Property Characterization – Ways Community May Acquire Interests in Separate Property
A Detailed Review of Four Ways in which the Community may Obtain an Interest in Separate Property
There are four ways that the “community” (i.e. both spouses together) may obtain an interest in one spouse’s separate property. In order to review these ways properly, it is necessary to understand the difference between “community property’ and “separate property.” Community property is defined as follows: “Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.” (Cal. Family Code 760) In simple terms, whatever property is acquired during marriage will be presumably joint, community property.
Separate property includes (1) All property owned by the person before marriage; (2) All property acquired by the person after marriage by gift, bequest, devise, or descent; (3) The rents, issues, and profits of the property described in this section. (Cal. Family Code 770.) Additionally, any earnings accumulated after the parties’ separation is separate property. (Cal. Family Code 771; 772.) In simple terms, whatever property is brought into the marriage by a party, acquired after separation, or acquired by inheritance or gift is separate, to include any interest or increase in value of these assets (even if during marriage).
The four ways in which the community may obtain an interest in one spouse’s separate property are as follows:
- By transmutation. This means that the property changes character by the occurrence of an event (for example, if a party signs a quitclaim deed)
- By commingling – this means that money is so intertwined with other money that it is impossible to tell the character
- Contributions of community property funds toward separate property (for example, using community property earnings during marriage to pay down the mortgage on a separate asset); and
- Contributions of community time, effort and energy on a separate asset (usually a business, for example, if a spouse goes to work everyday during marriage for the business that she owns the community will acquire an interest in the business, even though it is separate property.)
When property is “transmuted” it takes on a different character (meaning it changes character.) Property can be transmuted from community property to separate property, from separate property to community property, or from separate property to the other spouse’s separate property. There is a three step process to determine whether a property has been transmuted.
First, the transmutation must be valid in form. Usually, this means that a writing was made evidencing the change of character of the property that includes an “express declaration” that the person signing the document understands that they are giving up certain rights and they acknowledge the change in ownership.
Second, the change of ownership must be accomplished free of fraud. This means that the person receiving the benefit of the change in character of the property cannot have taken advantage of the other party. There is a presumption of undue influence when a spouse gives up property without receiving any consideration in return.
Third, if there is a waiver of the right to reimbursement, then there may be a valid transmutation. The waiver would need to be without fraud or undue influence.
For more information about transmutations, click here.
When property is “commingled” with property of a different character it may lose its separate property characteristics. The most common example of commingling occurs when money earned or acquired during marriage is mixed with money that was brought into the marriage or acquired from an inheritance, so that it is no longer discernible what money is what. In order to prove that money is not “commingled” to the extent it is no longer discernible, there are two ways to accomplish this task. First, the money can be directly traced, dollar for dollar, through bank account statements. Second, the “family expense presumption” can be used, which states that presumably community money is used before separate money for community expenses during marriage.
Contributions of Community Funds
It is permissible to use community property funds to pay for separate property during marriage. (See Cal. Family Code 1100.) This is because the money is reimbursable to the community. The most common situation where this scenario applies is where one spouse purchases a home before marriage, marries, and then the parties live in the separate property home during marriage and pay for the mortgage, improvements, etc. Under these circumstances, the community acquires an interest in the property under the Moore Marsden (and other) line of cases.
Contributions of Community Efforts During Marriage
The final way in which the community may acquire an interest in separate property is when one or both parties use their time, energy, efforts and skills during marriage to increase the value of the separate property asset. This methodology usually applies to the situation where one spouse brings a separate property business into the marriage, and then continues to work on the business during marriage. There are two cases that are primarily used to determine how the community will be determined to have acquired an interest under this fact pattern. Under Van Camp, the community’s efforts are determined to not be the primary reason for the increase in value or production of income during marriage. This usually occurs when the business runs by itself without much assistance from the owner-spouse. Under this case, the community is compensated using a reasonable salary assigned to the owner-spouse. Under Pereira, the community’s efforts are determined to be the primary reason for the increase in value or production of income during marriage. This usually occurs when the spouse spends considerable time and efforts to increase the sales/value of the business. Under this case, the community receives a rate of return on the value of the business.
For more information about fiduciary duties, transmutation of property, and characterization of property for your specific case, contact our office today. We offer a free, private consultation to discuss your options. We are conveniently located in Irvine and service Huntington Beach, Laguna and Anaheim.