The Character of Assets

Whether assets are community
property (belonging equally to both spouses, separate property (belonging
wholly to one spouse) or mixed (partially separate and partially community) is
an important issue when a marriage ends at death or divorce.  Let us consider some examples involving life
insurance, retirement plans and home purchases where the lines can get blurred.

          Any
assets acquired while married and living together are presumed to be community
property.  Unless there is an express
written declaration stating otherwise that is signed by the spouse whose
interest is adversely affected, any asset acquired using community property
funds — including marital earnings — is a community property asset regardless
of whose name is on title as the owner. 

          In Marriage of Valli (2014), 58 Cal. 4^th
1396, the California Supreme Court recently considered a life insurance policy
purchased by a husband naming his then wife as both owner and beneficiary of
the policy.  The court ruled that the
policy was the couple’s community property and not the wife’s own separate
property.  Why? 

          The
reasoning was that the policy was purchased with community funds and the
husband had not signed an express written declaration saying that he relinquished
his one-half community property interest.
The court held that the signed written declaration requirement still applied
equally to purchases made by a spouse and not only to transfers of property
between spouses.

          Next,
property interests acquired prior to marriage remain that owner’s separate
property after marriage. 

          In Marriage of Green (2013), 56 Cal. 4h
1130, the California Supreme Court considered a husband’s military service
credits, earned during his military service prior to marriage, which allowed
him to purchase enhanced retirement benefits.
The court ruled that the credits were his separate property even though
community property assets were later used to purchase the credits while married.  The court required the husband’s estate to repay
the community property estate for the community funds the husband used to
purchase his service credits.  The
reimbursement was a fraction of the husband’s enhancement to his retirement
benefits.

          Likewise,
community property rights acquired during marriage can continue after the
community has ended where a residual benefit remains.

          In Marriage of Barwell (2013), 221 Cal.
App. 4^th 1, the California Fifth Circuit Court of Appeal considered
a term life insurance policy purchased by a husband with community property
funds.  The Court ruled that the policy
continued to have a community property interest after the marriage ended because
the policy’s right of renewal was purchased during the first marriage using
community property funds.  Accordingly, the
policy proceeds had to be allocated between the community property estate of
the husband’s first marriage and the husband’s separate property estate.  The husband’s separate estate had an interest
in the policy too because he paid the insurance premiums on the renewed policy
which is why the policy was in effect when he died.

          Next,
consider the purchase of real property by a single person before marriage where
some or all of the subsequent mortgage payments are paid using marital earnings.  What interests do the community and separate
property estates have in the house?

          The
residence is the separate property of the person on title because the house was
purchased using separate property assets.
However, because community property funds were then used to pay some or
all of the mortgage payments, the community property estate was entitled to
reimbursement.  Accordingly, any
appreciation in the value of the real property benefits the separate property
estate.  Conversely, any deprecation in
value hurts the separate property estate.
Either way the community property estate is entitled to reimbursement,
nothing more and nothing less.