Glossary of Cali Community Property
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- Big Picture Questions
- 1. What is the source of the property?
2. Have the parties actions changed character of property?
3. Do any presumptions apply?
4. Are there any management and control issue?
5. How should the property by divided
- Opening Paragraph for Essay
- California is a community property (CP) state. All property acquired during a valid marriage through the labor and efforts of either spouse is presumed CP. All property acquired before or after marriage is presumed seperate property (SP). All property acquired by gift or inheritence or through the rents and profits of a SP source are also presumed SP.
The characterization of an asset is the process of determining if it is CP or SP. This depends upon the nature of the source of the funds used to acquire the asset. Since a change of form does not necessarily result in a change of character of an asset, tracing the asset to its original source is necessary in order to determine the assets character. Thus, the character of the assets at issue here must be determined for purposes of division at (divorce/death depending on the call...). Each asset will be considered below.
- Source of Asset
- SP - gift/inheritence; rents/profits of SP source
CP - during marriage; efforts/labor of either spouse
QCP - out of state realty purchased while couple were domiciled outside of Cali treated as CP at divorce and death (special rules apply at death and for creditors)
- Name the Assets that are Difficult to Classify...
- 1. Personal Injury Damages
2. Retirement Pensions
3. Disability Pay
4. Severence Pay
5. Stock Options
6. Business Profits
7. Professional Goodwill
8. Education and Training
9. Life Insurance
10. Property Insurance Proceeds
- Characterization of Personal Injury Awards?
- Characterization of personal injury rewards are based upon when the cause of action arose. If the cause of action arose during marriage, they are treated as CP. If the COA arose after marraige, then SP.
Personal injury damages against one spouse by the other are the injured spouse's SP always. . .
NOTE: Special Case of Divorce - If the couple divorces, the PI damages are awarded entirely to the injured spouse, unless a different division is required in the interest of justice. In any event, the injured spouse should receive no less than 1/2.
NOTE: Commingling of Funds - if PI damages are commingled with CP funds, they lose their SP character and are treated as CP!
- Characterization of Retirement Benefits?
- California treats retirement benefits as CP if the right to the benefits was earned during marriage, even if the benefits are received after divorce. This is because retirement benefits are considered "deferred compensation" and represent community savings for old age.
- Valuation of Pension Earned During and After Marriage - "Time Rule"?
- To determine the CP interest in a pension the right of which was earned prior to marriage, multiply the present value of the pension or the monthly benefits by the number of years married over the total years of pension contribution. Thus, the equation is:
CP = Value of Pension x n years married/total years of contribution.
- What happens if the pensionable spouse is eligable to retire but refuses?
- The non-employee spouse is entitled to his or her ½ interest upon dissolution regardless if the employee actually retires when the plan matures or the interest vests. Thus, the working spouse must pay the non-employee spouse what she would have gotten had the working spouse retired. Court may also order private employer to pay the nonemployee spouse her share of the benefits as though the worker had retired.
- Characterization of Disability Pay?
- California follows the replacement rule to determine what the DP is replacing. If the disability pay is intended to replace marital earnings, it is treated as CP. If it's intended to pay post seperation/divorce earnings it is SP.
- Characterizatoin of Severence Pay?
- Cases are Divided:
Some courts hold that a permanently seperated spouse's severance pay was SP b/c it replaced lost earning that would have been the worker's SP. Other courts have held that where you have a lump sum severence pay that is really a form of retirement benefit, it's CP if the right was contracted for during marriage. Use Replacement analysis
- Characterization of Stock Options?
- Stock Options are considered earned at the time of employment and not at the time they are exercised. Thus, use the “Time Rule”. The denominator of the fraction is the total number of years of employment to exercise the option and the numerator is the number of years married.
- Characterization and valuation of Goodwill?
- Goodwill is an intangible value that develops during the life of a business and includes, but is not limited to, the reputation and habitual clientele of a business.
Calfornia treates Goodwill as CP if earned during marriage. Valuation of good will could be by market sales valuation or capitalization of past excess earnings.
- Valuation of Business Profits under Pereira Formula?
- Pereira Formula – used when the increase in the value of the business is attributable to the spouse’s own energy, time, and efforts.
SP initial investment x reasonable rate of return x number of years of marriage = Spouses Separate Property
- Apportionment of Business Profits under Van Camp Formula?
- Van Kemp Formula – used when outside factors cause the business to appreciate in addition to SP investment:
Van Kemp formula: reasonable salary of spouse x n years of marriage – salary used by community = remainder CP interest in the business
- Characterization of Education and Training?
- Generally, education and training are not CP and are assigned entirely to the educated spouse upon divorce or dissolution. However, the community is entitled to reimbursement for funds used to pay for the education/training that substantially increases the earning capacity of the educated spouse.
EXCEPTIONS: (1) SP funds used to pay for the educated spouses training/education are considered a gift and not reimbursable; (2) If the contribution was made over 10 years ago, there is a presumption that the community has already benefited from the education received. This presumption can be rebutted if it can be established that the educated spouse did not use their education to benefit the community
- Characterization of Life Insurance Proceeds at Death?
- Apply the time rule: if premiums paid by CP funds, then the proceeds treated as CP in proportion to the amount of premiums paid by the community
- Characterization of Life Insurance Proceeds at Divorce?
- (1) Whole Life = if property has current cash value, the cash value is CP in proportion to the premiums paid through community funds.
(2) Term Life = depends on the character of the last premium paid for. If the last premium of the term was paid for by CP funds and the insured spouse is no longer insurable, the interest to the community is the continued right to be insured. Thus, if the last term was paid for by community funds and the insured spouse dies before the term is renewed, the community gets the entire insurance proceeds.
- What happens when deceases spouse names somone other than suriving spouse as the bene under a life insurance policy?
- If the deceased spouse names someone other than their spouse as an intended bene, the deceased spouse is considered to have made a testamentary disposition of his or her ½ CP interest and the surviving spouse gets the other ½ of the life insurance proceeds.
- Name the 5 ways a spouse can overcome the CP presumption?
- 1. Prove that the property is SP b/c it was acquired by gift/inheritence or through rents/profits of SP source.
2. Parties took with inconsistent title – if the parties took written title in a manner that suggests the parties intent to hold the property at issue as separate property, this fact may be sufficient to overcome the presumption.
3. The parties otherwise agree that the property would not be held as CP – the parties are free to come to an agreement before or during marriage that the property at issue will not be held as CP.
4. One spouse took title in form that evidences gift to the other spouse – the CP presumption can be overcome if one spouse can show that the other spouse took title to property that evidences the spouse’s intent to bestow a gift of that property to the other spouse.
5. When simple tracing is permitted – if the SP proponent can show through tracing that the property was acquired through SP resources, this may also overcome the CP presumption.
NOTE: Tracing fails to address the implications raised by the form of title taken by both spouses on property. Thus, an inconsistent form of title trumps tracing for the purpose of establishing a title claim.
- Name the different ways a contractual modification by the parties can change the character of an asset. . .
- 1. Agreement before marriage.
2. Agreements during marriage ("Transmutations")
3. Agreements to Change Character of Property from the Form of Title
- What are the requirements for a valid prenuptual agreement?
- 1. No consideration required
2. Agreement must be in writing (SOF applies)
3. Parties must be competent to contract.
4. Agreement must have been entered into voluntarily.
- Explain the "voluntariness" requirement for prenuptual agreements?
- California requires the adversely affected party to be represented by counsel and to have at least one week between the time the individual seeks counsel and the signing of the agreement. If unrepresented, the adversely affected party must be fully informed in writing prior to signing and was proficient in the language.
- What circumstances render Prenups unenforceable?
- (1) The Agreement Promotes Divorce
(2) The Agreement is Unconscionable and/or Nondisclosure of Assets/Wealth of the Other Spouse.
(3) The Agreement Limits Support Obligations in the Event of Divorce (NOTE: this is not per se unenforceable!)
- Explain how transmutations work that were entered before 1/1/1985. . .
- California courts were liberal in their application of transmutation analysis and would find a valid transmutation even through oral statements which tended to prove a change in the character of property.
- Explain how tranmutations work that were entered after 1/1/1985. . .
- All valid transmutations now require a writing that contains language reflecting an express declaration to change the character of the property at issue.
NOTE: Parol Evidence Rule applies – no PE unless to clear an ambiguity in the written instrument that changes the character of the property.
- Explain the Married Woman's Special Presumption. . .
- When written title was placed in a married woman’s name alone before 1975, that property is the woman’s separate property. Applies if a) married woman holds title in her name alone or with someone other than H or b) when married person holds title in unqualified form that does not specify JT or CP.
- How can the married woman's special presumption be overcome?
- MWSP can be overcome by showing that H had no knowledge the acquisition and did place title in W’s name for purposes of making a gift to her, thereby rebutting the presumption of a gift.
NOTE: When BFP buys pre-75 property in W’s name alone, MWSP is irrebuttable.
- Explain the Lucas case implications and how it applies.
- If SP funds used to purchase CP and HW hold title in that subsequent CP as JT, the SP contribution is presumed a gift unless the SP proponent can prove an understanding or agreement between the parties that the SP proponent would maintain a SP interest in the CP.
- Explain the aftermath of Lucas and the Special CP Presumption...
- At Divorce - all property held in JT is presumptively CP for purposes of distribution at divorce or legal separation. A collateral written agreement or a statement in the title itself that the property is SP and not CP can only overcome this presumption.
SP contributions made for the acquisition of the property will be reimbursed without interest or appreciation.
- Explain the retroactivity of the Special CP Presumption Statutes
- (1)Before 1/1/84 – only Lucas applies and SP contributions to CP presumed a gift unless agreement to contrary is established (i.e doesn’t have to be in writing)
(2) After 1/1/84 but before 1/1/87 – Special CP Presumption applies, §2582 & 2640 apply only to JT and nothing else
(3) After 1/1/87 – SCPP applies to any form of property.
- What happens if the SCPP is overcome?
- If Presumption Rebutted, then SP is proportionate owner and gets reimbursement of SP contributions and proportionate ration of ownership interest in the equity.
- Explain purchase money funds can be reimbursed?
- § 2640 reimbursement also applies to refinanced proceeds used to buy more CP assets. SP interest is proportional to the SP contribution used to purchase the initial asset.
- Explain how the presumption of family funds is applied to the principle of "tracing"?
- Presumption of Family Expenses: it will be presumed that CP funds are used first to pay for family expenses. SP funds are deemed to be used only when CP funds have been exhausted. When SP funds used to pay for family expenses, it’s presumed a gift unless there is evidence of a reimbursement agreement.
- Explain the 2 types of tracing methods. . .
- 1. Indirect Tracing using Exhaustion Method: SP proponent may show that CP funds in a commingled account had already been exhausted by family expenses. Thus the asset in question must have been purchased with separate funds.
2. Direct Tracing: SP proponant shows that even though there were sufficient community funds, SP funds were available and those SP funds were intended to be used to purchase the asset.
- Explain what happens when Community Funds Used to Pay off Purchase Price of Separate Property...
- The community is entitled to a proportionate interest to the extent that CP funds were used to pay down the principal debt on the SP. Interest, insurance, and tax payments are not factored in or counted in this amount. Only the amount of principal debt that is paid through CP funds or resources.
- What happens when One Spouse Uses CP Funds to Make Improvements on Own SP
- Since a spouse cannot make a gift to himself, when a spouse uses CP funds to improve his own property, no gift is presumed. The community is entitled to either reimbursment of the cost of the improvement or the amount the improvement increases the value of the property. Whichever is greater!
- Explain when deviation from "in-kind" division is allowed of CP assets...
- a) Equal division would diminish the value of the asset or jeopardize one spouse’s earning capacity
b) Loss of family home would uproot minor children
c) One spouse deliberately misappropriates CP funds
d) Liabilities exceed assets – the spouse whose able to pay usually has to pay the debts
e) Educational Debts – go to the educated spouse
f) Tort liability for one spouse for a tort not benefiting the community
g) Separate Debt of one spouse
h) Personal Injury Damages
- Explain how you can set aside a property settlement or decree?
- 1. Extrinsic Fraud/Mistake
2. Breach of Fiduciary Duties
- What are the fiduciary duties of the spouses?
- 1. To make full disclosure to the other spouse of all material facts and information regarding all assets in which the community has an interest and debts for which the community is liable.
2. To provide equal access to all information, records, and books that pertain to the value and character of those assets upon request.
- Explain how CP is divided upon testamentary transfer by a deceases spouse...
- A married person can transfer his/her ½ of CP and all SP by will. The surviving spouse owns the other ½.
- What happens when one spouse makes an unauthorized Inter Vivos Gifts of CP?
- Can’t make an inter vivos gift of CP without the written consent of the other spouse. The nonconsenting spouse can void the entire gift while the donor spouse is still alive. But after the donor spouse dies, the unauthorized gift is treated as a valid testamentary transfer of the donor spouse’s ½ CP interest. The non-consenting spouse can only get back her ½ interest in the unauthorized gift.
- Describe the way a breach of fiduciary duty can occur by a spouse?
- a) Making a gift of CPP without the written consent of the other spouse
b) Conveying or encumbering CPP used as the family dwelling or the furnishings of the home or the clothing of the other spouse or minor children without the written consent of the other spouse
c) Being the primary manager of a business that is CPP and not giving any prior written notice of any sale, lease, exchange, encumberance or other disposition of all or substantially all of the personal property used in the business
d) Making a real property conveyance, encumbrance, or lease for more than one year without the consent of the other spouse.
- Describe which properties are liable for debt owed to creditors?
- Debts incurred before/during marriage – All CP plus Debtor Spouse’s SP. Non-debtor spouse’s SP not liable.
NOTE: Reimbursement for this debt is only allowed if the debtor spouse had SP to pay the debt but used CP instead to pay for it.
Other spouse may be liable for “necessaries” during marriage when one spouse incurs such a debt. The other spouse’s SP can also be reached to satisfy such a debt, even after separation.
- Explain the reimbursement rights of CP for spousal and child support payments?
- Community is entitled to reimbursement for spousal or child support obligations from the other spouse’s prior marriage if CP was applied to satisfy the support payments and the other spouse had SP that could be used to pay but didn’t use it.
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