In California, Marriage of Epstein (1979) 24 C3d 76, dictates that post-separation payments out of the separate property of either H or W towards the community property assets or liabilities requires the separate property of the payer spouse to receive reimbursement unless:
an agreement between H and W provides otherwise;
the payment was intended as a gift;
the spouse making payment made use of the asset for which the separate property funds were expended;
or separate property payments were expended in relation to a valid spousal or child support obligation.
The rationale is that reimbursement in the exception situations specified above would be inequitable, as the paying spouse received a benefit, and as such, their spouse should not be legally obligated to compensate the payer spouse. The most common Epstein reimbursement fact patterns involve post separation payments of community property debts, and to a lesser extent, separate property improvements of community property assets. See Marriage of Reilley (1987) 196 CA3d 1119, 1122 for an example.
Exclusive use of Community Property Can Give Rise to Watts Charges
In California, Marriage of Watts (1985) 171 CA3d 366, dictates that the martial community may be owed reimbursement where one spouse makes exclusive use of a community property (CP) asset after the date of separation through the date of marital dissolution. Establish the “use value” of the asset at issue is the central determination leading to a Watts charge, and arriving at a value turns on the nature of the individual CP asset.
When assets and accounts are commingled, the holding in Marriage of Braud (1996) 45 CA4th 797, 822 applies. Under Braud, the character of the commingled funds or CP Asset, is not substantially affected however, where the respective SP and CP contributions to the purchase of the commingled asset or deposit to the commingled account can be traced back to the source of funds used to acquire the commingled asset or open the commingled account. Under Fam C §760, If the SP versus CP source of funds is untraceable, the overriding presumption that all property acquired during marriage in California is community property will control and thus the commingled assets or accounts will be classified as CP.
How does a Divorcing Spouse Prove a Comingled Asset was Acquired with Community Property?
Under Marriage of Braud (1996) 45 CA4th 797, 823, a H or W that seeks to prove a commingled asset or account was at least partially acquired with SP funds bears the burden of proof and must provide “substantial evidence” to the divorce court in order to prevail on his or her position and overcome the CP presumption. This may be able to be accomplished through direct tracing or family expense tracing.
Direct tracing involves proving the separate property contribution to a commingled account or asset by tracing its acquisition or funding back to a separate property source and then tracing forward to where the separate property funds were utilized to purchase a particular asset or deposited to a commingled account.
Under See v. See (1966) 64 C2d 778, 783, the only available method of proof in California, other than direct tracing, is family expense tracing, via which the spouse attempting to prove a separate property contribution towards a commingled asset or account must be able to prove that any available community property funds were fully exhausted at the time a commingled asset was purchased, a payment was made, or a commingled account was opened, and thus separate funds must have been used to make the disputed purchase or payment. They must also be able to prove that the separate property funds utilized were theirs. However, family tracing evidence will not be admissible to attempt to show that community expenses exceeded community income over the marriage in an attempt to argue for a separate property reimbursement as it must have been used to cover community expenses.
What Is the Tax Impact of Post Separation Payments with Separate Property Towards a Community Property Asset? was last modified: October 23rd, 2016 by David Klasing