift or inheritance to the injured spouse, the damages are the separate property of the injured spouse.
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In California, the characterization of personal injury awards and settlements depends on when the cause of action arose, not when the money is received (Family Code § 781):
- During Marriage and Before Separation: If the cause of action arises during marriage and before separation, the damages are community property (CP). This reflects the idea that the injured spouse’s lost earnings and earning capacity during marriage would have been CP.
- Before Marriage or After Separation: If the cause of action arises before marriage or after permanent separation, the damages are the separate property (SP) of the injured spouse.
- During Marriage, Gift: The damages are the separate property of the injured spouse.
Apportionment Upon Dissolution (Family Code § 2603): At divorce, community property personal injury damages are generally assigned to the injured spouse, unless the interests of justice require a different division. The court considers factors such as:
- Economic needs of the parties.
- Time elapsed since the recovery of the damages.
- Any other relevant facts.
- May award up to one half of the damages to the other spouse.
Reimbursement:
- If community property funds were used to pay expenses related to the injury (medical bills, etc.), the community is entitled to reimbursement, regardless of whether the award is ultimately characterized as CP or SP.
- If one spouse’s SP was used to pay CP expenses, that spouse is due reimbursement.
Commingling: If SP personal injury damages are commingled with CP funds in a way that makes tracing impossible, the damages may lose their SP character and become CP.
Identity of Tortfeasor:
- 3rd Party Tortfeasor- When cause of action arises dictates.
- Interspousal Tort- SP
Policy: The rules are designed to balance the community’s interest in earnings during marriage with the injured spouse’s right to compensation for their personal suffering and losses.
COMMUNITY PROPERTY
- Jointly Titled Property
COMMUNITY PROPERTY
- Jointly Titled Property
Under California Family Code § 2581, property acquired by spouses during marriage in joint form, including joint tenancy, tenancy in common, or tenancy by the entirety, is presumed to be community property upon dissolution of marriage. This presumption can only be rebutted by specific statutory methods.
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California Family Code § 2581 creates a presumption that property acquired by spouses during marriage in joint form (joint tenancy, tenancy in common, etc.) is community property for purposes of division upon dissolution or legal separation. This is a significant departure from the common law rule that the form of title controls.
Rebutting the Presumption (Anti-Lucas Legislation): The § 2581 presumption can be rebutted only by:
- A clear statement in the deed or other documentary evidence of title that the property is separate property and not community property; or
- A written agreement (which may need to meet the requirements of a valid transmutation under Family Code § 852) between the parties that the property is separate property.
Oral agreements or tracing to separate property funds alone are insufficient to rebut this presumption. This effectively overrules the prior case law (Marriage of Lucas) which allowed tracing to SP to rebut a joint title.
Lucas and Anti-Lucas Legislation (Family Code § 2640):
- Marriage of Lucas: Held that, absent an agreement to the contrary, a separate property contribution to the acquisition of community property was a gift to the community, and the contributing spouse was not entitled to reimbursement.
- Family Code § 2640 (Anti-Lucas): Overruled Lucas regarding reimbursement. It provides that a spouse who contributes separate property to the acquisition of community property is entitled to reimbursement for those contributions without interest, unless they made a written waiver of the right to reimbursement. This reimbursement is for down payments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property. It does not include payments for interest, taxes, or insurance. This reimbursement right is often referred to as a “2640 reimbursement.”
Therefore, even if the § 2581 presumption is not rebutted (meaning the property is CP), a spouse may still be entitled to reimbursement under § 2640 for traceable SP contributions to the acquisition of that property.
COMMUNITY PROPERTY
- Lucas/Anti-Lucas
COMMUNITY PROPERTY
- Lucas/Anti-Lucas
The Marriage of Lucas case held that separate property contributions to community property were presumed to be a gift to the community, with no right to reimbursement. This was overturned by Family Code § 2640, which now provides that a spouse who contributes separate property to the acquisition of community property is entitled to reimbursement for those contributions, without interest or appreciation, unless the spouse has made a written waiver of the reimbursement right.
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California Family Code § 2640, enacted in response to the Marriage of Lucas decision, provides a crucial right of reimbursement for separate property contributions to the acquisition of community property.
Marriage of Lucas (Pre-§ 2640): This case held that, absent an agreement to the contrary, a spouse’s contribution of SP to the acquisition of CP was presumed to be a gift to the community, with no right to reimbursement upon dissolution.
Family Code § 2640 (Anti-Lucas): This section overrules Lucas on reimbursement. It states that a spouse who contributes SP to the acquisition of CP is entitled to reimbursement for those contributions, without interest or appreciation. This reimbursement is limited to:
- Down payments.
- Payments for improvements.
- Payments that reduce the principal of a loan used to finance the purchase or improvement.
Reimbursement specifically excludes payments for interest, taxes, insurance, and maintenance.
Tracing: The contributing spouse must trace the contributions to their separate property source.
Written Waiver: The right to reimbursement can be waived, but the waiver must be in writing.
Interaction with § 2581 (Joint Title): It’s crucial to distinguish § 2640 from § 2581. § 2581 creates a presumption that property acquired in joint form during marriage is CP. Even if property is characterized as CP under § 2581, § 2640 still allows reimbursement for SP contributions to the acquisition of that CP. § 2581 deals with characterization; § 2640 deals with reimbursement.
Policy: § 2640 prevents unjust enrichment of the community at the expense of the separate property contributor.
COMMUNITY PROPERTY
- Fiduciary Duties
COMMUNITY PROPERTY
- Fiduciary Duties
Under California Family Code § 721, spouses have fiduciary duties to each other in transactions between themselves and in the management and control of community property, similar to the duties between business partners. This requires the highest good faith and fair dealing, and neither spouse may take unfair advantage of the other.
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California Family Code § 721(b) establishes that spouses have fiduciary duties to each other in the management and control of community property (CP), mirroring the duties between nonmarital business partners. This fiduciary relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This builds upon the general duties in managing CP outlined in Family Code § 1100.
Specific Duties:
- Full Disclosure: Spouses must provide full and accurate disclosure of all assets and debts, and all material facts related to community property transactions.
- Loyalty: Spouses must act in the best interests of the community, avoiding self-dealing or placing their own interests above those of the community.
- Care: Spouses must manage community property with reasonable care, prudence, and diligence. This does not mean they are liable for mere mistakes in judgment, but they must act with the care a reasonably prudent person would exercise.
- Accounting: Spouses must be prepared to provide an accounting of community property transactions.
Remedies for Breach (Family Code § 1101): If one spouse breaches their fiduciary duty, the other spouse may have various remedies, including:
- Damages: Compensation for any losses suffered by the community due to the breach.
- Accounting: A court-ordered accounting of community property assets and transactions.
- Setting Aside Transactions: In some cases, a transaction made in violation of fiduciary duties can be set aside (e.g., a gift of CP without consent).
- Award of a Greater Share of CP: The court may award a greater share of the community property (up to 50% of an undisclosed asset to the non-breaching party).
- Attorney’s Fees and Costs: The breaching spouse may be ordered to pay the other spouse’s attorney’s fees and costs.
COMMUNITY PROPERTY
- Pereira/Van Camp
COMMUNITY PROPERTY
- Pereira/Van Camp
When community labor is used to enhance the value of a separate property business during marriage, California courts apply either the Pereira or Van Camp accounting method to apportion the business’s growth between separate property and community property. Pereira is used when the increase is primarily due to community efforts, while Van Camp is used when the increase is primarily due to the inherent nature of the separate property.
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In California, when a spouse operates a separate property business during marriage, and community labor contributes to the business’s increase in value, the court must apportion that increase between separate property and community property. This is because the community is entitled to the fruits of community labor. Courts use two main accounting methods, Pereira and Van Camp, to achieve this apportionment.
- Pereira Accounting: Favored when the increase in value is primarily attributable to the community efforts, skill, talent, and labor of the managing spouse. The formula allocates a fair rate of return (e.g., a reasonable interest rate) to the initial SP investment, and the remainder of the business’s value is deemed CP.
- Van Camp Accounting: Favored when the increase in value is primarily attributable to the inherent nature of the separate property itself, market factors, capital appreciation, or the efforts of others (employees, etc.), rather than the managing spouse’s community efforts. The formula allocates a fair salary to the community labor, and the remainder of the business’s value is deemed SP. Family expenses paid from the business are deducted from the community portion.
Factors Influencing Choice of Method:
- The primary source of the business’s growth (community labor vs. inherent characteristics/market factors).
- Whether the community was fairly compensated for the spouse’s efforts during the marriage.
- The nature of the business.
- Evidence of comparable salaries in the industry.
The court has discretion to choose the method that will achieve substantial justice between the parties. It is not bound to strictly apply either formula and can even blend the approaches if necessary.
COMMUNITY PROPERTY
- Acquisitions of Property Using Credit
COMMUNITY PROPERTY
- Acquisitions of Property Using Credit
In California, property acquired on credit during marriage and before separation is presumed to be community property. To rebut this presumption, the party claiming separate property must show that the lender’s primary intent in extending the credit was to rely on the borrower’s separate property for repayment, not on community assets or the borrower’s general creditworthiness.
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In California, the character of property acquired on credit during marriage and before permanent separation is presumptively community property. This presumption stems from the fundamental principle that earnings during marriage are community property, and a spouse’s general creditworthiness is largely based on those community earnings.
Intent of the Lender Test: To rebut the community property presumption, the spouse claiming separate property must prove that the lender’s primary intent in extending the credit was to rely on the borrower’s separate property for repayment. This is often referred to as the “intent of the lender” test.
Evidence of Lender’s Intent: Relevant evidence may include:
- Loan Application: Did the application list only separate property assets as collateral or as the source of repayment?
- Credit Report: Did the lender rely primarily on the borrowing spouse’s separate property credit history?
- Lender Testimony: Testimony from the loan officer about the basis for extending credit.
- Loan Documents: Do the loan documents specify that the loan is secured by separate property?
Commingling: If loan proceeds (even if initially characterized as separate property based on the lender’s intent) are commingled with community property funds in a way that makes tracing impossible, the loan proceeds (and any assets acquired with them) may become community property.
Policy: The “intent of the lender” test is designed to protect the community’s interest in assets acquired during marriage, while also recognizing that a lender may, in some circumstances, legitimately rely solely on a spouse’s separate property as the basis for extending credit.
COMMUNITY PROPERTY
- Putative Spouses and Quasi-Marital Property
COMMUNITY PROPERTY
- Putative Spouses and Quasi-Marital Property
California recognizes the concept of a putative spouse: a person who has a good faith belief that their marriage is legally valid, even though it is actually void or voidable. Property acquired during a putative marriage, which would have been community property had the marriage been valid, is termed ‘quasi-marital property’ and is divided as if it were community property upon termination of the relationship.
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California recognizes the doctrine of putative spouse to protect the reasonable expectations of a person who believes in good faith that they are validly married, even if the marriage is legally defective. To be a putative spouse, a person must have a subjective good faith belief that their marriage is valid. This belief must be both honest and objectively reasonable, based on the circumstances.
Quasi-Marital Property: Property acquired during the putative marriage that would have been community property or quasi-community property had the marriage been valid is deemed ‘quasi-marital property.’ This property is treated as community property upon dissolution of the relationship (separation, annulment, or death). This means it is subject to equal division.
Comparison to Legal Marriage: A putative spouse has many of the same rights as a legal spouse regarding property division, spousal support, and inheritance, but only with respect to quasi-marital property. They do not have rights to the other party’s separate property.
Limitations: The putative spouse doctrine does not create a valid marriage. It only provides equitable relief regarding property and related rights. Once the putative spouse learns of the invalidity of the marriage, the ‘putative’ status ends, and further property acquisition is not quasi-marital property. The relationship can end when either party learns of the impediment.
COMMUNITY PROPERTY
- Premarital Agreement
COMMUNITY PROPERTY
- Premarital Agreement
Under the Uniform Premarital Agreement Act (UPAA), as adopted in California (Family Code §§ 1600 et seq.), prospective spouses may enter into a premarital agreement that alters or waives community property rights. The agreement must be in writing, signed by both parties, and must meet specific requirements for enforceability.
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California’s Uniform Premarital Agreement Act (UPAA), codified in Family Code §§ 1600 et seq., governs the validity and enforceability of premarital agreements (also known as prenuptial agreements). These agreements allow prospective spouses to contract out of the default community property rules and define their own property rights and obligations during marriage and upon dissolution.
Requirements for Enforceability:
- Writing: The agreement must be in writing.
- Signatures: It must be signed by both parties.
- Voluntariness: The agreement must be entered into voluntarily, free from duress, fraud, or undue influence. The is presumed involuntary unless the court finds:(a) The party against whom enforcement is sought was represented by independent legal counsel at the time of signing the agreement (or waived representation in a separate writing); and
(b) At least seven calendar days elapsed between the time that party was first presented with the agreement and advised to seek independent legal counsel, and the time the agreement was signed; and
(c) If unrepresented by legal counsel, the party against whom enforcement is sought was fully informed of the terms and basic effect of the agreement as well as the rights and obligations they were giving up by signing the agreement, with the explanation documented in writing and delivered prior to signing; and
(d) No duress, fraud, or undue influence; and
(e) Parties were proficient in the language of the explanation and the agreement; and
(f) Any other factors the court deems relevant - Not Unconscionable: The agreement, and particular provisions within, cannot be unconscionable. Unconscionability is determined at the time of execution. Provisions limiting spousal support are subject to review for unconscionability at the time of enforcement.
- Full Disclosure: There must be full and fair disclosure of assets and liabilities by both parties, or a valid waiver of such disclosure.
Limitations:
- Cannot adversely affect child support.
- Provisions promoting divorce are generally against public policy and unenforceable.
- Spousal support waivers, or limitations are subject to unique rules, needing representation.
The burden of proving that a premarital agreement is unenforceable is on the party challenging it.
COMMUNITY PROPERTY
- Student Loan Debt
COMMUNITY PROPERTY
- Student Loan Debt
Under California Family Code § 2641, educational loans incurred during marriage are treated as the separate obligation of the spouse who incurred the debt, and are not divided as community property upon divorce. The community may be entitled to reimbursement for community contributions to education or loan payments, with interest, if the education substantially enhanced the spouse’s earning capacity.
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California Family Code § 2641 governs the treatment of student loan debt upon dissolution of marriage. The general rule is that a loan incurred during marriage is assigned to the spouse who incurred the debt as their separate obligation. This is a departure from the usual rule of equal division of community debts. The rationale is that the benefits of the education (increased earning capacity) primarily inure to the educated spouse.
Community Reimbursement:
- Substantial Enhancement of Earning Capacity: If community property funds were used to pay for education expenses or loan payments, and the education substantially enhanced the earning capacity of the educated spouse, the community is entitled to reimbursement, with interest, for those contributions.
- Reduced need: If community property funds were used to pay for education expenses or loan payments, reimbursement can also happen if there is a reduced need.
Exceptions to Separate Assignment: The court has discretion to deviate from the separate assignment rule in the following circumstances:
- Community Benefit: If the community has substantially benefited from the education. There are rebuttable presumptions: If less than 10 years have passed since the education, a substantial benefit is presumed; if more than 10 years have passed, a substantial benefit is presumed not to have occurred.
- Reciprocal Education: If the other spouse also received community-funded education or training.
- Reduced Need for Support: If the education enabled the educated spouse to engage in gainful employment that reduced the need for spousal support that would otherwise have been required.
- Extraordinary Circumstances
Pre-Marital Loans: A loan incurred before marriage is the separate debt of the incurring spouse. However, if community funds are used to pay down the principal on a pre-marital loan, the community may acquire a pro tanto interest in the separate property asset purchased with the loan (if any), similar to the Moore/Marsden rule for real property. This does not apply to the loan itself; it applies to any asset purchased with the loan.
COMMUNITY PROPERTY
- Goodwill of a Business
COMMUNITY PROPERTY
- Goodwill of a Business
In California, the goodwill of a business, to the extent it is developed during marriage and before separation, is considered community property and must be valued and divided upon dissolution of marriage. This applies even if the business itself is the separate property of one spouse.
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In California, the goodwill of a business, to the extent it is developed during marriage and before separation, is community property (CP) and is subject to valuation and division upon dissolution of marriage. This applies even if the business itself is the separate property (SP) of one spouse.
Definition of Goodwill: Goodwill represents the expectation of continued public patronage and the value of the business beyond its tangible assets. It includes intangible factors like reputation, brand recognition, customer relationships, and location.
Valuation: There is no single, fixed rule for valuing goodwill. Courts may use various methods, including:
- Market Sales Valuation: Comparing the business to sales of comparable businesses in the open market.
- Capitalization of Excess Earnings: This method calculates the present value of the future earnings that are attributable to goodwill (i.e., earnings that exceed what a comparable professional would earn without the goodwill).
- Buy-Sell Agreement:
Separate Property Business: If the business itself is separate property, the court must apportion the overall increase in the business’s value (including goodwill) between SP and CP, using the Pereira or Van Camp accounting methods. Pereira is used when the increase is primarily due to community efforts; Van Camp is used when the increase is primarily due to the inherent nature of the SP business. The goodwill is valued and divided only to the extent it is attributable to the community portion of the business.
Professional Practices: Goodwill can exist in professional practices (law firms, medical practices, etc.) and is often a significant asset in divorce cases involving professionals.
The court has broad discretion to choose the valuation method that is most appropriate and equitable under the circumstances.
COMMUNITY PROPERTY
- Reimbursement for Property Acquisitions & Improvements
COMMUNITY PROPERTY
- Reimbursement for Property Acquisitions & Improvements
When separate property is used to acquire or improve community property, or when community property is used to acquire or improve separate property, California law may provide for reimbursement to the contributing estate, depending on the specific circumstances. Key statutes include Family Code § 2640 (Anti-Lucas) and case law addressing improvements and other contributions.
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California law recognizes that during marriage, separate property (SP) and community property (CP) funds may be used for various acquisitions and improvements, creating the need for reimbursement rights upon dissolution.
Key Reimbursement Scenarios:
- SP Contributions to CP Acquisitions (Family Code § 2640 - Anti-Lucas):
- A spouse who contributes SP to the acquisition of CP is entitled to reimbursement, without interest or appreciation, for:
- Down payments.
- Payments for improvements.
- Payments that reduce the principal of a loan used to finance the purchase or improvement.
- Reimbursement does not include payments for interest, taxes, insurance, or maintenance.
- The reimbursement right can be waived in writing.
- Tracing is required to prove the SP contribution.
- A spouse who contributes SP to the acquisition of CP is entitled to reimbursement, without interest or appreciation, for:
- CP Contributions to SP Acquisitions (Moore/Marsden, Frick):
- Moore/Marsden: When CP funds are used to pay down the principal of a mortgage on a SP residence acquired before marriage, the community acquires a pro tanto interest in the property’s appreciation during marriage.
- Frick: When CP funds are used for improvements to one spouse’s SP, the community is due reimbursement.
- SP Contributions to Other Spouse’s SP:
- Generally presumed to be a gift, with no right to reimbursement absent an agreement to the contrary. This presumption can be rebutted by evidence of a contrary intent.
- CP funds to pay SP education debt:
- The community is entitled to reimbursement.
Policy: These reimbursement rules are designed to prevent unjust enrichment and to fairly allocate property interests when SP and CP are used in combined transactions.
Limitations: Reimbursement rights are typically addressed at dissolution of marriage; they do not create an immediate ownership interest during the marriage.
COMMUNITY PROPERTY
- Moore/Marsden
COMMUNITY PROPERTY
- Moore/Marsden
When community property funds are used to pay down the principal balance of a mortgage on a separate property residence acquired before marriage, California applies the Moore/Marsden rule. This rule grants the community a pro tanto interest in the property, calculated in proportion to the amount of community funds used to reduce the principal balance of the loan, relative to the total purchase price. Appreciation is apportioned.
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California’s Moore/Marsden rule addresses the situation where community property (CP) funds are used to pay down the principal balance of a mortgage on a separate property (SP) residence acquired before marriage. The rule recognizes that while the residence itself remains SP, the community acquires a pro tanto interest in the property’s appreciation during marriage proportionate to the CP contributions to principal reduction.
Formula:
- Community Property Interest: (Community Property Principal Payments / Original Purchase Price)- Appreciation During Marriage + Community Property Principal Payments
- Separate Property Interest: (Separate Property Principal Payments / Original Purchase Price)- Appreciation During Marriage + Separate Property Principal Payments + Down Payment + pre-appreciation.
Key Considerations:
- Principal Payments Only: The calculation focuses on principal reduction, not interest, taxes, or insurance payments.
- Appreciation During Marriage: Only appreciation that occurred during the marriage is subject to apportionment. Pre-marital and post-separation appreciation is entirely SP.
- Refinancing: Refinancing can complicate the calculation, and the source of funds used to pay down the refinanced loan must be carefully traced.
- Frick Rule: California also addresses improvements.
Policy: The Moore/Marsden rule prevents the unjust enrichment of the separate property owner at the expense of the community, recognizing the community’s contribution to the equity in the property. The Frick rule does the same.
Limitations: The rule is typically applied to residences acquired before marriage. Different rules (e.g., tracing) apply to property acquired during marriage with a mix of SP and CP funds.
