Untangling Assets May Not Be An Easy Option
It often happens that community and separate property are mixed together either deliberately or mistakenly, in which case characterization can become complex. There are many ways this can happen, for example:
- A spouse deliberately or mistakenly mixes community and separate funds or property in a bank or brokerage account.
- The parties agree in writing to change the character of property from separate to community or vice-versa (a “transmutation agreement”).
- A spouse makes a gift of community property to the other.
- The parties purchase a house in their joint names with a down payment from the separate property of one or both spouses (or one spouse adds the other spouse’s name to title to a house the spouse had owned before marriage).
- One spouse owns a house before marriage and then uses community funds to pay the mortgage or improve the property after marriage but does not add the new spouse to title.
- A spouse uses community funds to pay his or her separate debt or for the benefit of his or her separate property.
- A spouse’s employer provides retirement, stock option, or stock purchase plans and the spouse participates in those plans before and during marriage or during and after marriage. See more information about this on our equity benefits and retirement assets page.
- A spouse spends substantial time managing separate investments during marriage.
- One spouse owned and worked in a business before marriage and then continues to work in the business after marriage or after separation a spouse continues to work in a business started during marriage.
- A spouse invests community funds in a business after separation.
- A spouse takes a loan that is secured by or to be paid from both community and separate assets.
Note that if community funds are used to pay a separate debt of a spouse, the community generally is entitled to be reimbursed from the spouse who benefitted from the payment. However, if a spouse uses separate property to pay most community debts, there is generally no right of reimbursement.
Proving Separate Interests
There are various circumstances in which separate property and community property may change their character which are discussed in the next section. Where a spouse spends significant effort during marriage to improve, manage or invest his or her separate property, the community may acquire an interest in the property, which is discussed more fully under our page explaining commingled assets.
In these circumstances, the law tends to favor the community over a spouse’s separate property. The party who claims the separate interest has the burden of establishing that he or she had a separate property interest and that the separate interest is traceable to a current asset. There is also a great deal of inconsistency in the treatment of commingled assets depending on what type of asset involved and how title is held.
For example, where a spouse owns a house before marriage, the method of calculating the community interest changes depending on whether the new spouse is put on title during the marriage. And if both separate and community funds are used to make a down payment in purchasing a jointly owned house, the law provides that the separate investment is reimbursed in full, but without any adjustment for interest or appreciation in the value of the house. If there are any funds remaining after the separate property is reimbursed, then the remaining equity is divided equally between the parties.
Moreover where, instead of a house, the spouse owns a business before marriage and continues to work in the business during marriage the law has completely different rules for determining the community and separate interests in the business than those applicable to the house.
Changing The Rules
It can come as a shock to the owner of what they think is their separate property that they will have to compensate their spouse because the law says part of that property has become community property. However, California law generally allows the parties to make written agreements that change the commingling rules before, during or after marriage. If you have such an issue and want to protect your assets, it is advisable to talk to an attorney about whether such an agreement is advisable. If you do have a commingling situation it can be very important to preserve contracts, escrow statements and account records relating to the acquisition, improvement, management, maintenance, sale, and subsequent use of sales proceeds to be able to establish the character of and your interest in the property. It is easy to not bother with this if the marriage is going well but can be very important if the parties ultimately divorce.
If you are getting married and have substantial property or are considering or involved in a divorce, it is important to consult with an attorney as friends, family and your soon-to-be-ex often cannot be relied upon to give good advice in this complex area.
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Di Maria & Cone
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Los Altos, CA 94024
Phone: (650) 321-4460
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Di Maria & Cone, located in Los Altos, represents clients throughout California, primarily on the San Francisco Peninsula and in Silicon Valley — in communities such as Atherton, Cupertino, Los Altos, Menlo Park, Mountain View, Palo Alto, Portola Valley, Redwood City, San Jose, Sunnyvale, and Woodside.