Community Property – Considerations Before Marriage – By Wayne Johnson, Attorney, Oakland, California

In states controlled by community property laws, most property acquired during the marriage (except for gifts or inheritances) is presumed to be community.  That means it is  owned jointly by both spouses and is divided upon divorce, annulment or death.   Under the community property doctrine, the law presumes in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property, that the property is jointly owned.

Many California residents presume that all property owned by one or both spouses is community property, and that is the “default” condition.  This means that unless property is of a certain character or the parties agree, in writing, to the contrary, that is how it is held.

Many California residents also assume that they enter into a common law marriage by living together in California for a set period of time and hold themselves out as husband and wife.

Both of the above presumptions are incorrect.

Common-Law Marriage in the United States can still be contracted in nine states (Alabama, Colorado, Kansas, Rhode Island, South Carolina, Iowa, Montana, Utah and Texas) and the District of Columbia. New Hampshire recognizes common-law marriage for purposes of probate only, and Utah recognizes common-law marriages only if they have been validated by a court or administrative order.

Common-law marriage can no longer be contracted in 27 states, and was never permitted in 13 states. The requirements for a common-law marriage to be validly contracted differ from state to state. Nevertheless, all states — including those that have abolished the contract of common-law marriage within their boundaries — recognize common-law marriages lawfully contracted in those jurisdictions that permit it, meaning if you consummate a marriage in a state where it is permitted and later move to a state that does not permit it, the new state will recognize it.

Some states that do not recognize common law marriage also afford legal rights to parties to a putative marriage (i.e. in circumstances when someone who was not actually married, e.g. due to a failure to obtain or complete a valid marriage license from the proper jurisdiction, believed in good faith that he or she was married) that arise before a marriage’s invalidity is discovered.  The principle of common-law marriage was affirmed by the United States Supreme Court in Meister v. Moore (96 U.S. 76 (1877)), which ruled that Michigan had not abolished common law marriage merely by producing a statute establishing rules for the solemnization of marriages.

Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California, a 50/50 division of community property is strictly mandated by statute, meaning that the focus then shifts to whether particular items are to be classified as community or separate property. In other jurisdictions, such as Texas, a divorce court may decree an “equitable distribution”” of community property, which may result in an unequal division of such.  In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property (i.e., not community property).

Division of community debts may not be the same as division of community property. For example, in California, community property is required to be divided “equally” while community debt is required to be divided “equitably.

Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is “transmuted” into community property.  The rules for this vary from jurisdiction to jurisdiction.

States that recognize community property are primarily in the West; it was inherited from Mexico’s ganancial community system, which itself was inherited from Spanish law (a Roman-derived civil law system) and ultimately from the Visgoths.  While under Spanish rule, Louisiana adopted the ganancial community system of acquests and gains, which replaced the traditional French community of movables and acquests in its civil law system.

The community property system is usually justified by the pragmatic recognition that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family unit, a basic component of civil society. The countervailing majority view in most U.S. states as well as federal law (based on traditional American family values and gender roles) is that marriage is a sacred compact in which a man assumes a “deeply rooted” moral obligation to support his wife and child, while community property essentially reduces marriage to an “amoral business relationship.

In the United States there are nine community property states. While not a community property state, Alaska does allow couples to opt-in to a community property arrangement; property is separate property unless both parties agree to make it community property through a community property agreement or a community property trust.  It used to be that the parties could determine the character of property by an oral agreement or understanding, or by conduct; however, now all property acquired during the marriage is presumed to be community unless the character is changed in writing.

If property is held as community property, each spouse technically owns an undivided one-half interest in the property. This type of ownership applies to most property acquired by each spouse during the course of the marriage. It generally does not apply to property acquired prior to the marriage or to property acquired by gift or inheritance during the marriage. After a divorce, community property is divided equally in some states and according to the discretion of the court in the other states.

It is extremely important to bear in mind that there are no two community property states with exactly the same laws on the subject. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. For example, in some community property states (so-called “American Rule” states), income from separate property is also separate. In others (so-called “Civil Law” states), the income from separate property is community property. The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state.

Community property has certain federal tax implications, which the Internal Revenue Service discusses in its Publication 555.  In general, community property may result in lower federal capital gains taxes after the death of one spouse when the surviving spouse then sells the property. Some states have created a newer form of community property, called “community property with right of survivorship.” This form of holding title has some similarities to joint tenancy with right of survivorship. The rules and effect of holding title as community property (or another form of concurrent ownership) vary from state to state.

Because community property law affects the property of all married persons in the states in which it is in effect, it can have substantial consequences upon dissolution of the marriage from the perspective of the spouse forced to share a valuable asset that he or she thought was separate property.

One of the most spectacular examples of this in recent memory was the Frank McCourt Dodger’s dispute.  Frank McCourt paid his ex-wife about $130 million to avoid a trial over whether the team was actually community property after the trial court ruled that the McCourts’ prenuptial agreement was invalid.

What is a Prenuptial or Premarital Agreement?

Basically, a prenuptial agreement is an agreement that defines property that might ordinarily be presumed to be community property.   The agreement is “pre” because it is usually entered into before marriage because that is when neither party owes the other a fiduciary duty to be fair and look out for the other’s interests.   However, a marital agreement may be entered into at any time.  During a marriage when both parties work, they usually treat their incomes as separate property, and they spent it as they did before being married until it is placed into a joint account; however, all income is presumed to be community property.

In a prenuptial agreement even income can be treated as separate property.   However, this does not mean that income is not subject to family support.  And, even the best of prenuptial agreements cannot exempt separate property from family support obligations.   Be mindful that separate property may be transmuted into community property by the way it is handled during the marriage.  If you place separate income into a joint account, or pay down a loan on separate property, the community can obtain all or a portion of the property.

Even a detailed prenuptial can be invalid so it is best that the prenuptial be arm’s length, and that the parties be represented by independent attorneys and clearly understand what they are giving up.   This is done by allowing both parties a reasonable amount of time to consult with attorneys to consider the terms of the prenuptial agreement.

Issues

Often a new couple acquires a family residence. If the marriage terminates in subsequent years, there can be difficult community property problems to solve. For instance, often there is a contribution of separate property; or legal title may be held in the name of one party and not the other. There may also have been an inheritance or substantial gift from the family of one of the spouses during the marriage, whose proceeds were used to buy a property or pay down a home loan or mortgage. Case law and applicable formulas vary among community property jurisdictions to apply to these and many other situations, to determine and divide community and separate property interest in such a residence and other property.

Community property issues often arise in divorce proceedings and disputes after the death of one spouse. These disputes can often be avoided by proper estate planning during the spouses’ joint lifetime. This may or may not involve probate proceedings. Property acquired before marriage is separate and belongs to the spouse who acquired it. Property acquired during marriage is presumed to belong to the community estate except if acquired by inheritance or gift, or by exchange for other separate property. This definition leads to numerous issues that can be difficult to ascertain. For instance, where a spouse owns a business when marrying, it is clearly separate at that time. But if the business grows during the marriage, then what of the additional property acquired during marriage? Do they not result from labor of the spouses? Were some of the funds that were used to pay for the property community funds while a portion of the funds were separate property?

Community property may consist of property of all types, including real property (“immovable property” in civil law jurisdictions) and personal property (“movable property” in civil law jurisdictions) such as accounts in financial institutes, stocks, bonds, and cash.

A pension or annuity may have first been acquired before a marriage. But if contributions are made with community property during marriage, then proceeds are partly separate property and partly community property. Upon divorce or death of a party to the marriage, there are rules for apportionment.

Options are also difficult to ascertain. A stock option is a right to purchase shares of a company at a fixed price. Companies with growth potential sometimes award stock options as compensation to employees, during times when there is not enough money to pay a suitable salary. By accepting a stock option for compensation, an employee invests his or her own trust in the belief that he or she will help make the company acquire a higher value. Thereafter, the employee works and contributes value to the company. If the company later acquires a higher share valuation, then the employee may “cash in” his options by selling them at the fair market value. The employee’s trust in this future value motivates his work without immediate compensation. That effort has value. If the marriage is terminated before the shares are cashed in, then the parties must decide how to apportion the community property portion of the options. This can be difficult. Case law precedents are not yet available for all situations involving stock options.

Definition – Quasi Community Property

Property acquired by a married person or couple in a non-community property state that would have been community property if it had been acquired in a community property state, e.g. California. If the married couple subsequently relocates to a community property state and either the couple divorces or one spouse dies, a court in that state may treat the property like community property when determining the property interests of the divorcing or surviving spouse(s).

Quasi-community property is a concept recognized by some community property states. For example, in California, quasi-community property is defined by statute as “all real or personal property, wherever situated, acquired before or after the operative date of this code in any of the following ways: (a) By either spouse while domiciled elsewhere which would have been community property if the spouse who acquired the property had been domiciled in this state at the time of its acquisition. (b) In exchange for real or personal property, wherever situated, which would have been community property if the spouse who acquired the property so exchanged had been domiciled in this state at the time of its acquisition.

It can also refer to property acquired by the parties during the marriage when they lived in a state that does not recognize community property under circumstances that it would have been presumed to be community property had the parties lived in California.

Typically, such property is treated as if it were community property at the time of divorce or death of a spouse, but in California, at least, property acquired while married and domiciled in a non-community property jurisdiction does not become community property just because the married parties move to a community property jurisdiction. It is the new event of divorce or death while domiciled in the community property state that allows that state to treat such property as quasi-community property.  As of 2007, only Washington, California, New Mexico and Arizona have laws that recognize quasi-community property.

Divorce

In many community property law states, a husband and wife may enter into a Premarital (or Prenuptial) Agreement that there will be no community property. Divorce terminates the community relationship in all community property states; however, the manner in which the property is divided differs.

Upon the dissolution of a marriage, the source of property becomes important in determining whether an asset is community or separate property. Ordinarily, separate property includes that which is acquired through gift, descent and distribution, and devise or bequest. Each partner in a Property Settlement reacquires whatever he or she owned prior to the marriage.

In some states, community property is divided equally; in others, the division is based on the court’s discretion. In certain jurisdictions, the guilt of a spouse in a divorce action can be a factor in reducing his or her share of the community property.

Inheritance Laws

Each spouse owns one-half of the couple’s property in community property states, and, therefore, when a husband or wife dies only one-half of the marital property is inheritable since the surviving spouse owns, in his or her own right, one-half of the marital property.  If that spouse does nothing to transfer his or her interest, his or her interest goes to the surviving spouse.

If you have a family law question or wish to consult with an attorney in the area of family law, you may contact Wayne Johnson, Attorney At Law, (510) 451-1166

 

 

 

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