With respect to property ownership by spouses, all states follow one of two legal systems: common law or community property.
In common law states, as a general rule, property acquired by a spouse prior to marriage, and property acquired during marriage and titled in the name of one spouse, is treated as the separate property of that spouse. Creditors of the debtor spouse cannot reach the separate property of the non-debtor spouse, with the limited exception for necessities of life.
In community property states, most property acquired during marriage is treated as community property. Even if property so acquired is titled in the name of one spouse, that merely creates a rebuttable presumption as to the community or separate nature of such property. Because each spouse has a coextensive ownership interest in community property, creditors of either spouse can reach all community property of the two spouses.
Most states in the
Example: Major
Nelson is married to
Planning in a common law state is relatively straight-forward in light of the above rule. If between the two spouses one is high-risk (likely to get sued because of the spouse’s profession or the business the spouse is engaged in) and the other is low-risk (unlikely to get sued), as much of the couple’s property as possible should be titled in the name of the low-risk spouse. Accordingly, if one spouse is a demolition contractor and the other grows roses, most of the couple’s property should be titled in the name of the green-thumbed spouse.
However, on divorce, the treatment of the spouses’ property is different. All property acquired during marriage,[1] regardless of how it is titled, is treated as marital property,[2] and is subject to a division on divorce.
The distinction that exists in common law states between what property is reachable by a creditor during marriage and subsequent to a divorce is very important. To summarize, during marriage, the creditor can reach only the property titled in the name of the debtor spouse. However, on divorce, all marital property will be divided, regardless of how it is titled and may become reachable by a creditor.
Example: If
Napoleon is on title to the
In a common law state, there do not appear to be any disadvantages in titling the bulk of a couple’s assets in one spouse’s name. During marriage, the assets are not exposed to the creditors of the high-risk spouse, and on divorce the property will be divided based on its classification as marital or nonmarital, and not based on how it is titled.
A creditor’s inability to pursue the non-debtor spouse extends to all separate assets of the spouse, including properties and earnings. It also, generally, does not matter how the liability arose, whether through a spouse’s tort or a contractual obligation. Only when the debtor spouse acted as an agent for both spouses, can the non-debtor spouse’s property be reached.
In a community property state there are two types of property: separate and community.[3] Separate property is acquired in much the same manner as in common law states: (i) property acquired prior to marriage; (ii) property acquired during marriage by gift or inheritance; and (iii) property acquired during marriage but as to which the spouses entered into an agreement treating it as separate property.[4]
Separate property in a community property state is afforded similar treatment to separate property in a common law state. During marriage, a creditor of one spouse cannot reach the separate property of the other spouse. However, the one important distinction is that in a community property state, separate property is separate for all purposes, including divorce. Recall, that in common law states separate property may also be marital property, subject to an equitable division on divorce.
Community property is a form of joint ownership of property by husband and wife. It is defined as real or personal property, wherever situated, acquired by a married person during the marriage while domiciled in this state. Each spouse can manage, direct and control community property.
The distinctive feature of community property[5] is that both spouses own coextensive interests in all of community property. This means that a creditor of one spouse can reach all the community property of the spouses. California Family Law Code Section 910(a) provides:
Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.
The liability of community property extends to contracts entered into by either spouse during marriage, to torts of either spouse during marriage, and to most pre-marriage obligations of either spouse.
Example:
The two barbells and the bottle of oil are
An exception is carved out for earnings of a spouse, which are not liable for pre-marital liabilities of the other spouse.[6] The earnings remain protected even after paid to the non-debtor spouse, provided that the earnings are deposited into a separate bank account.
The five major factors affecting characterization of property as separate or community are the following: (i) time of the property’s acquisition; (ii) the source of funds used to acquire the property; (iii) whether spouses entered into a “transmutation agreement” to change the character of property from community to separate, separate to community, and from the separate property of one spouse to the separate property of the other spouse; (iv) actions by parties, including actions that “commingle” or combine separate and community property; and (v) operation of various legal inferences, called “presumptions,” that help to determine the character of property.
The most important factor to consider is the timing of the acquisition. Property owned by a spouse before marriage, as well as rents and income from such property, is separate property of that spouse, unless the spouses entered into an agreement to transmute such separate property into community property.
A community property interest can be created only during marriage.[7] Absent an agreement to the contrary, all property, real or personal, acquired during marriage will be treated as community property.
When the timing of the acquisition is unclear or not overly helpful in the analysis, other factors must be taken into account in determining the character of property.
The source of funds used to acquire property of a spouse may help determine the character of such property. This stems from the rule that changing the form of the property does not change its character. For example, if a spouse has a bank account before marriage (treated as separate property), then if the spouse uses the funds in that account to acquire a real estate parcel, such parcel will also be separate property.
If property is acquired during marriage with both community and separate property funds, then there is a presumption that such property is community property. That is based on the general presumption that property acquired during marriage is community property. However, this presumption may be overcome by tracing to the separate property funds, and allocating at least a portion of the property to the separate property interest.[8]
For purposes of characterizing property as separate or community, “commingling” means mixing or combining separate and community property into one aggregate. Characterizing commingled property usually requires “tracing” the separate and community contributions back to their respective sources. The mere commingling of separate with community property does not destroy the character of either, provided that their respective amounts can be ascertained.
If property is commingled to such an extent that tracing will not successfully establish its source, then the community property presumption (for property acquired during marriage) cannot be overcome.
The most common type of commingling that take place during marriage involves commingling separate and community funds in a common bank account. There are two ways to trace such commingled property.
Under the direct tracing method, a spouse may trace funds in a commingled account to separate property by maintaining a set of itemized, chronological records reflecting all the deposits and the withdrawals from the account. Using such records, it should be possible to establish how much separate property of either spouse went into the account, how much community property went in, and how much separate and community property was withdrawn.
It is important to note that it is not sufficient to simply
show the availability of separate funds, the expenditure must be traced back to
the source of funds. For example, if
Lucy buys property during marriage and titles it in her name alone, it is not
enough for her to show that she had separate property funds available for the
purchase. To overcome
Example: Lucy
and
The other way to trace commingled funds is through the use of the so-called family expense tracing method. This method works off the legal presumption that family expenses are paid from community funds. This means that if one spouse can establish that all of the community funds in an account were expended to pay for family expenses, then necessarily, the only funds left in the account are separate property funds. However, the family expense tracing method will work only if the spouse maintained sufficient records to trace deposits and withdrawals from the account, and if the community did not generate sufficient earnings to pay for its expenses.
Example: Ron and Nancy open a bank account and deposit $10,000 in community funds. Ron later deposits $5,000 of separate property funds. During the year, the couple spends $12,000 from the account on family expenses. At the end of the year, Ron spends $500 from the account to buy a saddle. The saddle is Ron’s separate property, because of the presumption that community property is used first to pay for family expenses.
To avoid the problems posed by commingling, spouses are always advised to: (i) execute and record a separate property inventory that includes all separate property owned at the time of execution; (ii) keep financial records adequate to establish the balance of community income and expenditures at the time an asset is acquired with commingled property; or (iii) avoid commingling altogether and maintain a separate bank account for separate property funds.
If the spouses use community property funds to improve the separate property of one spouse, that does not change the nature of the separate property. The funds expended by one spouse for the improvement of the separate property of the other spouse are presumed to be a gift between spouses (gifts are always separate property).
However, if one spouse used community property funds to improve his or her own separate property without the consent of the other spouse, the community is entitled to a reimbursement.
When property is acquired during marriage using both separate and community property funds, then, if it is possible to trace, the property will be partially separate and partially community. If tracing is unavailable, then the regular community presumption will apply,[9] and the property will be treated as community property.[10]
If property is acquired during marriage with a separate property down payment, and with a loan where the lender relies on the earnings of both spouses, then the loan is community, and thus a portion of the property is separate (the portion attributable to the down payment) and the rest is community. The character of property acquired by a sale on credit or by a loan depends on the intention of the seller or lender to rely on the separate property of the purchaser or to rely on community assets for satisfaction of the debt. The proceeds of an unsecured loan made on the personal credit of either spouse are regarded as community property. Funds borrowed by the pledge of a spouse’s separate property are that spouse’s separate property. Absent evidence that a seller or creditor relied primarily on the purchaser’s separate property in extending credit, the property purchased or money borrowed is presumed to be community property. This result follows the general rule that property acquired during marriage is community property.
For property acquired during marriage, it is important to establish not only the actual amounts of separate and community contributions, but also their respective proportions. Thus, when the property appreciates in value, it will be still possible to apportion.
When one spouse devotes time during marriage to develop his
or her separate business and the business appreciates in value, then a portion
of that appreciation is attributable to the community. During marriage the time of each spouse
belongs to the community, and the time expanded on a separate business is
community’s time.
Married persons may, by agreement or transfer, and with or without consideration, change or “transmute” the character of their property in any of the following ways: (i) from community property to separate property of either spouse; (ii) from separate property of either spouse to community property; (iii) from separate property of one spouse to separate property of the other spouse.[11]
To be effective, a transmutation agreement must be in writing, the spouses must fully disclose their properties to each other, and a transmutation of real property will be effective as to third-party creditors only if it is recorded.[12]
The law of fraudulent transfers applies to transmutation agreements.[13]
There is a legal inference, called a “presumption,” that all property acquired during marriage by either husband or wife or both is community property.[14]
The general community property presumption specifically applies to the following types of property:[15] (i) all real property, including leased property, that is located in California and is acquired during marriage by a spouse while domiciled (living with intent to remain) in California; (ii) all personal property, wherever located, that is acquired during marriage by a married person while domiciled in California; and (iii) all community property transferred by husband and wife to a trust pursuant to Family Code Section 761.
However, the general community property presumption that property acquired during marriage is community property may be overcome by evidence that the disputed property is actually separate property.
Evidence that may be used to overcome the community property presumption includes the following: (i) an agreement between the parties to change the character of (transmute) the property from community to separate property; (ii) tracing property to a separate property source; or (iii) reliance on separate property as collateral when property is purchased on credit.
If the community property presumption cannot be overcome, the party who has made traceable separate property contributions to the acquisition of property may obtain reimbursement in certain circumstances.[16]
There are several statutory exceptions to the general
presumption that all property acquired during marriage is community property: (i) property acquired by either husband or wife by gift,
will, or inheritance;[17]
(ii) property that either spouse acquires with the rents, issues, or profits
from separate property; (iii) property held at death and that a spouse acquired
during a previous marriage if that marriage was terminated by dissolution more
than four years before death; (iv) any real or personal property interest
acquired by the wife by written instrument before
The general community property presumption applies to all property acquired during marriage, including property titled in joint form, such as joint tenancy or tenancy in common. A spouse intending to rebut the community property presumption for jointly titled property may do so in one of two ways: (i) a clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate and not community property; or (ii) proof that the spouses have made a written agreement that the property is separate property.
Neither tracing, nor an oral or implied agreement, is sufficient to rebut the general community property presumption.[19]
Example: Mary and George buy a house during marriage and take title as joint tenants. George uses separate property funds to make the down payment on the house. The spouses make no written agreement that each of their joint interests would be separate property. The remaining payments are made with community funds. The spouses then terminate their marriage. On dissolution the house will be presumed to be community property. This presumption cannot be overcome because there is no written agreement that the property will be separate. George, however, is entitled to reimbursement for his separate property down payment provided that he can trace the down payment to his separate property funds.
As elsewhere with the community property presumption, it arises only on divorce, and does not affect the spouses’ ability to hold property as joint tenants, and does not affect the ability of a third party creditor in reaching the property.
What happens when spouses jointly set up a living trust, and
one spouse contributes separate property?
While trusts usually provide that they do not alter the separate-community
nature of the assets, real estate should always be titled to make it clear that
it is either community or separate property.
Consequently, the following method of titling is recommended:
Property titled in the spouses’ names as husband and wife creates a community property presumption, unless the instrument indicates otherwise. However, unlike the joint tenancy presumption which is effective only on divorce, the presumption created by the “husband and wife” title is effective both on divorce and against a third party creditor.[20]
When a spouse uses either community or his or her separate funds to purchase property in the name of the other spouse alone, there is a presumption, that the purchasing spouse has made a gift of his or her interest (community or separate) to the other spouse.[21] However, the purchasing spouse may attempt to rebut this presumption with evidence that he or she did not intend to make a gift. The rebuttal will be successful if the purchasing spouse establishes (i) the separate nature of the funds used to purchase the property, and (ii) the existence of an understanding between spouses that the property is not a gift.
[1] Other than by gift or inheritance.
[2] Generally, in a common law state, marital property will be any property owned by a spouse except: (i) property acquired prior to marriage; (ii) property acquired during marriage by gift or inheritance; and (iii) property designated as nonmarital through an agreement between spouses.
[3] There is
actually a third form of property in a community property state:
quasi-community property.
Quasi-community property is real and personal property, wherever it is
located, that would have been community property had the spouse been domiciled
(resided) in
[4]
[5]
Community property states include:
[6]
[7] For this purpose, marriage ends with a divorce, or, if earlier, when the spouses are legally separated and are living apart (the “separate and apart” test). Spouses are considered to be living “separate and apart'” from each other when they have come to a parting of the ways with no present intention of resuming marital relations, and in which there is conduct evidencing a complete and final break in the marital relationship.
[8] If such property is titled in the name of both spouses, then the community property presumption with respect to such property cannot be overcome by tracing. More concrete evidence will be required to establish a separate property interest.
[9]
[10]
However, even if tracing is unavailable, in certain circumstances, separate
property may be entitled to a reimbursement of its contribution. See,
[11]
[12]
[13]
[14]
[15]
[16]
[17]
[18] See, Family Code Sections 770, 781, 802 and 803.
[19] However, traceable separate property contributions may be reimbursable.
[20] See, Abbett Electric Corp. v. Storek, 22 Cal. App. 4th 1460, 1466-1467 (1994) (designation of parties as joint tenants, in addition to designation as “husband and wife,” showed “different intention,” in action by third party creditor); Estate of Petersen 28 Cal. App. 4th 1742, 1747 (1994) (when title held as “husband and wife, as joint tenants,” joint tenancy form of title rebuts community presumption arising from “husband and wife” title).
[21] See, In
re Marriage of Frapwell, 49