California Divorce: Community Property / Separate Property

Community property: meaning and effect

California is a community property state, which means anything of value received or created by either spouse during the marriage is community property, including earnings & bonuses, retirement benefits and pensions, as well as interests in intellectual property and entrepreneurial ventures that were created during the marriage, or increased in value due to the personal efforts of either spouse during the marriage. Each spouse is entitled to an undivided one-half interest in all community property. Thus, if the parties divorce, each party is entitled to receive one half of all community property.

Separate property: meaning and effect

Separate property is the property owned by one of the spouses prior to marriage as well as any property acquired during the marriage by one spouse through inheritance or gift; or acquired by one of the parties after the date of separation. Absent an agreement to the contrary, separate property is owned only by one spouse, and upon divorce that party is awarded 100% of the asset with no portion going to the other spouse. And although not technically community property, any money received as a result of a claim/lawsuit for personal injuries received by one spouse, will usually be awarded solely to that spouse upon divorce.

Separate property can become community property [in whole, or in part] during the marriage 

Transferring title: The community can acquire an interest in the separate property of one of the spouses during the marriage. The obvious way for separate property to become community property is for the parties to agree to change the property from separate property to community property. This is usually done by transferring the title to the property from one person to joint ownership. Although joint ownership does not necessarily mean that the property is community property, joint ownership does give rise to the presumption that it is community property.

Requirement for express written statement of intent to change character of property. 

The law requires that any change from separate property to community property be done by a writing that "expressly" states that it is being changed from separate to community property, with the significant exception [as developed by case law], of a grant deed of real property that results in title being held jointly, where courts have usually held that such a deed results in a change into community property. Other transfers, without such an express written agreement, are ineffective to change separate property into community property. [Such as bank accounts and titles to cars, and transfers where there is no record title].

Gifts of property to one spouse by the other; need for writing for substantial gifts.

In addition, separate property of one spouse, as well as community property, can be changed into the separate property of the other spouse by way of gift and/or transfer from one spouse to the other. Gifts of substantial value [given the financial situation of the parties] require an express written agreement specifically stating that it is changing the character of the property to make the gift the separate property of the receiving spouse. Therefore, without such a written agreement the gift will continue to be community property and in a divorce, the value of the property will be divided equally between the parties. Conversely, gifts that are not of substantial value do not require a writing to effectively make the property the separate property of the receiving spouse.

Presumption of undue influence may void any transaction between spouses.

An overriding factor in all transfers and transactions between spouses is the requirement that the transfers not be the result of undue influence. Importantly, undue influences is presumed in any transaction between the spouses that benefits one spouse at the expense of the other, unless it can be proved that the transferring spouse had a full understanding of the facts and consequences of the transfer/transaction. This often comes up in the context of one party quitclaiming an interest in joint real property to the other, sometimes in connection with a refinancing of a mortgage. But it applies to all financial transactions between spouses.

Right of reimbursement for separate property contributed to, or changed to, joint property. 

And even though a valid transfer of separate property to jointly held community property results in a community property asset, the spouse transferring the separate property is entitled to reimbursement for the entire net value of the property at the time of transfer, absent a written waiver of the statutory right to reimbursement for the contribution of separate property to a community property asset. In most cases this can be a significant portion of the assets value, especially if the asset is a depreciating asset.

Even with real property this can amount to most of property's value, especially if there has been minimal appreciation. The reimbursement right is limited to return of the value or money at the time of transfer/transmutation without interest or appreciation, and importantly, is limited to the value of the asset at the time of division of the marital property.

Community interest in separate property by contributions/additions to its value during marriage. 

The other way for one spouse to acquire an interest in the separate property of the other during marriage is for contributions or increases to the value of the property as a result of efforts by either spouse that have the effect of increasing the value of that property, including personal efforts and/or use of community funds, such as earnings, to add to the property's value, or to reduce the principal on a loan secured by that property.

If  you have further questions regarding community or separate property, please contact Martin "Jamie" Elmer, family law attorney in Berkeley, California, at (510) 644-2411 or by email, for a free initial consultation.