COMMUNITY PROPERTY - THE BASICS
In many states in the United States, property acquired by either the husband or wife after marriage is considered community property unless they agree to the contrary, or it stems from separate property, or is a gift or inheritance. Community property is jointly owned and controlled by the husband and wife.
In the United States, the doctrine of community property is purely a statutory creation. Under common law, a husband is primarily responsible for the expenses of the family and the wife’s responsibility is only secondary. However, under community property law, the expenses of the family and the education of the children, including stepchildren, are chargeable upon the property of both husband and wife, or either of them, and they may be sued jointly or separately for obligations such ownership creates.
Community property law exclusively deals with property and has no bearing upon the other personal rights and liabilities of spouses. Theoretically, it reflects the inherent partnership and sharing of property and duties in a marital relationship. The notion of community property is that marriage is a partnership in which the spouses devote their particular talents, energies, and resources to their mutual benefit. The acquisitions and benefits made by the spouses using community expenditures of labor and resources are shared equally by the community.
What is gifted to a spouse as separate property after marriage, either by gift or inheritance, remains separate property of the spouse. Income and assets purchased from separate property owned by the spouse prior to marriage normally remains the separate property of that spouse. Minus agreement to the contrary, separate property normally remains separate and community remains community. However, if commingling of assets occurs, as discussed below, tracing of assets to determine what percentage is community or separate becomes required.
Statutes and courts stipulate that property acquired prior to marriage is separate, while property acquired during the marriage is presumed to be community property. Similarly, “income from separate property is separate, the intrinsic increase of separate property is separate, but the fruits of the community’s expenditures of time, talent, and labor are community property.” In re Marriage of Dekker, 17 Cal. App. 4th 842, 850 (Cal. App. 4th Dist. 1993).
As discussed in our article on Premarital Agreements, the creation and maintenance of community property may be voluntarily eliminated or controlled by the spouses entering into an agreement either before or after the marriage. This article shall discuss the basic law of community property, presuming that no such agreement has been entered into by the spouses.
Community Property- A State Creation
Community property law is applicable only in those states termed “community property” states. There are nine states within the United States that use the community property system to divide marital assets: Arizona, Texas, California, Idaho, Louisiana, Nevada, New Mexico, Washington and Wisconsin. In Alaska, if both parties agree to make the property community property through a community property agreement or trust, then the property is made community property. Alaska may be considered a voluntary community property state.
Quasi-community property is recognized by some community property states. Quasi-community property is property located outside of a community property state which would be considered community property if located in that state. However, in California, property acquired while married and domiciled in a non-community property state does not become community property just because the married parties move to a community property state.
In a community property state, any asset acquired during a marriage is considered to be a community property and hence all assets acquired by any one spouse during marriage belong to both of them equally. But nevertheless, under community property law, certain assets acquired after marriage can be classified as separate property if not commingled.
Community property states normally classify the following as a married couple’s joint property:
Separate property in a community property state includes:
Note that separate property can transform into community property. This can be done voluntarily by one or both spouses, or involuntarily by taking certain actions. As an example, if a spouse owns property before marriage and voluntarily adds the new spouse’s name to the deed, then that property becomes community property. As another example, if community property resources are used to maintain or improve a home owned separately by one spouse, then the property, at least in part, has a community property interest.
There is also case law that if a spouse devotes sufficient “expert” time to maintaining or improving separate property, then a community property interest is created since his community property “earnings” were used to increase the value of the property. Thus, a contractor who spends six months improving a structure that he owns separately can face a claim that the value of his services were community property which is now vested in the property. A stock broker who spends time assessing and improving a separate stock portfolio may face the same claim.
However, it is important to note that there are no two community property states with exactly the same laws on the subject. For instance, if income from separate property is separate in one state, then in a civil law state, the income from such separate property is community property. Some states have created a newer form of community property, known as community property with right of survivorship. Local counsel is required to determine the particular aspects of the state’s law applicable.
Management of the Community Property:
According to the community property system, each spouse has an undivided one half interest in the community property. The spouses’ interest is equal, undivided, immediate and vested. Spouses cannot alter their domicile state merely by choosing to contract in another forum and contractually consenting to the application of that forum’s laws. Where they are actually domiciled will determine the law that applies.
With regard to community property, spouses have fiduciary duty towards each other. The removal of community property without spousal notice or approval constitutes a breach of such duty. If a spouse conveys or disposes of community property in fraud of the other spouse’s rights, the aggrieved spouse has a right of recourse, first against the property or estate of the disposing spouse and, if that proves to be of no avail, then the aggrieved spouse may pursue the proceeds to extent of his or her community interest into the hands of the party to whom the funds have been conveyed.
Generally, the right of the spouses to contract with each other during their marriage regarding their property rights depends upon statute and varies among the different jurisdictions. The Uniform Marital Property Act abolished restrictions on the power of spouses to enter into property transactions with each other. Spouses have a constitutional right to make an agreement exchanging between themselves the community interest of one spouse in any property for the community interest of the other spouse in other community property. A transaction between spouses, to be valid must be fair and reasonable and voluntarily and understandingly made. Due to the fiduciary nature of the relationship, full disclosure and ample time to consider the ramifications is required are necessary. It is wise to have independent legal counsel represent each party.
Some statutes permit transmutation of property if it is made by an express declaration which contains language expressly stating that the characterization or ownership of property is being changed. The Uniform Marital Property Act provides that spouses may reclassify their property by gift or by a marital property agreement. California allows such transmutation agreements, subject to strict requirements of disclosure and fairness.
In many states, in the absence of special circumstances, a husband has the exclusive right to represent the community in litigation involving community property. However, the wife sometimes may maintain an action to avoid a transfer of community property made by the husband in violation of statutory restrictions on his power of disposition. Moreover, the wife may sue to recover community property when, for reasons of public policy, the husband could not maintain the action, and when the spouses’ interests are antagonistic. Furthermore, a judgment rendered against the husband concerning the title to community real property is not binding on the wife, when the judgment was obtained in fraud of her interest and she was not named as a party. See In re Norton, 180 B.R. 168 (E.D. Tex. 1995).
In California, spouses have joint control of community property with concurrent rights of management. However, most third parties require written consent of both spouses in any transaction involving community property to avoid the entire issue of whether a particular spouse had the power to commit the community. Refusal of one spouse to consent normally will stop the transaction from occurring.
Community property interests of spouses are determined by the law of the domicile when they are acquired. Community property retains its character as such when it is removed to a common law state. In re Marriage of Moore & Ferrie, 14 Cal. App. 4th 1472 (Cal. App. 1st Dist. 1993)
The law of the state to which the parties remove will regulate their future conduct and acquisitions. However, removal will not alter the rights of either to the property then in their possession, the title to which had vested under the community property law. The community property law will cease to operate on property subsequently acquired in the state other than where they originally resided, and the change of domicile does not affect existing community interests.
Property rights are not lost simply because property is transported into another state and exchanged there for other property. The separate property of a nonresident husband or wife invested in state land remains separate property; conversely, the rights of state spouses are protected when community funds are invested in land in another state. Tomaier v. Tomaier, 23 Cal. 2d 754 (Cal. 1944).
The most frequently recurring issue, in cases involving a change of domicile from a community property state to a non-community property state, is the liability of property accumulated in the former state during the domicile there to inheritance taxation on the subsequent death of one of the spouses in the common-law jurisdiction. See our article on Wills and Trusts.
When the separate property or funds of either spouse is intermixed or commingled with community property, so that the separate property has lost its identity and cannot be clearly traced or segregated, it becomes community property. This causes a loss of the separate character of the property. However, where the community interest is inconsequential in the property with which it has been intermingled, the community will not draw to it the separate estate. In re Estate of Cudworth, 133 Cal. 462 (Cal. 1901). In most contests during dissolution of marriage, the issue of such commingling becomes a central fight between the spouses-what is separate, what was commingled, who has rights to what.
Property acquired by a husband and wife during marriage is presumed to be community property. This is a rebuttable presumption and applies to all property, including property purchased with money borrowed by either spouse during the existence of the community. It also applies to money obtained on an unsecured note executed by one of the spouses during marriage. The party asserting the separate property character of property bears the burden of proving the property is separate with reasonable certainty and particularity. Property acquired during marriage may be part community and part separate in character, if the source of the property acquired is part community and part separate.
Generally, a spouse, or one claiming through a spouse, must trace and clearly identify property claimed as separate property. Furthermore, it is well settled that the burden is not discharged and the statutory presumption prevails, when the evidence shows that separate and community property have been so commingled as to defy resegregation and identification.
Put another way, if you wish to maintain the separate character of your property, it is necessary to maintain sufficient records so that such separate nature can be clearly demonstrated in a court of law. Failure to do so will result in the presumption overcoming the separate nature of the property. It should be noted that destruction of records due to natural disasters can thus result in the destruction of the separate property nature of the spouse’s claimed property.
Often a spouse will create a separate property trust into which he or she deposits all separate property so that a clear differential is established and separate records maintained for so long as necessary. See our article on Revocable Intervivos Trusts.
Control of Community Property
The system of community property provides each spouse equal interest in all the marital assets. The spouses have joint ownership over the property. Pursuant to the Uniform Marital Property Act (UMPA) spouses can manage and control marital property held in the names of both spouses only if they act together.
Spouses have a fiduciary relationship among themselves regarding their community assets until their marriage is dissolved. If a spouse is not informed about the transfer of community assets this amounts to breach of fiduciary duty. This breach can be termed as fraud on community. Even if the spouse who transfers the property has no intention to commit fraud on the other spouse the action may amount to fraud under law. The spouse, who is aggrieved by this action, can move against the property of the disposing spouse. If the disposing spouse has no assets in his/her name, the aggrieved spouse can take action against the person to whom the property has been conveyed without that spouses permission. For this reason, most third parties require both spouses to sign off for major purchases or obligations.
Without a spouse’s permission the spouse’s separate property cannot be changed to community property In re Marriage of Lund, 174 Cal. App. 4th 40 (Cal. App. 4th Dist. 2009). Likewise, as discussed in our article on Community Property Debts, separate property obligations created by a spouse are normally not imposed on the separate property of the spouse or even on the community, with some exceptions.
The well advised creditor, buyer or seller will insist upon both spouses executing all the required documentation for the borrowing, buying or selling of any significant asset. The law is far too complex and fact intensive to allow a third party to determine whether a debt is community or separate and most form agreements (and all recommended by this office) address the issue of the community or separate nature of the obligation or asset directly in the documents.
The old theory that the husband controls the community is largely replaced with the joint control of the community and in these days, when women are as often in the workplace and handling business as men are, the old system no longer has rationality. This necessarily requires husband and wife to jointly make the decisions concerning community property and their failure to agree can nullify any proposed transaction.
More than one marriage known to this writer has been destroyed when one spouse refused to agree to a transaction that the other spouse considered vital for an investment or business. Many business people, used to taking risks for the possible gain that entrepreneurs love, find themselves facing a reluctant spouse who is not used to risk and simply refuses to sign the documents required. Emotions can quickly escalate, most especially when men find themselves embarrassed before their male colleagues when a spouse simply refuses to go along with his decision.
Or, as one disgruntled client put it to the writer, “I didn’t realize when I tied the knot that she could wrap it around my neck…” Of course, from her point of view, she was simply trying to protect the family nest egg and felt he was badgering her into going along with high risk investments.
The essence of the matter is that neither spouse has exclusive control of community property and both can put the full break on any transaction involving community property. To avoid that danger, it is required to obtain a written premarital agreement, postnuptial agreement, or only utilize separate property for such transactions.
In terms of estate planning, family asset planning and divorce planning, it is essential to understand the powerful rights the concept of community property vests in each spouse. This is not academic and will directly alter what each spouse can do and can commit to do with assets. Further, in certain circumstances even the unintentional acts of a spouse can create community property which vests these powers in the other spouse.
It is ironic that it is during the heady time of engagement and planning for marriage that the issue of control of the automatic creation of community property is most required to be considered. Even those persons not wishing to create a full scale prenuptial agreement could still take steps to isolate and protect existing separate property from the danger of commingling by the use of trusts and separate accounts.
Such wise thinking is the exception for the typical engaged couple which means that a full understanding of the nature of community property becomes vital for the couple as they decide what to do with the community property and obligations they develop during their marriage.
These Articles are to give the reader a general description of certain areas of the law. Legal advice is necessary to apply these legal concepts to your particular situation. The Reader should obtain competent legal advice before relying on the Articles.
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