Property Characterization

Property Characterization When Is A House Your Separate Property Or Is It Community Property

In practicing marital dissolutions, (commonly known as a divorce), in Family Law within Sacramento County, Santa Clara County, the City of Sacramento, Roseville, Placerville, San Jose and the surrounding communities such as Santa Clara, Los Gatos, Sunnyvale, Campbell and Morgan Hill, an issue which comes up frequently is wether or not a family residence is community property or the separate property of one of the spouses. This can be one of the most expensive issues to litigate in a divorce and one of the most complex. It is the intent of this article to discuss what is community property, separate property how to transmute the status of real property, (changing separate property into community property intentionally), and just what a Delaney Action is all about in The State of California. This article applies to married individuals as well as registered domestic partners.

What is Community Property?

Generally, the concept of community property is that ANYTHING acquired during the course of a marriage or domestic partnership is PRESUMED to be community property unless it is proven by the party making a claim of separate property that the asset or debt at issue is in fact separate property. Unless there is a valid written agreement between spouses or domestic partners, marital property rights of individuals, (not persons), are determined and set Family Code,§§ 750, 760 and 770. The State of California does not recognize the concepts of "dower" and "curtesy, Probate § 6412. Essentially what this means is that if any debt or asset is acquired after the date of marriage, or before the date of separation, is community property with certain exceptions which are discussed below.

"Except as otherwise provided by statute," community property is all property acquired by a married person during marriage while domiciled in California. [Family Code, § 760; see also Civil Code, § 687; Marriage of Bonds (2000) 24 Cal.4th 1, 12, 99 Cal.Rptr.2d 252, 258] This is applicable as to registered domestic partners as well. Community property is all property acquired by either partner during the domestic partnership while domiciled in California. [Family Code, § 297.5] These statutes and cases make our rules of community property and they apply to all real and personal property no matter where the property is located. [Family Code, § 760] The parties' respective interests in community property at all times are "present, existing and equal." [Family Code, § 751; see Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1012–1013, 84 Cal.Rptr.3d 642, 658–659 (stock); Vick v. DaCorsi (2003) 110 Cal.App.4th 206, 212, 1 Cal.Rptr.3d 626, 630; State Board of Equalization v. Woo (2000) 82 Cal.App.4th 481, 483, 98 Cal.Rptr.2d 206, 208]

What this means is that each spouse has a 50% ownership interest in all community property, and that they have equal rights of management and control. Neither spouse has any advantage over the other in the management of marital assets and each party is subject to fiduciary duties to the other. (Family Code, §§ 721(b), 1100 et seq.). This means that each spouses interest are "equal" interests under the meaning of § 751. This is a 50–50 interest in the whole of the community property. Neither spouse has any right nor do they have any"exclusive" interest in only half of the community property. In other words, neither spouse has a 50% ownership interest in the community estate to the exclusion of the other. [In re McIntyre (9th Cir. 2000) 222 F.3d 655, 658]

What about out of state property?

Often individuals who reside in Santa Clara County, especially in San Jose and the surrounding communities such as Santa Clara, Los Gatos, Sunnyvale, Campbell and Morgan Hill, own property not only in this county or these communities, but they also own property or properties out of state. Where parties have connections with other states as to their spouses or with their property, courts must address a threshold issue...... Which state's laws apply to determine marital property interests.

The answer to this question is that the location of the property is not controlling as to the marital laws of the State in which the property is located. For the purposes of The State of California and Santa Clara County, in defining community vs. separate property interests, the law of where parties' marital or domestic partnership domicile will control. In other words, if the parties to a dissolution, (divorce), live in The State of California, then the law of The State of California will control. The principle which applies is the normal choice of law rule governing personal property disputes, (Civil Code, § 946) This states that regardless of where located, personal property "follows" the owner and is governed by the law of owner's domicile, (residence). This rule applies when we determine what the marital interests in real property, are. [Barber v. Barber (1958) 51 Cal.2d 244, 247, 331 P.2d 628, 630–631; Grappo v. Coventry Fin. Corp. (1991) 235 Cal.App.3d 496, 505–506, 286 Cal.Rptr. 714, 719–720) "As a rule, marital interests in money and property acquired during a marriage are governed by the law of the domicile at the time of their acquisition, even when such money and property is used to purchase real property in another state." [Grappo v. Coventry Fin. Corp., supra, 235 Cal.App.3d at 505, 286 Cal.Rptr. at 719––Calif. law applied to determine CP vs. SP interests in Nevada land purchased while spouses domiciled in Calif.; see also Muckle v. Super.Ct. (Burgess–Muckle) (2002) 102 Cal.App.4th 218, 225–226, 125 Cal.Rptr.2d 303, 308]

In enacting the Family Code, the statues effectively change the prior statutory definition of "community property". The prior definition was that out–of–state real property was generally not community property but for purposes of addressing debt liability as to the property and division of assets during a marriage it would be treated as community property. The change has resulted in the courts in The State of California treating out–of–state community real property as community property for all purposes, including intraspousal management and control fiduciary obligations. [See Law Rev. Comm'n Comment to Ca Fam § 760, 23 Cal.L.Rev. Comm'n Reports 1 (1993)] However, as a matter of choice–of–law rules, a California court's judgment dividing out–of–state real property cannot directly affect the nature of title thereto unless allowed by the situs state's law. [Fall v. Eastin (1909) 215 U.S. 1, 11–12, 30 S.Ct. 3, 7–8; Rozan v. Rozan (1957) 49 Cal.2d 322, 330, 317 P.2d 11, 15]

What happens if we buy property in California and later move out of The State of California?

This issue arises where the marital partners or domestic partners have bought property while they lived in The State of California and have subsequently moved from The State of California. If parties to a marriage or a domestic partnership have moved from The State of California, a community property interest which was created while the parties resided in The State of California, will not be defeated by the parties' subsequent move to another common law state. [Marriage of Moore & Ferrie (1993) 14 Cal.App.4th 1472, 1482, 18 Cal.Rptr.2d 543, 547] This only applies to another COMMON LAW state.

However, once the parties have made their move from The State of California to another common law state, no further community property ownership interests will be created as to additional marital assets once the parties change their domicile. The community property interest in the property is fixed while the parties lived in California and are fixed as of the date the parties change their domicile to a common law state. A case which the courts look to for direction is this is Marriage of Moore & Ferrie, supra, 14 Cal.App.4th at 1482–1483, 18 Cal.Rptr.2d at 549.

What if we have moved from another State to California after we obtained marital property?

Remember, if you are getting a dissolution of marriage or dissolution of a domestic partnership, (divorce), in The State of California, the laws of The State of California apply. This may seem confusing but it will become clearer as this discussion continues.

When a couple have obtained property in another State while living in the other common law State, and have subsequently relocated or moved to The State of California, the property is viewed as quasi–community property. This is a matter of pure property law. When spouses move from a common law state to The State of California, any property acquired in the common law state retains its common law (separate property) character and does not "ipso facto" become community property simply because the parties later moved The State of California. [Estate of Thornton (1934) 1 Cal.2d 1, 33 P.2d 1, 3] However, when the courts determine the marital estate debt liability and the marital estate is being divided in a dissolution, (divorce) all property that would have been community property had it been acquired while the parties LIVED IN The State of California is deemed quasi–community property and treated exactly as if it were community property. [Family Code, § 125] In English this means that if you move to The State of California after you have been married and you acquire property outside of The State of California, then the court will treat the property as being community property even if it is not community property in the other State. For purposes of this discussion "State" means any of the 50 States of the United States, its territories and possessions, as well as any other Country out side of the United States of America.

As stated above, although the character of property does not change when spouses move from a common law State to The State of California, property acquired during their marriage or domestic partnership may be treated as community property under quasi–community property law for purposes of defining marital property debt liability and property division rights upon marriage termination. However, community property interests cannot be acquired by parties to an invalid marriage. But if either party is a "putative spouse", (where there is a good faith belief that the parties are in a valid marriage when it is not a valid marriage), any property acquired during the union which would have been community or quasi–community property, had the marriage been valid at the time the property was acquired, are deemed "quasi–marital property" and must be divided in a nullity proceeding just as if the property was community property. [Family Code,§ 2251]

Just what are the interest between spouses in a marriage or a domestic partnership?

Remember, that pursuant to the laws of The State of California, which the communities of Sacramento County, Santa Clara County, the City of Sacramento, Roseville, Placerville, San Jose and the surrounding communities such as Santa Clara, Los Gatos, Sunnyvale, Campbell and Morgan Hill, any property, real or personal, may be owned either separately or jointly. (Civil Code, §§ 681 & 682) Spouses or registered domestic partners may co–own property as joint tenants, tenants in common, community property or community property with right of survivorship. (Family Code, §§ 750 and 297.5) However, community property ownership cannot coexist with joint tenancy or tenancy in common ownership in the same property between the same co–owners. Thus, each party's interest in joint tenancy or tenancy in common property is his or her own separate property. [Estate of Mitchell (1999) 76 Cal.App.4th 1378, 1385, 91 Cal.Rptr.2d 192, 196–197; see In re Summers (9th Cir. 2003) 332 F.3d 1240, 1243) This is tempered by

When assets are being addressed in a marriage dissolution, legal separation or a dissolution of domestic partnership, for purposes of a property division a far–reaching community property presumption attaches to property acquired by the parties in "joint form" during marriage. [Family Code, § 2581] This statutes make it clear that the Legislature expressly intended courts to apply § 2581 regardless of the date of acquisition of the property. Specifically, it is set forth in the Family Law statutes:

"It is the public policy of this state to provide uniformly and consistently for the standard of proof in establishing the character of property acquired by spouses during marriage in joint title form . . ." [Family Code, § 2580(a)]

"The methods provided by case and statutory law have not resulted in consistency in the treatment of spouses' interests in property they hold in joint title, but rather, have created confusion as to which law applies to property at a particular point in time . . . and, as a result, spouses cannot have reliable expectations as to the characterization of their property . . ." [Family Code, § 2580(b)]

"Therefore, a compelling state interest exists to provide for uniform treatment of property. Thus, [Ca Fam § 2581 and its predecessor], as operative on January 1, 1987, appl[ies] to all property held in joint title regardless of the date of acquisition of the property or the date of any agreement affecting the character of the property, and . . . in all proceedings commenced on or after January 1, 1984. However, [§ 2581 and its predecessor] do not apply to property settlement agreements executed before January 1, 1987, or proceedings in which judgments were rendered before January 1, 1987, regardless of whether those judgments have become final." [Ca Fam § 2580(c) (brackets added)]

The Family Code, § 2581 presumption attaches to any type of joint title acquisition by spouses during marriage (real and personal property, whether tenancy in common, joint tenancy, tenancy by the entirety or community property). [Family Code, § 2581] As a result, ANY asset, whether they are stocks, motor vehicles, boats, any form of real property, and any other assets acquired in joint title form during marriage are presumptively community property. (The same is true for bank accounts and other accounts in financial institutions held jointly by spouses; but the community property presumption in these cases, including corresponding rebuttal rules, are governed by the Multiple–Party Accounts Law (Probate Code, § 5100 et seq.), not by Family Code, § 2581.

However, unlike the general community property presumption and other title presumptions, as set forth in Family Code, § 760, Family Code, § 2581 applies only for purposes of a division of property upon marriage dissolution or legal separation. [Family Code, § 2581; Dorn v. Solomon (1997) 57 Cal.App.4th 650, 652, 67 Cal.Rptr.2d 311, 312; see Estate of Blair (1988) 199 Cal.App.3d 161, 166–167, 244 Cal.Rptr. 627, 630; Abbett Elec. Corp. v. Storek (1994) 22 Cal.App.4th 1460, 1466–1468, 27 Cal.Rptr.2d 845, 848–850 & fn. 7]

So long as there is a pending dissolution action in which the character and nature of property are at issue, it is properly before the court in a marriage dissolution or legal separation proceeding,. The § 2581 presumption then attaches to joint tenancy property acquired during marriage to effectively defeat the "survivorship" interest that normally accompanies a joint tenant's title. Absent there being admissible evidence of a a written agreement rebutting the § 2581 community property presumption, Family Code, § 2581 controls over the form of title (joint tenancy) presumption. [Marriage of Hilke (1992) 4 Cal.4th 215, 222–223, 14 Cal.Rptr.2d 371, 376–377] Under this line of authority, it is the express designation of joint title during marriage that invokes the presumption. [Marriage of Neal, supra, 153 Cal.App.3d at 124, 200 Cal.Rptr. at 346; Marriage of Anderson, supra, 154 Cal.App.3d at 579, 201 Cal.Rptr. at 502]

Accordingly, if the parties change the title to a separate property residence, a separate property bank account, or any other separate property to joint title between the spouses during marriage, the property is presumptively community property at dissolution or legal separation under Family Code, §§ 2581. [See Marriage of Rico, supra, 10 Cal.App.4th at 710, 12 Cal.Rptr.2d at 661] Under this case the residence was acquired as tenants in common before the marriage. The parties then converted to joint tenancy during marriage. The presumption is that it is community property in the dissolution action and the party claiming separate property status bears the burden of proving with admissible evidence that the property is separate property. In the case of the Marriage of Weaver (2005) 127 Cal.App.4th 858, 865, 26 Cal.Rptr.3d 121, 125, the husband's mother executed quitclaim deed during marriage that included husband's wife as joint tenant along with husband and herself. The property is presumed to be community in nature.

Many spouses do this for a variety of reasons. Mostly this occurs during refinancing of property. However the reason for the conversion is immaterial. The rule above is applicable regardless of the reason as to why the parties converted title. Even if the sole purpose of the conversion was to satisfy the demands being made by a lending institution. This routinely occurs where separate property is refinanced during marriage, and as a condition of the refinancing the lender requires title to be placed in joint tenancy. Merely making the change in title brings the presumption into play. [Marriage of Neal, supra, 153 Cal.App.3d at 125, 200 Cal.Rptr. at 346; Marriage of Anderson, supra, 154 Cal.App.3d at 579, 201 Cal.Rptr. at 502; Marriage of Kahan (1985) 174 Cal.App.3d 63, 69, 219 Cal.Rptr. 700, 704]

Unfortunately for either party, this rule applies even if it was made by mistake. The presumption arises even if the conversion to joint title during marriage was allegedly an oversight, unintended and a "mistake." [Marriage of Weaver (2005) 127 Cal.App.4th 858, 865, 26 Cal.Rptr.3d 121, 126] If the separate property to joint title "conversion" advantages one spouse, such as where there is inadequate consideration being given to the disadvantaged spouse for the transfer, the Family Code, § 2581 presumption becomes subordinate to the presumption of undue influence. If the presumption of undue influence is not rebutted by admissible evidence, then the transaction is voidable at the behest of the disadvantaged spouse. If this occurs, then neither the Family Code, § 2581 nor Family Code, § 2640 are considered unless the spouse who is advantaged by the transaction is able to carry the burden of proving the transfer was not tainted by undue influence. [See Marriage of Delaney (2003) 111 Cal.App.4th 991, 998–999, 4 Cal.Rptr.3d at 383–38]

Parties in a marriage or a domestic partnership must always remember that community property transactions between themselves, the spouses are always subject to the general rules governing fiduciary relationships. The general rules of fiduciary relationships control the actions of persons in a confidential relationship (Family Code, § 721(b)). The reasoning behind this is that both spouses stand on equal footing and that a marriage or a domestic partnership is a confidential relationship as a matter of law. When either spouse causes there to be a transaction between the two spouses and there is any unfair advantage given either spouse over the other, there will be a a presumption of undue influence. [Marriage of Delaney (2003) 111 Cal.App.4th 991, 996, 4 Cal.Rptr.3d 378, 381–382; Marriage of Lange (2002) 102 Cal.App.4th 360, 364, 125 Cal.Rptr.2d 379, 382]

Where there is a dissolution action, and where the common law presumption of title and the community property presumption of undue influence are in conflict; then the application of Evidence Code, § 662 is improper. In this situation the common law title presumption, and its accompanying higher rebuttal burden of proof, must yield to the presumption of undue influence that emanates from Ca Fam § 721 (b). [Marriage of Haines (1995) 33 Cal.App.4th 277, 283, 300–302, 39 Cal.Rptr.2d 673, 677, 688–689; Marriage of Delaney, supra, 111 Cal.App.4th at 997–998, 4 Cal.Rptr.3d at 382–383] If the foregoing occurs from a transaction between spouses, a presumption of undue influence arises from the interspousal community property transaction. At this time the initial burden is on the advantaged spouse to prove the transaction was not consummated in violation of his or her fiduciary duties. The advantaged spouse must show by a a preponderance of the evidence, with admissible evidence that the transaction was "freely and voluntarily" entered into by both parties with full knowledge of all relevant facts and a complete understanding of the effect of the transfer. [Marriage of Haines, supra, 33 Cal.App.4th at 297, 39 Cal.Rptr.2d at 686; see Marriage of Mathews (2005) 133 Cal.App.4th 624, 631, 35 Cal.Rptr.3d 1, 6]

Where the advantaged spouse is not able to provide the rebuttal evidence by a preponderance of the evidence, the presumption of undue influence prevails. At this time the spouse contesting a claim of separate property may set–aside the transaction. This effectively defeats record title. [Marriage of Haines, supra, 33 Cal.App.4th at 297–298, 39 Cal.Rptr.2d at 686; Marriage of Delaney, supra, 111 Cal.App.4th at 1000, 4 Cal.Rptr.3d at 384–385; see also Marriage of Lange, supra, 102 Cal.App.4th at 364–365, 125 Cal.Rptr.2d at 383]

What happens if we own property jointly before we marry?

This results in an entirely different result. If property is purchased or aquired by the parties together BEFORE or prior to the date of marriage in joint title, even if they get married at a later date, as long as there is no change of title AFTER the marriage the property is presumed held in accordance with the form of title. This means that any property which is not acquired during marriage is outside the scope of Family Code, §§ 2581 and 2640. [See Marriage of Leversee (1984) 156 Cal.App.3d 891, 896–897, 203 Cal.Rptr. 481, 484; Rico, supra, 10 Cal.App.4th at 710, 12 Cal.Rptr.2d at 661]

Are there any exceptions to the community property rules?

In short yes there are exceptions to the community property rules. The general Family Code, § 760 definition of community property is subject to several statutory exceptions (see Family Code, § 760, "Except as otherwise provided by statute . . ."). Those exceptions are the subject of greater detail in future articles, however, most notably these exceptions include:

separate property acquisitions during marriage (Ca Fam § 770(a));

marital earnings and accumulations while living separate and apart or after a judgment of legal separation (Ca Fam §§ 771(a) & 772); community property transmuted to separate property (Ca Fam § 850 et seq.);

and certain personal injury damages recoveries (Ca Fam § 781).