17/1/2021
Family Law
Separate Property (SP) v. Community Property (CP) in California
Premarital + Marital Agreements in California
Presumptions arising from certain conduct
Business Assets, 401(k) Retirement Savings, Pension Benefits, Severance Pay
Stock Options, Goodwill of a Professional Practice, Educational Expenses
Tort + Contract Liability, Personal Injury Award
More about Community Property …
Multi-state Problems / Conflict of Laws
The Californian Community Property legislation applies to married couples (including same-sex married couples~) and registered* domestic partners (retroactively from 1 January 2000).
The legislation does not apply to unmarried cohabitants^ (the equivalent of de facto couples in Australia).
In the event of separation, unless agreed otherwise (refer to the discussion on premarital + marital agreements below) each party generally keeps their own Separate Property (SP), whereas Community Property (CP) is split 50/50.
The primary legal questions revolve around the enforceability of premarital +/or marital agreements, and alternatively, the classification of property as either SP or CP.
From 2002 any Premarital Agreement is presumed to be involuntary UNLESS strict protocols are followed (designed to protect the parties).
The presumption is rebutted where the parties have at least 7 days to obtain independent legal counsel + review the agreement before signing.
Once parties are married or their relationship is registered, the only formal requirement is that the agreement needs to be in writing.
Any advantage gained by one party over the other [in other words "Bad Deal"] raises a presumption of undue influence which must be rebutted by the spouse or partner who has obtained the benefit.
In Australia, the Family Law legislation applies to married couples (including same-sex married couples), registered domestic partners and de facto partners.
There is no concept of Separate Property v. Community Property.
All property and liabilities are shared, whether acquired before or during the relationship.
The marital/relationship asset pool also includes both parties lifetime accumulated personal Superannuation Balances.
Any split of the asset pool in the event of separation is not automatically 50/50.
Many factors can influence the final outcome.
Whether you are married, have a registered relationship or are in a de facto relationship, you can take proactive steps to protect your "Separate Property" by entering a Binding Financial Agreement (BFA).
However, for many reasons, using the word "Binding" in the name Binding Financial Agreement (BFA) does not "of itself" make the agreement binding.
When entering a BFA strict protocols (designed to protect the parties) must be followed, as a BFA cannot be set aside solely on the ground that it was a "Bad Deal"!
Please read this FAQ: When can a Binding Financial Agreement (BFA) be set aside? for a detailed explanation.
If the parties are unable to agree regarding their property settlement, the Australian Family Court will decide for them.
Australia ➲ Mandatory legislation applies whether you like it or not.
The legislation automatically applies once a de facto relationship has been deemed to have been formed.
This generally occurs after the parties have lived together on a genuine domestic basis for a minimum of two years regardless of whether they have decided to get married or formally register their relationship; versus
California ➲ "Opt-in" system where the Community Property legislation does not apply unless you first:
1️⃣ Get married; or
2️⃣ Formally register your relationship (if it is capable of registration*).
The only exception being where you hold a false belief that you are married when you are not actually married (for more information please refer to the discussion regarding the Putative Spouse Exception at the bottom of the article).
1️⃣ Property owned by either spouse (or registered domestic partners upon filing a Declaration of Domestic Partnership with the Secretary of State*) before the marriage; or
2️⃣ Property acquired during the marriage or registered domestic partnership by gift, will or inheritance; or
3️⃣ Property acquired during the marriage or registered domestic partnership with the expenditure of Separate Property (SP) funds; or
4️⃣ Rents, issue and profits derived from Separate Property (SP).
Property acquired by either spouse or registered domestic partner during the marriage/registered domestic partnership is presumed to be CP.
The most common examples include all salaries or wages of the parties.
It would also include windfall game or quiz show winnings (labour/skill of a spouse), and/or a bonus (even if it is wrapped as a gift) paid by an employer to a spouse (again, linked to spouse's labour/skill).
There is a community presumption where assets acquired by either spouse during the marriage, other than Separate Property (SP), are presumptively Community Property or (CP).
The above statutory definitions and presumption apply unless the character of an asset can be shown to have altered by the party so contending who holds the burden of proof to establish:
✅ The parties' agreement (premarital or during the marriage);
✅ Parties' conduct; or
✅ How title was taken.
Separate Property (SP) remains separate unless otherwise agreed by the husband and wife/registered domestic partners via a premarital agreement, or during marriage via a transmutation.
Requirement for a valid premarital agreement:
✅ In writing and signed by the parties.
❌ A verbal premarital agreement is generally void under the Statute of Frauds, with two exceptions:
1️⃣ If the premarital agreement has been fully performed; or
2️⃣ Based on the equitable doctrine of estoppel where there has been detrimental reliance.
Note: A party cannot argue that proceeding with the marriage is a sufficient performance of the verbal contract.
Marriage alone is not sufficient performance, as this would eliminate the writing requirement in every case.
Just about anything, except an agreement to limit either parties contribution to furnish child support.
This is prohibited by statute.
From 2002 a premarital agreement is presumed to be unenforceable unless the Court finds that the party seeking to avoid the agreement:
✅ Was represented by independent legal counsel at the time the agreement was signed (or the right to counsel is waived in a separate writing); and
✅ Was given at least 7 days to sign; and
✅ If not represented by independent legal counsel, was fully informed in writing (in the language in which the party is proficient) of the terms and basic effect of the agreement.
The party must have executed the document declaring that they received the required information and provide details of the who provided it.
Spousal Support
Provision regarding spousal support is unenforceable on one of two grounds:
1️⃣ Party challenging was not represented by independent legal counsel at the time signed; or
2️⃣ Provision is unconscionable at the time of enforcement (even if the party was represented by independent legal counsel).
The circumstances have changed so much that this is now unconscionable.
Anything else
Agreement unenforceable if unconscionable when made and no full and fair disclosure of other party's property or financial obligations; right to disclosure not waived in writing; and party challenging had no adequate knowledge of other party's property or financial circumstances.
By statute, unconscionability is a matter of law to be decided by the Court.
1️⃣ Must be in writing (from 1985);
Note: By statute, before the death of a party, a statement as to the character of property in a Will or revocable trust is NOT admissible as evidence of transmutation;
2️⃣ Signed by the spouse whose interest is adversely affected;
3️⃣ Must explicitly state that a change in ownership is being made; and
4️⃣ No consideration is required. Can be by gift or agreement.
Spouses are subject to fiduciary duties that arise from their confidential relationship, imposing a duty of the highest good faith and fair dealing with each other.
If one spouse gains advantage from a transaction, a presumption of undue influence arises.
The spouse who has obtained the benefit has the burden of proof to show she did not breach her fiduciary duty.
A grossly negligent and reckless investment of community funds created a presumptive breach of a spouse's fiduciary duty.
In Marriage of Lucas the Court held that taking title as joint tenants, property was presumptively Community Property (CP).
Any subjective intent was irrelevant, absent proof of an agreement to the contrary.
Death: In the case of a death involving one party, Lucas is still law.
Therefore, use of Separate Property (SP) as a Down Payment, or for Improvements or Principal payments on the mortgage ("DIP") creates no separate ownership or claim for reimbursement.
Divorce/Separation: In the case of divorce or separation, California has passed two anti-Lucas statutes on the ownership and reimbursement issues.
Ownership: Community Property (CP) presumption can be rebutted by an express statement in the deed or other instrument of title that the property (or portion thereof) is Separate Property (SP); or a separate written agreement to that effect.
Reimbursement: For Spouse who made contributions of Separate Property (SP) to the Down Payment, Improvements, or Principal payments on the mortgage ("DIP")
No Reimbursement: For Separate Property (SP) used to pay Taxes, Insurance, Interest on the mortgage, or Property maintenance ("TIIP").
Note: A receipt issued in joint names is not sufficient for the rule in Lucas to apply.
A title document in joint and equal form is required.
The proration rule: the community estate takes a pro-rata ownership portion of the Separate Property (SP) [and whole life insurance policies], measured by the percentage of principal debt reduction attributable to the expenditure of community funds.
Taxes, Insurance, Interest, and Property Maintenance ("TIIP") are not included in these calculations.
Term Life Insurance Policies are pure insurance with no cash surrender value (like car insurance).
The rule is that the source of funds used to pay the last premium determines the character of the policy.
The proration rule therefore does not apply.
The Doctrine of Fixtures: The expenditure of Community Property (CP) does not change the ownership character of the Separate Property (SP).
The improvements become part of the property.
There is a claim for reimbursement for the community.
The community gets the greater of the expenditure on improvements or the increase in the value of the property attributable to the improvements.
The anti-lucas statutes DO NOT apply because "joint ownership" is not present to act as the trigger to activate the provisions of the two anti-lucas statutes.
Only expenditures of SP on CP trigger anti-lucas.
This is the opposite.
Split of Authority
No reimbursement - these facts give rise to a presumption of gift to the other spouse's Separate Property (SP); presumption of gift can be overcome only by evidence of an agreement to reimburse community estate.
Reimbursement - other cases rejected presumption of gift and granted reimbursement.
Assuming a Separate Property (SP) bank account used to deposit Community Property (CP), and/or pay CP family living expenses during the marriage.
The mere fact that SP funds are commingled with CP funds does not transform or transmute the SP into CP.
The burden of proof is on the owner of the SP to show any assets were purchased with SP funds.
There is a family expense presumption that expenditures for family expenses (food, housing, clothing, recreation, etc.) were made from community funds.
If the source is uncertain due to commingling of funds and inadequate records, the presumption is a gift to the community with no reimbursement intended.
To defeat this presumption, the owner of the Separate Property (SP) funds needs to show an "agreement to reimburse".
Evidence of this can be shown via two alternative accounting methods:
1️⃣ Exhaustion - CP exhausted, other new SP funds used to buy the asset; or
2️⃣ Direct Tracing Method (Quick-in/Quick-out) - requires sufficient SP was available, and the intention to use SP funds to buy the asset.
Pereira (P) - think Personal Skills and Effort.
Spouse's time, skill and effort are major factors in the growth of the business.
Look for instances where the spouse personally contributed creative ideas or developed new techniques, and/or worked long hours and only drew a modest salary.
Formula: Pay interest on SP; the rest is CP.
Van Camp (VC) - think Valuable Company or Asset.
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 spouse was paid a substantial salary and large bonuses (meaning the community was compensated).
Look for hiring of talent with great ideas, above market compensation, good fortune and timing, only an idiot couldn't have made a fortune...
Formula: Value Community Labour; the rest is SP.
Start with the value of spouse's services at market rates (how much would executives in similar positions be compensated MINUS salary already received MINUS family community expenses (if any) already paid EQUALS community component.
The balance is SP.
The California Supreme Court has said it is not bound by either P or VC.
The Court may select whichever formula will achieve substantial justice between the parties.
401(k) individual balances accumulated before marriage are SP.
401(k) contributions made by one or both parties during the marriage are CP.
Employee retirement benefits accumulated during marriage (10 years), whether or not vested (Retirement 30 years to Vest) at the time of divorce, are CP.
Use proration rule: Yrs married (10) over Total Yrs employed to Retirement and vesting of Pension (30) = 10/30 or 1/3 of pension is CP.
Two Options:
1️⃣ If and when pension vests to the retired participating spouse (non-participant spouse or NPS) gets 1/6 share; OR
2️⃣ Cash non-participating spouse or NPS out by awarding NPS other assets of equal value.
If pension benefits have vested prior to divorce: NPS can get a qualified domestic relations order or QDRO and receive payments from the pension plan, even if PS has not yet retired.
If the NPS dies: interest in the pension is terminated due to preemption by Federal laws under the Supremacy Clause.
Any disability retirement benefits and/or workers' compensation are treated as wage replacement, and classified according to when received, not when earned.
Where there is an election, it cannot be used to defeat a NPS right to share in Community Property (CP).
No clear rule. Split opinion. Argue both ways.
1️⃣ Severance Pay is SP because it replaced lost earnings which after divorce or separation would be SP; or
2️⃣ CP because it arose from a collective bargaining agreement and was this earned by employment during marriage.
If the options have not vested, the proration formula to use depends upon the primary intent of the employer in granting the options.
Reward for Past Services as a form of deferred compensation:
Use the Marriage of Hug proration formula
x Yrs employment to date economic community ended over
Y Yrs employment to date option becomes exercisable
CP subject to equal division on divorce.
Reward to encourage stay with the company into the future:
Use the Marriage of Nelson proration formula
x Yrs from date option granted to date economic community ended over
Y Yrs from date option granted to date options become exercisable
CP subject to equal division on divorce.
Goodwill to the extent acquired during the marriage is CP subject to equal division upon divorce.
Goodwill are those qualities that generate income beyond that derived from the professional's labour; and reasonable return on capital and physical assets.
Primarily established by expert witness testimony as to its value.
A partnership buy-sell agreement with a set figure payable to a partner who dies or leaves the firm is a factor but is not conclusive as to the value of goodwill.
Eg., One spouse incurred educational debts: treated separately as separately incurred debt.
The community is entitled to reimbursement for the cost of the education if the CP paid for the education, and the education enhanced earning capacity.
This is true even if the education expenses were incurred before the marriage, and the loans were paid from community funds.
Defences to any claim for reimbursement to the community include:
1️⃣ The Community has already substantially benefited from the earnings of the educated spouse. If more than 10 years have passed since the degree was awarded, the presumption is that the community has substantially benefited, meaning that unless the presumption is rebutted, there is no valid claim for reimbursement; or
2️⃣ If the other spouse also received a CP-funded education.
Tort Recovery
If a spouse is injured, and the other spouse is the tortfeasor, the tort recovery is SP.
Otherwise, they would benefit from a wrongful act.
Where damages are recovered from a third party, the tort recovery is CP.
Tort Liability
Eg., One spouse has incurred tort liability.
The rule is that CP is subject to the tort liability of either spouse.
If the tortfeasor was performing an act for the benefit of the community (eg., driving to work, or driving the kids in a car pool) the liability is first satisfied from CP, and then from the tortfeasor's SP.
If not performing an act for the benefit of the community (eg., driving to SP vineyard, or driving to liaison with boyfriend), the liability is first satisfied from the tortfeasor's SP, and then from CP.
A judgment creditor cannot reach the other spouses SP.
Contract Liability
Spouses have equal management powers and either spouse can enter into contracts and/or incur debts.
Can CP be reached if debt was incurred by spouse before the marriage?
Yes, with 1 exception.
The earnings of a non-debtor spouse cannot be reached for pre-martial debts if held in a separate account (in which the other spouse has no right of withdrawal) and not commingled with other CP funds.
The other spouses SP cannot be reached in satisfaction of the other spouses business debt, but can be reached in satisfaction of medical bills. The Family Code provides that each spouse has the duty to support the other spouse and minor children. This means that each spouse is personally liable for the other spouse's contracts for necessity (until they are officially divorced). The other spouse can be reimbursed from the CP (if funds are available).
After Divorce: a creditor cannot reach CP awarded to a spouse unless that spouse incurred the debt, or was assigned the debt by the Court.
Personal Injury Award is CP, but on divorce is awarded to the injured spouse
In a divorce or separation, the Personal Injury Award goes entirely to the injured spouse, so long as the award can be traced and has not already been spent.
This will be the result (unless interests of justice require otherwise).
This equates to breach of fiduciary duty, and the breaching spouse is liable to the non-breaching spouse.
This occurs when community liabilities exceed community assets.
The relative ability of spouses to pay the debt is considered (the rationale for this approach is to protect creditors).
Subject to the controlling test of the "primary intent of the lender", or where the lender is looking for satisfaction of the debt.
General Rule: Equal Management Powers, with full power to buy or sell CP and contract debts without the other spouse's joinder or consent.
Personal Belongings Exception: One spouse cannot sell or encumber personal property used in the family dwelling (furniture,.. clothing, etc.) without the written consent of the other spouse. Such a transaction is voidable by other spouse any anytime.
CP Business Exception: If the spouse with primary management and control of the CP Business sells, leases or otherwise encumbers substantially or all of the CP personal property used in the business, they must give written notice to the other spouse.
CP Real Estate: General Rule is neither spouse can transfer or encumber their 50% CP interest in real CP. Only the entire 100% CP interest can be transferred or encumbered.
One exception is where a spouse can unilaterally encumber their 50% interest in real CP to pay the family attorney representing them in a divorce action.
This is known as the Family Attorney's Real Property Lien.
If the other spouse sells or leases property for more than 1 year the joinder of both spouses is required. The other spouse can void the transfer, as long as this is done within the 1 year statute of limitations.
If the purchaser knew or should have known that the owner of the property was married there is no statute of limitations period to void the transaction.
Set aside CP gift without consent in its entirety OR equal offsetting CP assets on divorce, or take under or against the Will (Widow's Election).
Where a married couple move to California from a non-Community Property State, their assets acquired while the couple were domiciled elsewhere, which would have been classified as Community Property (CP) had it been acquired in California, is Quasi-Community Property (QCP).
This includes "foreign" real property located in another state.
This is true even though California has no jurisdiction over the land, as the Court could leave the land in the name of the one spouse (who holds title) and award other assets of equal value to the other spouse, or require the other spouse to execute any required conveyances that are necessary.
If the marriage ends as a result of death:
With regard to stocks or other personal property acquired interstate only 50% CP can be devised by the acquiring spouse Will.
If the non-acquiring spouse dies, they have no power over the disposition unless they survive the acquiring spouse.
With regard to "foreign" real estate, the law of the state where the property is located controls the outcome.
The test is whether the putative spouse had a subjective belief that they were lawfully married.
If so, the assets acquired are called quasi-marital property (QMP) and if and when they split, the assets are split 50/50.
One California Court of Appeal case held that if one party is a "bad faith" partner, they are not entitled to 50% of the property earned by the labour of the putative spouse.
The above situation only lasts for as long as the subjectively false belief is held.
As soon as the putative spouse learns the truth, the parties begin to keep what they each earn individually as unmarried cohabitants.
Under the Supremacy Clause, federal law preempts inconsistent state laws.
In some instances, federal law preempts California from applying CP concepts to certain assets:
Preempted
Federal homestead claims
Military life insurance benefits
U.S. Savings Bonds
Social Security Benefits
Not Preempted
Railroad retirement benefits
Military retirement benefits
Copyrights
Notes:
~ In In re Marriage Cases (2008), the Californian Supreme Court held that the law providing that only a marriage between a man and a woman is valid or recognised in California was unconstitutional under the California State Constitution.
Subsequently, the voters approved Proposition 8 (Prop 8) to amend the California Constitution.
Prop 8 was challenged in Federal Court and found unconstitutional, with the result being that same-sex marriage is legal in California.
* A domestic partnership is defined as "two adults who have chosen to share one another's lives in an intimate and committed relationship of mutual caring," which can include heterosexual couples (where at least one is over the age of 62) as well.
The requirements to register a domestic partnership in California are as follows:
In California, a registered domestic partnership grants almost all of the same state-level rights as marriage.
Examples of these rights include tax relief, the ability to make medical decisions in emergencies, access to domestic relations laws, state spousal benefits including workers compensation, inheritance rights and spousal testimonial privilege.
# Unmarried Cohabitants can contract with each other to hold property as CP. The contract will be upheld so long as "consideration" for the contract does not violate public policy, e.g., agreement was made in exchange for sexual services.
^ Community Property states of the USA, include as of 2020: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Credits:
Cover Image courtesy of Nathan Dumlao on Unsplash
This article was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠ as part of his study of California Law in preparation to sit the California Bar Exam.
Important Notice:
This article is intended for general interest and information only. It is not legal advice and nor should it be relied upon or used as such. Always consult a lawyer for specialist advice specific to your needs and circumstances.
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