Community Property

Question 1

Community Property - Defined

Answer 1

California is a community property state. Accordingly, all property acquired during marriage is presumed to be community property, unless acquired by gift or inheritance, in which case it is presumptively separate property.

Question 2

Community Property - Exam Approach

Answer 2

1. Set forth the Community Property definition
2. Before characterizing and discussing each asset, if the parties were not married in California, you must address either the quasi-marital property or quasi-community property issue.
   a. In all other respects, an essay on QMP is analyzed the same as a community property question.
3. To determine the effect of the community property presumption, discuss each asset or debt separately, and in the order they appear in the call of the question.
4. Ask the following questions about each item of property:
   a. Who acquired the property?
   b. How was it acquired?
   c. When was it acquired?

Question 3

Separate Property - Defined

Answer 3

If the asset is acquired by inheritance or gift by one of the spouses, it is presumptively that spouse’s separate property, no matter when the asset was acquired.

Question 4

Putative Spouse - Generally

Answer 4

A putative spouse is one who believed in good faith that a void or voidable marriage was valid.

All property acquired during the putative marriage is labeled as quasi-marital property

Discuss the putative spouse’s rights as if they were a legal spouse, and leave open the rights of a non-putative spouse, or treat them the same.

Question 5

Unmarried Cohabitants - Generally

Answer 5

If the parties are not putative spouses, but just unmarried cohabitants, then generally the community property rules do not apply.

The only argument the unmarried cohabitants have against each other is either express contract, implied contract, or some form of an unjust enrichment theory.

Question 6

Quasi-Community Property - Generally

Answer 6

Quasi-community property is property acquired by one of the spouses that would have been community property had the spouse been domiciled in California or any other community property state at the time of the acquisition.

Until divorce or death, the quasi-community property remains the separate property of the acquiring spouse.

Question 7

Quasi-Community Property - Divorce or Death

Answer 7

At divorce, or on the death of the acquiring spouse, quasi-community property is treated the same as community property.

If the non-acquiring spouse dies first, the quasi-community property remains the separate property of the acquiring spouse.

Question 8

Quasi-Community Property - Property Purchased Outside the State While Married

Answer 8

Property acquired in a non-community property state by spouses while they are domiciled in a community property state is community property if it would otherwise be community property if acquired in California.

Question 9

Pensions, Stock Bonuses, and Options - Generally

Answer 9

Bonuses and pensions are treated as wages, and any such bonuses and pensions earned during marriage are presumptively community property.

Question 10

Pensions, Stock Bonuses, and Options - Pension Time Rule

Answer 10

In determining the character of stock bonuses, pensions, and stock options acquired in part during marriage and in part outside of marriage, the court should apply the Pension Time Rule.

To determine the community interest, the total amount of stock or other compensation or benefits is multiplied by a fraction:

1. The numerator is the total number of years of marriage in which stock or other compensation is earned; and
2. The denominator is the total number of years in which stock or other compensation is earned until payable.

Question 11

Personal Injury Damages - Generally

Answer 11

Personal injury damages are treated as community property if the personal injury cause of action arises during marriage, and separate property if before marriage or post-separation.

If the other spouse caused the injury, all damages are separate property.

Question 12

Life Insurance - Generally

Answer 12

Life insurance proceeds are generally CP.

Question 13

Life Insurance - Term Life Insurance

Answer 13

At death or divorce, a court will characterize the proceeds as the character of the last premium. If the last premium was paid with CP, the surviving spouse gets 1/2 and the beneficiary gets 1/2 of the proceeds.

Question 14

Life Insurance - Whole Life Insurance

Answer 14

At death or divorce, a court will characterize the proceeds as community property in proportion to the number of premium payments that were made with community funds.

If the policy was paid only with community funds, a surviving spouse gets 1/2 of the proceeds, and the other 1/2 goes to the named third-party beneficiary.

Question 15

Disability Pay - Generally

Answer 15

Disability pay is characterized by what it is intended to replace:

1. Earnings during marriage (community property); or
2. Earnings before or after marriage (separate property).

Question 16

Business Valuation - Generally

Answer 16

When a business is developed entirely during a marriage, it is entirely community property.

Question 17

Business Valuation - Community Property Invested in Separate Property Business or Investment

Answer 17

The Van Camp and Pereira rules apply when community property enhances the value of separate property.

Question 18

Business Valuation - Pereira Rules

Answer 18

The Pereira approach assumes that a spouse’s personal time, effort, character, energy, ability, and capacity are factors that caused an increase in the value of the separate-property business during the marriage.

The court will determine how much of the increase in the business value was due to capital appreciation of the initial investment with a fair rate of return, and allocate any excess to the community.

SP = Value of the SP Business at the Time of Marriage + (Value of the SP Business at the Time of Marriage × 10% × Years of Marriage)

CP = Fair Market Value of the Business at Divorce – SP

Question 19

Business Valuation - Van Camp Rules

Answer 19

When either the character of the business, or external circumstances is primarily responsible for the increase in value, a court will apply the Van Camp rules.

The Van Camp approach allocates the reasonable value of the spouse’s efforts to community property, with the balance going to separate property.

To calculate the community-property portion, the court estimates the reasonable (market rate) salary for the working spouse’s services less family expenses, which are presumed to be paid from community property. The remainder is classified as separate property.

CP = Reasonable Value of Services x Years During Marriage – Family expenses

SP = FMV of the Business at Divorce – CP

If the exam merely mentions the salary or services, but doesn’t give any specific numbers, just discuss the Van Camp rules without doing any calculations.

Question 20

Business Valuation - Goodwill

Answer 20

Business goodwill, the difference between a business’ total value and the value of its assembled physical assets, is treated as community property to the extent it is earned or developed during marriage.

Businesses are valued using either market sales valuation of comparable businesses, or based on capitalization of excess earnings, based on the standard for the particular industry.

Question 21

Education and Training - Generally

Answer 21

Education and training acquired during marriage are not treated as community property.

Question 22

Education and Training - Right to Reimbursement

Answer 22

Absent an agreement to the contrary, the community has an equitable right of reimbursement, with interest, when community funds are:

1. Used either to pay for education or training or used to repay a loan used for education or training; and
2. The education or training substantially enhances the earning capacity of the educated party.

Question 23

Education and Training - Substantial Benefit Based on Length of Marriage

Answer 23

There is a rebuttable presumption that the community has already substantially benefited when more than 10 years have elapsed between the obtaining of a degree and the divorce.

Conversely, there is a rebuttable presumption that the community has not substantially benefited when less than 10 years have elapsed between the obtaining of a degree and the divorce.

Question 24

Education and Training - Reduction of Spousal Support

Answer 24

Reimbursement to the community may also be reduced if the education reduces the need for spousal support. This alternative should also be discussed—but many students often forget to do so.

Question 25

Prenuptial Agreements - Generally

Answer 25

Agreements made before marriage do not require consideration, but they must be in writing, and signed by both parties.

Premarital agreements will not be enforced if they “promote divorce.”

Question 26

Prenuptial Agreements - Enforceability

Answer 26

An agreement is not enforceable if it was not entered into voluntarily. A prenuptial agreement is voluntary if:

1. The party against whom enforcement is sought was represented by independent counsel, or expressly waived that requirement;
2. At least seven days before execution, the agreement is presented to the party and the party is advised to seek independent counsel; and
3. If they are still unrepresented by counsel, the party is:
   a. fully informed in writing of the terms of the agreement and the rights she would be giving up, and
   b. was proficient in the language of the agreement and the explanation, and
   c. the agreement was not executed under duress, fraud, or undue influence.

Question 27

Prenuptial Agreements - Unconscionability

Answer 27

A party could set aside a prenuptial agreement that is unconscionable when executed if:

1. The party did not have adequate knowledge of the wealth of the other party; and
2. Didn’t waive their right to disclosure of such wealth.

Question 28

Transmutation Agreements - Generally

Answer 28

Transmutation agreements are agreements made during marriage to alter the character of property

These agreements are analyzed differently depending on whether the agreement was made before or after January 1, 1985.

Question 29

Transmutation Agreements - Pre-1985

Answer 29

If the spouses agreed to transmute their property before January 1, 1985, they could do so orally, and courts inferred the intent to transmute from the parties’ behavior.

Even a reference on a tax return to “our” house was sufficient evidence of the intent to transmute from separate property to community property.

Question 30

Transmutation Agreements - 1985 through the Present

Answer 30

Under the anti-Lucas legislation, all agreements entered into after January 1, 1985 to transmute property must be in writing in the form of an express declaration.

The declaration must expressly state that a change in the characterization or ownership of the property is intended and must be made.

Because of the presumption that all property acquired during marriage is community property, merely taking title in one spouse’s name will not overcome the presumption.

Question 31

Anti-Lucas Legislation - Upon Divorce

Answer 31

When spouses take or acquire title in joint form during their marriage, under the anti-Lucas legislation, all jointly held property, including property held in joint tenancy after January 1, 1985 and in tenancy in common after January 1, 1988, is presumed community property at divorce.

Any separate property contributions to the acquisition of the property shall be reimbursed to the separate property contributor without interest or appreciation.

Question 32

Anti-Lucas Legislation - Upon Death

Answer 32

Upon death, the property will remain separate, unless the parties executed a collateral written agreement or a separate statement in the documentary evidence of title that the property is “separate property and not community property.”

Question 33

Lines of Credit and Loans - Generally

Answer 33

Courts determine the character of property acquired on credit by the lender’s intent to rely on one of the following:

1. The purchaser’s separate property; or
2. A community asset or income stream.

In the absence of evidence proving that the seller “primarily relied” on the purchaser’s separate property in extending credit, courts generally apply the presumption that property acquired during the marriage is community property.

Question 34

Tracing of Funds - Generally

Answer 34

There are two presumptions involved in tracing commingled funds used to purchase an asset:

1. Family expenses are presumed to be paid first from community funds; and
2. When separate funds are used to pay family expenses, they are presumed to be a gift to the community.

There are two methods of tracing, Exhaustion and Sufficient Funds

Question 35

Tracing of Funds - Exhaustion

Answer 35

Under the exhaustion method, the separate-property proponent must prove that community property funds in the account were already exhausted by the payment of family expenses at the time that the asset was purchased.

In essence, if the asset was purchased solely with separate funds, it is categorized as separate property.

Question 36

Tracing of Funds - Sufficient Funds

Answer 36

Under the “sufficient funds” tracing method, the separate-property proponent must prove that there were sufficient separate-property funds available at the time that the asset was purchased and that the intent was to use the separate-property funds to purchase the asset.

Question 37

Community Payments on Purchase Price of Separate Property - Generally

Answer 37

An issue arises when a spouse brings separate property into the marriage, and continues to make payments on the purchase price of the property with community property funds.

In that case, the community interest is proportional to the amount by which the community payments reduce the principal. Any payments that go toward interest, taxes, or insurance are not considered.

Question 38

Community Payments to Improve Separate Property - Generally

Answer 38

When a spouse makes community payments to improve their own separate property, the community is entitled to the greater of:

1. The reimbursement amount; or
2. The amount by which the improvement increases the value of the separate asset.

When a spouse makes community payments to improve the other spouse’s separate property, the traditional rule was that the community made a gift to the other spouse’s separate property.

The modern rule tends to reimburse the community in the absence of any contrary agreement.

Question 39

Sale of Community Real Property Without Other Spouse’s Consent - Generally

Answer 39

Both spouses must execute any instrument transferring real property. A transfer to a good faith purchaser without knowledge of the marital relationship is presumed valid.

The non-consenting spouse can overcome this presumption only if they:

1. Bring an action to void the transaction within one year of the recording of the transfer; and
2. Demonstrate that they did not in any way consent to or participate in the transfer. If successful, the transfer may be voided, but only if the purchase price is returned.

Question 40

Sale of Community Personal Property Without Other Spouse’s Consent - Generally

Answer 40

A spouse cannot sell household furnishings, clothing and the like without the other spouse’s consent.

If that is done, the community is entitled to reimbursement.

Question 41

Breach of Spousal Fiduciary Duty - Generally

Answer 41

In the management and control of community assets, each spouse must act in accordance with the general rules governing fiduciary relationships which govern the actions of persons in confidential relationships.

Deliberate dissipation of community property, recklessness, and grossly negligent conduct that results in the loss of community property are actionable, and can result in the requirement that the culpable spouse reimburse the community for any loss.

Question 42

Debts and Obligations - Generally

Answer 42

A creditor may reach any property over which a debtor has the legal right of management and control.

There are two major issues:

1. Which property is liable for the debts; and,
2. For tort and criminal debts, in what order are those types of property available to satisfy the debt?

Question 43

Debts and Obligations - Types of Debts

Answer 43

Contract debts are incurred at the time the contract is made.

Tort debt arises when the tort is committed, but a non-tortious spouse is not personally liable for the tortious spouse’s torts, unless they would be liable even if the parties were not married.

Criminal liability (for restitution, or fines) is treated in the same way as tort liability.

Child and spousal support from a previous marriage is treated as a debt incurred before marriage.

Question 44

Debts and Obligations - Order of Satisfaction

Answer 44

The order of satisfaction rules only apply to tort debts and criminal fines. With contractual debts, the creditor is not limited to an order of satisfaction.

If a tort that gives rise to the debt is for the benefit of the community, then the debt will first be satisfied from the community property, then, if necessary, from the debtor spouse’s separate property.

If the tort is not for the benefit of the community, then the debt will first be satisfied from the debtor spouse’s separate property, and then, if necessary, from the community property.

Question 45

Debts and Obligations - Bad Faith Exception

Answer 45

If a spouse expends funds in bad faith (for example, the spouse sold real property without other spouse’s consent and then spent it, or gambled away community funds), the community is entitled to offset or reimbursement.

However, these are not as strict as a prudent investor standard, so a merely negligent investment will not result in a requirement of reimbursement.

Question 46

Debts and Obligations - Child Support Exceptions

Answer 46

Child support from a prior marriage is considered prior debt, and payable from community property.

If, at the time of payment, separate property was available to pay the support, the community is entitled to reimbursement.

If the non-indebted spouse put their earnings into a separate bank account in the spouse’s sole name to which debtor spouse had no access, those funds cannot be reached to pay past child support.

Question 47

Debts and Obligations - Debts Before Marriage

Answer 47

All the community property, and the debtor’s separate property, is liable for a contractual debt incurred by the debtor spouse before marriage, but the separate property of a non-debtor spouse is never liable.

Prior marriage spousal support and child support payments, if paid from community property when the debtor spouse’s separate property was available to make the payments, must be reimbursed to the community on divorce.

Question 48

Debts and Obligations - Debts During Marriage

Answer 48

All the community property, and the debtor’s separate property, is liable for a debt incurred by the debtor spouse during marriage.

The separate property of a non-debtor spouse is only liable if the debt is contractual and is for “necessaries” such as living expenses (food, shelter, medicines, and the like).

Question 49

Survivor/Widow’s Election - Generally

Answer 49

When the decedent spouse attempts to transfer the surviving spouse’s interest as well as their own, an election is forced.

The surviving spouse must elect to take either: (1) the community property share they are entitled to, or (2) the distribution of property available through the will - not both.

Question 50

Federal Preemption - Generally

Answer 50

When state community property law is inconsistent with Federal law, federal law prevails. To determine if there is an issue, there is a two-part test:

(1) Does the property right conflict with the express terms of federal law?
(2) If yes, does the state law cause sufficient injury to federal objectives to require preemption?

Federal homestead rights, armed forces life insurance benefits, U.S. Savings Bonds, social security, railroad retirement benefits, and VA disability benefits preempt community property law.

However, federal civil service and foreign service retirement benefits are subject to community property law, and ERISA pension benefits in a divorce are divisible under community property law.