Community Property Rules Flashcards
SEPARATE PROPERTY
- Property owned by either spouse before marriage;
- Property acquired during marriage by gift, bequest, will, or inheritance;
- Property acquired during marriage with the expenditure of separate funds; and
- The rents, issue and profits derived from separate property.
COMMUNITY PROPERTY
GENERAL RULE: Property other than separate property acquired by either spouse during the marriage.
THE MOST COMMON:
o Salary or wages earned by either spouse; and
o The income from community assets.
COMMUNITY PROPERTY PRESUMPTION: All assets acquired during the marriage are presumptively community property.
o Burden is on the party attempting to show it is separate property to prove it is not community property.
o Ways to overcome: Showing an agreement between the parties, or proving title taken in a manner inconsistent with community property.
DOMESTIC PARTNERS - Applies to registered domestic partners upon filing a declaration partnership with the Secretary of State.
o Available to same sex couples and elderly opposite sex couples receiving social security benefits.
o Community property rules will be the same as if couple were married.
ECONOMIC COMMUNITY
DURATION
o The economic community lasts throughout the duration of the marriage.
o It ends through:
• Permanent physical separation; AND
• Intent not to resume the marital relations.
NOTE: Maintaining the outward appearance of a marriage will still be considered a marriage by the courts. Thus, until divorce, the earnings are community property.
COMMUNITY PROPERTY AND DIVORCE
Absent a property settlement agreement, all community property must be divided equally upon divorce.
SPOUSAL AND CHILD SUPPORT: Disparity in earning power can only be considered as to spousal support (alimony) and child support.
EXCEPTIONS:
Economic Circumstances Exception: If economic circumstances warrant awarding certain assets wholly to one spouse (and each spouse ends up with half of all community property in terms of total economic value) this is considered a non-pro rata division that will be allowed.
o Still needs to be a 50-50 division so one spouse may get a whole asset but the other needs to be cashed out (example – the family residence).
o Closely held corporation (one will get it).
o Pensions: Awarding all to one and giving other assets to the other
COMMUNITY PROPERTY NOT DIVIDED AT DIVORCE: Courts will retain jurisdiction – the property will be divided equally, unless circumstances require unequal division.
LIFETIME TESTAMENTARY GIFT OF COMMUNITY PROPERTY
Neither spouse can make a gift of community property without the other spouse’s written consent, because the power to manage is not equal to the power to give it away.
o If husband gives community property to someone other than wife:
• Wife can set aside the gift in its entirety, or
• Upon divorce, Wife can take equal offsetting CP assets to recover her one-half community property interests.
o If the Wife learns about the gift after the Husband’s death, then she can:
• Set aside her half of the community property interest, or
• Recover from either the donee or Husband’s estate.
EXCEPTION: US government savings bonds, where federal law trumps and there is federal preemption. There is no recovery in community property if there is a US savings in the name of someone other than the spouse.
ACQUISITIONS ON CREDIT DURING THE MARRIAGE
COMMUNITY CREDIT PRESUMPTION: Funds borrowed during marriage and goods purchased during the marriage are presumptively community property.
CREDITOR INTENT TEST: Borrowed funds are classified according to intent of the lender (i.e., where is the lender going to look for satisfaction of the debt? Whose money is primarily used?).
o If the lender primarily relies on Husband or Wife’s general standing in the community or relying primarily on one; personal creditworthiness or reputation: The note is a community property obligation.
o If the lender primarily relies on a mortgage on land owned by Husband or Wife as separate property: The note would be a separate property obligation to the extent of that amount relied upon by the creditor (the rest would be community property).
o Credit standing: Community Property.
SPOUSAL FUDICIARY DUTY
Spouses are subject to fiduciary duties that arise from their confidential relationship, imposing the highest duty of good faith and fair dealings with each other.
o If one spouse gains an advantage under the transaction, there is a presumption of undue influence and they have the burden of proof to show that they did not breach that duty.
NOTE: Grossly negligent and reckless investment of community funds is now considered a breach of fiduciary duty.
PREMARITAL AGREEMENTS AND COMMUNITY PROPERTY
Must be in writing, signed by both parties.
o Oral agreements are invalid, unless: there is full performance of the oral agreement, and estoppel based on detrimental reliance.
o Consideration not required.
o Can agree to almost anything, except: Cannot limit the other party’s contribution to child support.
DEFENSES TO ENFORCEMENT:
a. Formalities for Signing: Party must have independent legal counsel when signed; Given seven days or more to sign; and If party did not have independent counsel, they must be fully informed in writing of the basic terms and effect of the agreement.
b. Unconscionable: Agreements may be unenforceable if:
o Unconscionable when made;
o There was no full and fair disclosure of other party’s property or financial obligations;
o Right to disclosure not waived in writing; AND
o Party challenging had no adequate knowledge of other party’s property or financial circumstances.
MARITAL AGREEMENTS AND COMMUNITY PROPERTY
BEFORE 1985: Oral agreement was permitted, whether by express agreement or agreement in fact.
- *AFTER 1985 – RULES:**
1. Must be in writing;
2. Signed by the spouse whose interests are adversely affected;
3. Must explicitly state that a change in ownership is being made;
4. Applies to all transmutations; and
5. Typical exceptions to the writing requirement DO NOT apply (such as estoppel or part performance).
6. Consideration not required.
7. EXCEPTION: For gifts of a personal nature that are not of substantial value (based on circumstances of the marriage – will differ based on each couple and their wealth).
PROPERTY ACQUIRED BEFORE 1975: “MARRIED WOMEN’S SPECIAL PRESUMPTION”
Where community property was used to take written title in a married woman’s name before 1975, and the title did not indicate community property or joint tenancy was intended, the court presumptively treated the property as the Wife’s separate property.
o NOTE: This is the exception to the general principle that title taken in one spouse’s name does not overcome the community property presumption.
o This particular presumption cannot be overcome by a third-party bona fide purchaser who buys in reliance on the titled property.
o The presumption is rebuttable as between Husband and Wife.
o If title is taken in both the Husband’s and Wife’s names, but not as husband and wife or joint tenants, then the property is presumptively one-half Wife’s separate property, and one-half community property.
TAKING TITLE IN JOINT AND EQUAL FORM
DEFINE “JOINT AND EQUAL FORM”: The title lists both spouses’ names.
MARRIAGE OF LUCAS:
o Applies to property purchased with both community and separate funds prior to January 1, 1987.
o Presumption: Community property, if spouses took in joint and equal form. Any separate property used in the purchase is considered a gift.
ANTI-LUCAS LEGISLATION:
o Applies to property purchased with both community and separate funds after to January 1, 1987.
o Presumption: Depends on how marriage ends.
• For purposes of death, if a couple took title to an asset in joint and equal form, any separate property used in the purchase is presumed to be a gift. No reimbursement or a separate ownership interest in the property unless there was an oral or written agreement.
• For purposes of divorce, if a couple took title to an asset in joint and equal form, any separate property used in the purchase is reimbursed to the contributor without interest. The asset is presumed to be community property unless there is a writing to the contrary.
INSTALLMENT PURCHASE PRE-MARRIAGE
SCENARIO: Occurs when an installment is made prior to the marriage (thus separate property) and debt is paid down with community property after marriage.
PRO-RATION RULE: Community takes a pro-rata portion of the property – the amount (percentage) of principal debt reduction attributable to the use of community funds (think: how much did the community pay off?):
o Numerator: Principal debt reduction attributable to community property.
o Denominator: Total purchase price – the fraction is the percentage that is community property.
WHOLE LIFE INSURANCE POLICIES: Apply the pro-ration rule— how many of the payments were paid with community funds and how many premium payments were made before. (Same as above numerator and denominator.)
TERM LIFE INSURANCE POLICY: The last premium payment determines the character.
USING COMMUNITY FUNDS TO IMPROVE SEPARATE PROPERTY
FIXTURES: Real property rule, the improvements made to separate property with community property become part of the property and that expenditure does NOT change the ownership character of the house (so it remains separate property).
ASSETS: When an asset is held in joint and equal form, and separate property is used to improve community property, upon divorce the separate property contributor is entitled to reimbursement without interest of any of the down payment, improvement, or principal payments.
COMMINGLED BANK ACCOUNTS
Commingling separate property funds with community property funds does not transform or transmute that separate property into community property – the burden is on the party claiming it is separate property to prove that each asset claimed was purchased using separate funds.
RECAPITULATION METHOD: Does not show that community property funds were unavailable when each asset was purchased.
FAMILY EXPENSE PRESUMPTION: Presumed that expenditures for family expenses (food, housing, clothes, recreation) were made with community funds to the extent they were available even if separate funds were available.
o If expenses are paid for with separate property funds, then the presumption is that it was a gift to the community (and thus no reimbursement).
o To defeat this presumption: show an agreement between husband and wife.
o Methods to satisfy burden that separate funds were used: Exhaustion method (all community funds were used up at the time) and direct tracing method (separate funds were available and the spouse intended those funds to be used to buy the asset).
COMMON CHARACTERIZATION PROBLEMS: BUSINESSES
SCENARIO: Occurs when a business owned before a marriage increases in value during the marriage. There are two tests – apply both.
PERAIRA TEST: Use when personal skills, time, and effort were the reason for the growth of the business (examples: their creative idea, new technique, worked long hours, drew a modest salary).
o Formula: Pay the interest to the separate property; the rest is community property. Interest is:
o Legal rate of 10% on the value of the business at the time of the marriage.
VAN CAMP TEST: Use where the capital investment was the major factor in the business’s growth, and spouse’s skill and efforts were less of a factor (look for instances where the spouse drew a substantial salary and large bonus because it will show the community was compensated).
o Formula: Pay the value of community labor; the rest will be separate property. Community labor is:
o Value of spouse’s services at market rate (meaning similar positioned executives) compensation;
o Minus the family expenses paid with community funds; and
o That amount will be the community component the rest is separate property.
COMMON CHARACTERIZATION PROBLEMS: PENSION BENEFITS
Employee Retirement Benefits: Community property - look at what was acquired during marriage, regardless if they are vested at divorce.
o Use the proration rule:
• Numerator = years of service while married.
• Denominator = total years employed to retirement
If The Person Is Not Eligible For Retirement At The Time Of Divorce, Either:
o “When and if received”: If and when received, s/he gets his or her share of the benefits.
o “Cash her out”: Award assets of equal value now
If The Person Could Have Retired At The Time Of Divorce But Does Not:
o If s/he could have retired, that means the benefits have matured, so s/he cannot elect out of duty to avoid paying spouse.
o The non-worker spouse cannot leave his or her interest in the plan to someone else, unless the couples get divorced. If the non-worker spouse dies before the participant, there is no interest left (ERISA governs, which is federal).
Disability Retirement Benefits: Disability retirement benefits and workers compensation are treated as a wage replacement and is classified according to when received and when earned
COMMON CHARACTERIZATION PROBLEMS: STOCK OPTIONS
Gives an employee an option to purchase shares of company stock at a set price on a certain date in the future.
Typically provide that they are not vested, and the company must employ the option holder when the option becomes exercisable.
If the option is awarded during marriage but does not vest until after the economic community has ended, the proration formula that is used to determine which part of the option is community property and which is separate property will depend on the primary intent of the employer in granting the option.
MARRIAGE OF HUG: The starting point for both the numerator and the denominator is the date of employment. That fraction is then multiplied by the number of shares of stock that can be purchased under the option. Use this when the stock options are awarded for past services as a form of deferred compensation.
MARRIAGE OF NELSON: The starting point of both the numerator and denominator is the date the options are granted.
COMMON CHARACTERIZATION PROBLEMS: GOODWILL OF PROFESSIONAL PRACTICE
Community property subject to division upon divorce - Those qualities that generate income beyond that derived from:
o The professional’s labor; and
o Reasonable return on capital and physical assets.
COMMON CHARACTERIZATION PROBLEMS: EDUCATIONAL EXPENSES
Professional Degree Earned: The professional degree earned is separate property of the educated spouse.
Enhanced Spouses Earning Capacity: Entitled only to reimbursement for costs of education if it enhanced that spouses earning capacity.
Educational Expenses Incurred Before Marriage: If educational expenses were incurred before marriage and loans are paid with community funds after marriage, reimbursement is available.
Defenses To Reimbursement Of Community Estate For Educational Expenses:
o Community has already substantially benefited from the earnings of the educated spouse (if more than 10 years elapse it is a presumption that they have); or
o The other spouse also received a community property - funded education.
TORT LIABILITY AND COMMUNITY PROPERTY
Recovering Assets: Community Property is subject to the tort liability of either spouse.
o What money creditors are able to recover first:
• If Wife was performing an act for the benefit of the community, the liability is first satisfied from community property, and then from separate property.
• If Wife was not performing a task on behalf of the community, it is separate property first, then community property.
• Judgment creditor can never reach the Husband’s separate property in this case
CONTRACT LIABILITY AND COMMUNITY PROPERTY
Equal management powers: Each spouse has equal management and control over all community property, and thus has full power to buy or sell community property and contract debts without the other spouse’s consent.
EXCEPTIONS:
o Personal belongings exception: One spouse cannot sell or encumber personal property used in family dwellings (furniture, furnishing, clothing) without the other spouse’s written consent. If this happens, the transaction is voidable (at any time!).
o Business exception: A spouse who operates a business interest that is all or substantially all community personal property has primary management and control over the business; thus, s/he can act alone in most transactions.
• Exceptions: If they sell, lease or otherwise encumber substantially all, then they must have given written notice to the other spouse
QUASI-COMMUNITY PROPERTY
Property acquired while the couple was domiciled in a non-community property state, which would be community property if they were in CA, will be considered quasi-community property.
Real Property: Counts as quasi-community property. If the real property is located in another state, the court will award assets of equal value to the other spouse (or require a conveyance).
PROPERTY ACQUIRED OUTSIDE THE MARITAL RELATION
Common Law Marriage : Not recognized in California.
o EXCEPTIONS: If it the marriage validly contracted in another state, then it will be considered a Tenancy in Common.
o CONTRACTS BETWEEN UNMARRIED COUPLES: Valid, so long as not based solely on sexual services.
Putative Spouse – Quasi-Marital Property: When a spouse has an objectively reasonable, good faith belief that s/he was lawfully married.
o If so, the assets will be called quasi-marital property, and when the couple splits, there will be equal division in kind.
o If the putative spouse is aware that the couple is not lawfully married, the relationship is defined as “unmarried cohabitants,” and absent a contract, each keeps whatever individually required. Rights terminate upon knowledge.
Basic Presumptions California
Basic Presumptions California is a community property state. All property acquired during the course of a marriage is presumed to be community property. All property acquired before marriage or after permanent separation, by gift or inheritance, is presumed to be separate propert
