Division of Community Property
As to the division of community property, the law is very clear.
California Civil Code Section 4800 provides that the court shall divide the community property equally. This means 50-50, not 51-49. Of course, the parties may, by way of settlement, waive an equal distribution of the community property.
Definition of Community Property and Separate Property
When considering what the community property is, you must keep in mind the definition of community property. Community property is defined, with a few exceptions, as those earnings and which are acquired between the date of marriage and the date of separation. Separate property, with the exception of quasi-community property, is defined as any property that is not community. The term “property” includes debts and assets. Thus,
the equity in your house may be community property and, if so, must be divided between the parties. This may mean that the house will have to be sold.
The term “earnings and accumulations” is a critical part of the definition of community property. Many such “earnings and accumulations” are often overlooked. Perhaps the major area of assets overlooked is in the area of deferred compensation. Deferred compensation includes, but is not limited to, the following types of assets:
Pensions; profit sharing plans; defined benefit plans; Social Security; Railroad Retirement; profit thrift plans; Individual Retirement Accounts (IRA); Keogh (HR-10) plans; target benefit plans; money-purchase plans; stock options; termination benefits; deferred compensation contracts; “play or pay” contracts; disability; workers’ compensation; Supplemental Security Income (SSI); unemployment insurance or benefits; insurance, whether whole life, term, or group; accrued vacation or sick pay; and variable incentive pay.
This list is not meant to be exhaustive, but simply to alert you to the possibility that there may be community assets that you have not thought of.
Social Security Benefits
At this time, it has been held that the primary Social Security Benefits of an employed spouse is the separate property of the employed spouse. (It is questionable whether or not Social Security Benefits will remain separate property in light of the rather liberal attitude of the California Supreme Court. You may want to discuss this with me.)
Primary Social Security Benefits are the type of benefits that we normally think of, i.e. the payment of several hundred dollars per month to the employed spouse once the employed spouse reaches retirement age. However, there is a secondary type of social security benefits called derivative benefits. Derivative benefits apply to the non-employed spouse in a marriage which lasted at least ten years. Beginning with applications filed after January 1, 1985, an ex-spouse who is over 62 years of age and who was married for at least ten years and divorced for at least two years, is entitled to derivative Social Security Benefits if the ex-spouse will be eligible for primary benefits upon retirement. Formerly, an ex-spouse had to wait until the working spouse retired. This statute also provides that the surviving ex-spouse, widow, or widower, who remarries after age 60 (or age 50 if the recipient is entitled to disability benefits before remarriage) is entitled to receive derivative benefits.
Certainly, the most common form of deferred compensation involved in dissolutions is the pension/profit sharing/retirement plan. It may seem rather cold and callous to be discussing the division of retirement pay; however, it can be a major portion of the community property. There are many options to be considered when discussing the division of the retirement plan. These include a reservation of jurisdiction by the court over the plan to pay to the non-employed spouse his or her appropriate share when the employed spouse receives his or her benefits, a buy-out by the employed spouse from the non-employed spouse based upon an actuarial evaluation of the present value of the fund; or a division “in kind” whereby the court actually makes the non-employee spouse a part-owner of the funds. There are also several minor and infrequently used methods of disposition such as termination of the plan, taking a loan out against the plan and rolling the plan over into a different plan. Which method to use depends largely upon what we are trying to accomplish and what the attitude of the particular judge is with respect to retirement plans.
The California Supreme Court has held that where the court does reserve jurisdiction over the distribution of the retirement plan, the non-employee spouse may demand his or her share of the payment at the first available retirement date of the employee spouse even if the employee spouse is not drawing retirement. Thus, if a husband is covered by a plan and has the opportunity to retire (even though with reduced benefits) at age 55, but elects to work until age 65, the wife may demand, on husband’s 55th birthday, or thereafter, her share of the payment as if husband had in fact retired at age 55. Thus, husband would have to take out of his own salary wife’s portion of the retirement benefits. This, of course, can cause some economic problems for the employee spouse. We should discuss in detail, if this is a problem, the pros and cons of the various alternatives in dividing a retirement plan.
Effective January 1, 1987, the court is permitted to make whatever orders are necessary or appropriate to assure that each party receives his or her full community property share in any survivor and death benefits. The court may make an order dividing the survivor and death benefits or may order a party to elect a survivor benefit annuity or other similar election for the benefit of the other party.
Prior to January 1, 1987, the law regarding survivor benefits was in the “grey area.” Often the courts felt they did not have the power to award or divide the survivor benefits. This issue has now been cleared up by the Legislature. These survivor benefits are extremely important and must be given careful consideration in the division of property.
Separate Property Contributions to Community Property
Often one spouse has contributed his or her separate property funds to the acquisition of community property. The question becomes whether or not that spouse is entitled to reimbursement, in one form or another, for the separate property contributions. Although the answer is not crystal clear, it appears, based upon case law, as well as legislative activity, that the answer depends upon when the property in question was acquired. It is critical that you inform me immediately if the facts in your case might require some analysis as to whether or not there is a right of reimbursement as a result of a separate property contribution to community property, if you have not already done so.
In determining the answer to the right of reimbursement for separate property contributions, there are competing legal theories. A short cut way of referring to these theories are as “Lucas” and “4800.2”.
According to the Supreme Court in the Lucas case, and as subsequently interpreted by other courts, if property is acquired in the name of husband and wife with the aid of a separate property contribution (such as a down payment) absent an agreement or understanding to the contrary, the entire property is community property. There is no reimbursement to the party contributing to the separate property. However, if the parties have reached an agreement or an understanding that the contributing party will be reimbursed his or her separate property or will somehow maintain a separate property interest in the property, then there is a right of reimbursement to the party contributing to the separate property. This agreement or understanding can either be written, oral or implied from the conduct of the parties.
Community Contributions to Education or Training: Where the community has made contributions to the education or training of a party that substantially enhances the earning capacity of that party, the amount of the contribution shall be reimbursed, with interest at the legal rate, subject to certain limitations. Thus, if one of the spouses went to a professional school or in some manner was educated or trained during marriage and the community made contributions to the education or training, there may be an issue of reimbursement. It is critical that you inform me immediately if the facts in your case might require this type of reimbursement, if you have not already done so.
Management and Control of Community-Business by Operating Spouse
Effective July 1, 1987, the spouse that manages a community-business or otherwise operates it, shall have “primary” management and control, meaning that “the managing spouse may act alone in all transactions but shall give prior written notice to the other spouse of any sale, lease, exchange, encumbrance or other disposition of all or substantially all of the personal property used in the operation of the business…, whether or not title to that property is held in the name of only one spouse.” The failure to comply with this provision allows the spouse not in the management or control of the business to bring a lawsuit, within the dissolution action or separate and distinct from the dissolution action.
Division of Community Debts
Effective January 1, 1987, debts that are unpaid at the time of trial for which the “community estate” is liable, shall be confirmed or divided upon the dissolution of the marriage. The trial court is required to characterize liabilities as separate or community and confirm or assign them to the parties in the following manner:
- Debts Incurred Before Marriage: Debts that are incurred prior to marriage will be assigned to the spouse incurring the debt without right of offset and be confirmed to that spouse as their separate property debt.
- Debts Incurred From Marriage to Separation: Debts that have been incurred from the date of marriage to the date of separation will be considered community
property debts, except for debts not incurred for the benefit of the community, and are subject to the equal division rule. If a debt was incurred that is not for the benefit of the community, the court may assign that debt to the incurring spouse as his or her sole and separate property debt, without right of offset.
- Debts Incurred From the Date of Separation to Judgment: As to debts incurred from the date of separation to judgment, the characterization of the debt depends upon whether there is a court order for support or an agreement regarding the payment of those debts. If there is a court order for support or the parties have reached an agreement regarding the payment of the debts, any debt incurred after the date of separation is the separate property obligation of the spouse incurring the debt. However, where there is no such order or agreement, debts incurred after separation but before entry of judgment for “common necessaries of life” of a spouse or “necessaries of life” of children shall be confirmed to either spouse according to their respective needs and abilities to pay at the time the debt was incurred. Debts incurred after separation but before entry of judgment for non-necessaries shall be confirmed without offset to the spouse who incurred the debt.
- Debts Incurred After the Judgment but Prior to the Date of Status Termination: Where a Judgment of Dissolution of Marriage has been entered but the marital status does not terminate until some time in the future, debts incurred after the entry of judgment or prior to the termination of the marital status shall be confirmed without offset to the spouse who incurred the debt.
Reimbursement of Debts Paid After Separation (Epstein Credits)
Very often after the date of separation only one spouse can afford to make payments on community debts. As previously indicated, any earnings and accumulations, including wages, earned after the date of separation, are the separate property of the earning spouse. As a general rule, a spouse who, after separation of the parties, uses earnings or other separate funds to pay preexisting community obligations, will be reimbursed therefor out of the community property. These are called “Epstein” credits. However, there are a number of exceptions to this general rule. (1) Reimbursement will not be allowed if the payment was made under circumstances in which it would have been unreasonable to expect reimbursement, for example, where there was an agreement between the parties that the payment would not be reimbursed or where the paying spouse truly intended the payment to constitute a gift. (2) Where the payment was made on account of a debt for the acquisition or preservation of an asset that the paying spouse was using and the amount paid was not substantially in excess of the fair rental value of the asset, no reimbursement will be allowed. (3) Reimbursement would not be ordered where the payment on account of a preexisting community obligation constituted, in reality, a discharge of the paying spouse’s duty to support the other spouse or the dependent children of the parties. This is because both spouses have a duty to support their dependent children and other spouse. In addition, because of the new legislation on the division of debts, if a spousal support award has not been entered, the debts incurred after separation for the “common necessaries of life” of your spouse or “necessaries of life” of your children may be allocated to you. In such situation, any payments on these debts would be nonreimbursable, in essence, because they are being made in lieu of support. The issue of reimbursement for the payment of community obligations out of separate property funds should not be forgotten as the amount of money can be quite a bit.
Normally, if there is a reimbursement to one spouse, it is for one-half of the payment since the paying spouse is paying a debt that is one-half his or hers and one-half the other spouse’s.
Obligation on Assigned Contracts
It should be noted that, although an obligation based on a contract is assigned to your spouse as part of an equal division of community property, in the event that your spouse, who was assigned the obligation, defaults on the contract, the creditor may have a cause of action against you and sue you for any monies due and owing, together with interest and penalties. The California and Federal Constitutions prohibit our courts from interfering with contractual arrangements and, therefore, the court cannot take you totally off the hook with respect to the payments on these debts. However, should your spouse fail to pay the debt and the creditor comes against you, you will have a right to go against your spouse for whatever it is worth.