Community and Separate Property
Under California law, property held by a married person is either community property or separate property or a mixture of the two. Community property is considered to be the property of both spouses, while separate property belongs to just one or the other. Thus, familiarity with the law governing community and separate property is important for many reasons, from pre- and post-marital planning and agreements, to rights on dissolution of the marriage and to estate planning. California laws governing community and separate property generally can be changed by written agreement of the parties or by certain kinds of conduct discussed elsewhere.
It is not uncommon that community and separate property may both contribute to the acquisition or improvement of an asset, either deliberately or by mistake, see [link]. It is not uncommon that a spouse learns that property they thought was community is actually separate or vice versa when the issue arises in a divorce. Thus, it is advisable to maintain documentation concerning property acquisition and improvement, as well as records from accounts that may hold both community and separate property or funds, and of secured loans. Remember that a spouse claiming a property is separate has the burden of proving that claim and if the spouse is unable to do so, it will be treated as community if it was acquired during marriage.
California law provides that from the date spouses marry until the date they separate or a spouse dies, property either spouse or both spouses acquire is presumed to be community property. Each spouse has an equal interest in the community property and generally each has an equal right to manage and control that property. For this purpose, “during marriage” means from the date of marriage until the date of separation or death. Community property also includes income from community property, such as rent, interest and dividends, as well as property acquired with income or sales proceeds from community property. Thus, the fact that one spouse makes much more than the other spouse does not give the high earner any more or different interest in the community property than the low earner spouse. Furthermore, a California court in a marital dissolution proceeding can characterize property located in another state or country that was acquired during marriage as “quasi-community property” using the same rules as apply to characterizing property located in California. However, the California court’s powers as to making orders concerning property in another jurisdiction are limited compared to property located in California.Separate Property
Under California law a spouse’s separate property consists of all property owned by the spouse before marriage, all property acquired by the spouse during marriage by gift or inheritance, and all property acquired after the date of separation (unless acquired with community property). Separate property also includes the income from separate property and proceeds of the sale or refinancing of separate property.
Community and Separate Debt
Debt and other legal obligations are also presumed to be community where they were incurred during marriage and are presumed to be separate where they were incurred before marriage or are solely for the benefit of spouse’s separate property. Additionally, an obligation may be classified as separate where it has no benefit to the community, such as debt incurred to pay for an extra-marital affair or liability for certain crimes and torts that do not benefit the community.
The character of loans made during secured by property (and the proceeds of those loans) depend on the intent of the lender as to what the primary source of funds to repay the loan will be. For example, a loan secured by rental property would likely have the same character as the rental property while a loan secured by a home to be paid from the borrower’s income during marriage would likely have the same character as the borrower’s income. The fact that a spouse did or did not sign the loan paperwork is not a significant factor. If there is no substantial evidence of the lender’s intent, the loan obligation will be characterized based on the presumptions described in the previous paragraph.
Management and Control of Community Property and Duties of Each Spouse to the Other:
Each spouse has an equal interest in the parties’ community property. Thus, the fact that one spouse works is the bread winner while the other takes care of the home and the children does not give the bread winner any more or different interest in the community property than the homemaker. The fact that each spouse has an equal interest in community property means that with certain exceptions, each spouse has management and control of the community property. However, a spouse who manages a business that is primarily community property has primary management of the business income and assets.
The fact that each spouse has an equal interest in community property also means that each spouse has the absolute right to dispose of the property to a third party (other than by a will or other testamentary document). There is an exception to this rule so that both spouses must join in transferring the family residence, furniture and furnishings, and clothing or personal items of the other spouse or the children, as well as in making gifts of community personal property, without the written agreement of the other party.
Another aspect of having an equal interest in community property is that each spouse owes the other a duty to act as a “fiduciary” in dealings with the other spouse. As a fiduciary, a spouse must use the highest good faith and fair dealing with the other spouse and cannot take unfair advantage of the other spouse.
As a fiduciary, each spouse has a duty the other spouse to:
- Provide access to records concerning transactions.
- Provide full information to the other spouse on request concerning transactions involving community property.
If the other spouse did not consent to a transaction in community property, the spouse who made the transaction must hold any profits on the transaction as a trustee for the benefit of the other spouse. If a spouse fails to fulfill his or her fiduciary duties, the court may declare an agreement between the spouses void, as well as award damages or attorney fees to the other party.
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Di Maria & Cone
628 Cuesta Drive
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.