Jack and Jane fell in love. Jane moved into Jack’s apartment. A year later, they married. Jack sold his apartment for $150,000 and used the money for a down payment on their “forever home” in Northern California.
After receiving a degree, saving for retirement, and having a daughter, Jane quit her job to become a stay-at-home parent.
Jack, a financial manager, earned $250,000 annually plus bonuses. He was the primary breadwinner, and his income was deposited into a checking account held solely in his name. Jane’s access to the family finances was limited; she used a credit card to pay day-to-day expenses.
After receiving $250,000 inheritance from her grandmother, Jack and Jane bought a vacation home on Cape Cod. Jack’s salary and bonuses earned during the marriage paid both property mortgages.
Aside from estate planning documents, Jack and Jane never put any of their agreements about money or property in writing.
Jack and Jane are now getting divorced and wonder if the Mill Valley house, Cape Cod house, Jack’s income, Jane’s inheritance, Jack’s checking account, and Jane’s credit card debt are community property. Here are a few things they want to know.
1. California is a Community Property State
Through the lens of California family law, a legal community is created when a couple legally marries or registers a domestic partnership. It’s a community of two and resembles an equal (50-50) business partnership.
If a married couple doesn’t have a valid prenuptial agreement saying otherwise, and California is the domicile of either spouse/partner, California family law controls the community’s property in a Legal Separation, Dissolution of Marriage or Dissolution of a Domestic Partnership.
California is a person’s domicile if he/she is physically present in the state and intends on remaining indefinitely. A spouse/partner doesn’t change his/her domicile by being temporarily out of state or having several residences where he/she lives. A person may only have one domicile at a time.
California’s community property laws are those that determine the character of a married couple’s property and their legal rights therein. (California Family Code Sections 760, 771(a) and 772)
In the example given above, California’s community property laws will determine the character of Jack and Jane’s property because, Jack and Jane don’t have a valid prenuptial agreement and California is Jack and Jane’s domicile – the Mill Valley house is their “forever home,” Cape Cod is their vacation destination, Jack works in San Francisco, and their daughter goes to school nearby.
2. California community property laws determine the character of out of state property
If spouses/partners acquire out-of-state property while domiciled in California, California’s community property laws determine whether the property is community property.
If a married couple moves from a common law state to California, the character of property acquired while domiciled in the common law state retains its common law character; the move doesn’t change it. But, if a couple legally separates, gets divorced or dissolves a domestic partnership in California, property they acquired while living in the common law state is treated as community property if it would have been community property had the couple been domiciles of California on the date of acquisition. This property is quasi-community property. (California Family Code Section 125)
If a married couple moves from California to a common law state, community property they acquired while domiciled in California isn’t defeated. But, the community property interest is fixed on the date the couple moves.
Because Jack and Jane are, and were California domiciles when they acquired the Cape Cod house, and they’re separating and getting divorced in California, the property’s character will be determined by California’s community property laws.
3. Any property may be community property if it passes a three-pronged test
Any property, whether an asset, debt, income or expense, real or personal, that can be transferred, jointly owned and survive a spouse’s death, can be community property.
Wages, salary, bonuses, stock received instead of wages, employer contributions to a profit-sharing plan, incentive stock options, vacation pay, deferred compensation, pension, employment termination benefits, non-vested or contingent benefits, severance pay, medical reimbursement accounts, and other fringe benefits can be community property.
Professional practices (medical, dental, legal,) business profits, intellectual property, legal causes of action, and a lawyer’s right to receive legal fees can be community property.
Likewise, credit card debt, parental support, legal damages, personal loans, mortgages, margin loans, property taxes, lease obligations, and other types of debt and expenses can be community property.
Jack and Jane’s Mill Valley and Cape Cod houses and mortgages, Jack’s salary, bonuses, and checking account, and Jane’s credit card debt can be community property.
4. Some property cannot be community property
If property cannot be transferred and jointly owned, and it won’t survive the death of a spouse, it cannot be community property. It is always separate property.
Education, professional licenses, and rights to practice professions cannot be transferred or owned jointly, and do not survive the death of a spouse; they always are a spouse’s separate property. However, the community may have a right to reimbursement for community property funds used to pay a spouse’s educational costs.
Jack and Jane’s educations and degrees are separate property. If community resources were used to pay their educational costs, the community might have a right to reimbursement.
5. Property acquired by a spouse/partner during marriage and before separation is presumed community property
If a spouse/partner acquires property during marriage and before separation, it’s presumed to be community property.
A spouse acquires property when he/she has a legal interest in the property.
Real estate is acquired when the purchase contract, not the deed, is signed.
Salary, deferred compensation, unvested, and contingent or intangible assets or interests are acquired when earned, not paid. “Vesting,” “maturity” and “contingency” affect the property’s value, not its character.
A spouse acquires a debt at the following times:
(a) In the case of a contract, at the time the contract is made
(b) In the event of a tort, at the time the tort occurs
(c) In other cases, at the time the obligation arises
(California Family Code Section 903)
Jack and Jane acquired the Mill Valley house, Cape Cod house, Jack’s salary and bonuses, funds in their checking account, credit card debt, and Jane’s inheritance during the marriage. All of these assets are presumed community property. Jack acquired his apartment before the wedding. It is not presumed community property.
6. The community property presumption is rebuttable.
A spouse may rebut the community property presumption by proving property was:
- Acquired before marriage (California Family Code Section 770)
- A gift or inheritance intended for the exclusive benefit of one spouse (California Family Code Section 770)
- Acquired while living separate and apart, after the date of separation, or after a Judgment for Legal Separation is granted (California Family Code Sections 771 and 772)
- Derived from a separate property source
- Transmuted (legally transformed) into separate property (California Family Code Section 850)
- An award for personal injuries suffered by a spouse while living separate and apart or after entry of a Judgment of Legal Separation or Dissolution of Marriage or Domestic Partnership (California Family Code Section 781)
A spouse who contends property is separate property has the burden of proving it.
Jane may rebut the presumption that the inheritance she invested in the Cape Cod house is community property. Jack may rebut the presumption that the net proceeds from the sale of his San Francisco apartment, which he used for the down payment on the Mill Valley house, is community property.
7. Commingling separate and community property, and changing the form of property doesn’t ipso facto change the character of respective property interests.
“Unless a court order or written agreement provide otherwise, property derived from a community property source remains community property, and property derived from a separate property source remains separate property.” (Hicks v. Hicks (1962) 211 CA2d 144, 152-153)
Using separate property during the marriage, without more, doesn’t convert it into community property, and vice versa. ( Marriage of Rossin (2009) 172 CA4th 725, 734, 91 CR3d 427, 433)
Incorporating a separate property business or selling a separate property house during marriage doesn’t transform the business or sale proceeds from separate into community property. (Marriage of Koester (1999) 73 CA4th 1032, 1037)
Depositing a spouse’s salary earned during marriage into a bank account held solely in one spouse’s name does not change the character from community to separate property.
The net proceeds from the sale of Jack’s San Francisco apartment, and Jane’s inheritance are/were separate property. They did not become community property by being invested in the Mill Valley and Cape Cod houses.
8. Commingling property changes its character 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. (Marriage of Braud (1996) 45 CA4th 797, 822-823; Marriage of Cochran (2001) 87 CA4th 1050, 1057)
Property acquired with commingled property is treated as community property. (California Family Code Section 760, Marriage of Mix (1975) 14 C3d 604, 611, Marriage of Frick (1986) 181 CA3d 997, 1010)
Merely depositing Jack’s earnings into a checking account held solely in his name didn’t change the community into separate property.
9. Separate property can be changed into community property, community into separate property, and the separate property of one spouse into the separate property of the other spouse. (California Family Code Sections 850(a), (b), (c) and 1500)
The legal transformation of property is called a transmutation.
Post-1985 transmutations are only valid if the adversely affected spouse expressly declared in writing, that he/she consented to, or accepted the change in the character of the property. (California Family Code Section 852, Marriage of Valli (2014) 58 C4th 1396) A spouse may include his/her express declaration in a deed or estate planning documents.
If there is a written express declaration, the benefiting spouse must overcome a legal presumption that he/she unduly influenced the adversely affected spouse. If he/she cannot, the transmutation is invalid and character of the property remains unchanged.
Pre-1985 transmutations and gifts of insignificant value intended for use primarily by one spouse don’t require express written declarations.
Jack and Jane don’t have any written agreements or court orders, so the language in the deeds and estate planning documents, and either spouse’s ability to overcome the presumption of undue influence are determinative.
10. Spouses must act in good faith and fair dealing while managing community property
Spouses have the same rights and duties of nonmarital business partners. (California Corporations Code Sections 16403, 16404 and 16503) The confidential relationship “imposes a duty of the highest good faith and fair dealing.” Spouses may not take unfair advantage of each other. (California Family Code Section 721 and 1100(e))
A spouse’s fiduciary duty arises upon marriage, continues through separation or dissolution, and terminates upon the distribution of all the property. (California Family Code Sections 2102(a) and (b) and 1100(e)) A judge can sanction a spouse for breaching his/her fiduciary duty. (California Family Code Section 721)
Jack has exclusive control of community property earnings and bonuses on deposit in his checking account. He must act fairly and in the highest good faith while managing the funds during separation and divorce.
If you’d like California community property law explained and applied to the facts of your life, please call Laura at 415-968-3028 or complete the form below and schedule a consulting session.