Jack and Jane fell in love. Jane moved into Jack’s apartment, and a year later they married. Jack sold his apartment for $150,000 and used the money to make a down payment on Jack and Jane’s “forever home” in Northern California.
Jack, a financial manager, earned $250,000 annually plus bonuses and was the primary breadwinner in the family. Jack’s income was deposited into a checking account held solely in his name. Jane used a joint credit card to pay the day-to-day expenses and Jack paid off the debt monthly. Jack’s salary and bonuses earned during the marriage were used to pay the mortgages on both properties.
Aside from estate planning documents, Jack and Jane never put any agreements about money or property in writing.
Now, Jack and Jane are getting divorced and need to decide how to divide the Mill Valley house, Jack’s income, Jack’s checking account, and any joint credit card debt.
Jack and Jane may divide their assets and allocate debt anyway they choose as long as their agreement isn’t unconscionable, but like many people, Jane wants to understand California community property law, and how they apply to Jack and Jane’s assets and debts.
First, the basics of California community property explained
1. A “community” is formed when a couple legally marries or registers a domestic partnership
2. The community is comprised of two people, whether spouses or domestic partners
3. In transactions between spouses/partners and in the management and control of community property, spouses/partners have the highest duties owed by parties to a fiduciary relationship; they are in essence, legal business partners
4. If a couple legally separates or dissolves a marriage or domestic partnership in California and doesn’t have a valid prenuptial, postnuptial or marital settlement agreement stating otherwise, California community property law controls the characterization and division of property where ever situated
5. Any asset, debt, income or expense, real or personal, may be community property if it can be transferred, jointly owned, and survive a spouse’s death
6. Property acquired during marriage and before separation is legally presumed to be community property
7. The fruits of a spouse/partner’s time/labor/talent expended during marriage are presumed to be community property
8. To overcome the legal presumption that property acquired during marriage is community property, the spouse/partner who wishes to prove the asset, debt, income or expense is separate property, must prove the property was:
– A gift or inheritance intended for the exclusive benefit of one spouse, or
– Acquired while the spouses/partners were living separate and apart, after the date of separation, or after a Judgment for Legal Separation was granted, or
– Transmuted into separate property, or
– A personal injury award received by a spouse who suffered the injury while legally separated, or
– Derived from a separate property source
9. Simply depositing separate and community property into joint or separate accounts does not legally transform community property into separate property and vice versa
10. Changing the form of property doesn’t ordinarily transmute community property into separate property and vice versa
11. Property is legally commingled, and the characterization changed, only if the components of the commingled mass cannot be traced to separate or community property sources, nor identified as separate and community property interests
12. Property acquired with commingled property is treated as community property
13. Community property may be transmuted (legally transformed) into separate property, separate into community, and the separate property of one spouse into the separate property of the other spouse
14. If asked, a Judge/Commissioner must divide community property equally between spouses/partners
Second, California’s community property laws applied in Jack and Jane’s case
A. Jack and Jane’s community was formed when they married
B. Jack and Jane did not sign a prenuptial, post nuptial or marital settlement agreement, nor did they draft estate planning documents so, if Jack and Jane legally separate or get divorced in California, California’s community property laws apply unless Jack and Jane decide otherwise
C. All of Jack and Jane’s assets, debts, income, and expenses listed above may be community property because they can be transferred, jointly owned, and survive a spouse’s death
D. Jack acquired his apartment before marriage so it is/was Jack’s separate property (Jane may have Marvin’s rights in a civil suit)
E. The sale of Jack’s apartment during marriage and subsequent investment of the $150,000 net sales into another home did not legally transform Jack’s separate property into community property, and the funds may be reimbursed under California Family Code Section 2640
F. Jack and Jane’s salaries and bonuses earned during marriage and before separation are community property, and depositing the funds into a bank account held solely in either person’s name did not legally transform the character of the funds
G. Jack and Jane’s salaries earned before marriage, and during and after separation are Jack and Jane’s respective separate property, and depositing the funds into a joint account or an account held solely in the other spouse’s name did not legally transform the character of the funds
H. If Jack or Jane’s salaries and bonuses earned during or after separation were used to improve the equity in, or pay the principal mortgages on, the Mill Valley home, Jack and Jane’s investments will be reimbursed if the couple agrees or the funds are traced to separate property sources
I. Any credit card debt incurred in good faith during marriage and before separation, is community property debt
J. Credit card debt incurred in bad faith in anticipation of divorce is ordinarily awarded to the spouse/partner who acquired the debt and he/she may be financially liable for breaching his/her fiduciary duties to his/her spouse and the community
If you would like California community property law explained and applied to the facts of your case, please schedule a consulting session now