Q. My wife and I separated in June 2009. When we purchased our home in March of 1998 (married December 1994), she used part of an inheritance from her grandmother to help with the down payment. I have been paying the mortgage since we bought it. Will she get her inheritance back in our divorce? What would I get?
Howard, Seal Beach, CA
Because I need more information and the answer to some questions and then to follow up questions, I can only give you a generalized response.
Family Code Section 2640
So long as your wife can trace the portion of her downpayment contribution to the inheritance, she is entitled to a Family Code section 2640 reimbursement in the amount that she proves by this tracing. However, she has the burden of proof and problems arise for her if the monies were commingled into a joint account. Does she have the necessary records? If this is a lengthy marriage, I'd bet not.
She is not entitled to interest on grandma's gift to her, however, but only the principal. However, this assumes that the downpayment contribution always remained separate from any other money or bank assets that you had an interest in, or that the community had an interest in: If the inheritance monies were commingled with joint monies or your separate funds between the date she received them and the date they were used as part of the purchase price for the home, then a further tracing is required to establish that what money in the account at that time was her separate and what amount was something else. Here is a Blog article that discusses tracing principles in more detail.
You don't report whether you were on title to the residence when escrow closed or at any later time. Whether or not you were on title when the property was purchased, it is presumed to be community property UNLESS you (a) deeded off when escrow closed or deeded off since that time or (b) consented to or are deemed to have consented to your Wife being the sole record title holder if at the close of escrow title issued in her name.
If you were on title at close of escrow and to the present day, the answer is easy - your Wife gets her traced inheritance money first, off the top, from any equity in the home. She does not get interest on the money. The remaining net equity, without other facts, belongs to the community so that each of you is entitled to one-half of what remains.
If you were not on title when escrow closed, and if you cannot rebut by clear and convincing evidence the legal presumption set forth in Evidence Code section 662 (based upon form of taking title in her name alone) that you consented to that outcome, then (a) your Wife still gets her downpayment back and (b) the community estate is entitled to be reimbursed for carrying the mortgage all those years and reducing the principal balance due the mortgage holder. It doesn't matter who paid the mortgage, so long as it was paid from community earnings during the marriage.
There is a very important reimbursement concept under California Law known as Moore-Marsden apportionment. It applies to a common situation where a home is acquired before marriage (or during marriage as separate property), title is in the name of the acquiring spouse alone, and during the marriage and up to separation or divorce and there is or was a mortgage that was paid during the marriage.
Where this occurs the community estate acquires a legal, reimbursable, interest in what would be otherwise be entirely the separate property of the titled spouse IF community funds (earnings of either spouse, for instance, or both) are used to make the mortgage payments. The idea is that joint funds are being used to benefit a separate property interest, i.e., the separate property equity. Many legal scholars consider this to be a breach of fiduciary duty - that whenever one or the other spouse's separate property interests are increased with community funds, or community time, skill, and efforts of either spouse during the marriage, the community is disadvantaged and that this disadvantage violates the statutory duties of the parties that place the party's joint interests above their separate interests.
The formula for apportionment is that the community acquires a pro tanto (dollar for dollar) interest in the ratio that principal payments on the purchase price made with community property bear to payments made with separate property. Hence, any increase in value (appreciation) must be apportioned accordingly between the separate property and the community property estates upon separation or dissolution.
Note that this only applies to separate property owned prior to marriage with a mortgage that was paid during marriage where an equity position has been increased. For instance, if a mortgage exists but it is an interest only, payments during marriage do not reduce principal. Therefore, the separate interest of the owner spouse is not improved because the debt remains exactly the same. As a general rule, the amounts paid for interest, taxes, and insurance on the house are disregarded since that portion does not to contribute to the capital investment.
Also, it assumes that the mortgage was paid with joint (community) funds, or that the funds used were so commingled that the "separatizer" is unable to trace them to a separate property source (meaning they don't have records showing where each payment was made or are unable to provide a recapitalization of the source of the funds). If your husband reduced the mortgage throughout the marriage but he did it with an account that was his separate property then the community would not have this reimbursement right.
The Moore Marsden formula requires a number of bits of information at important points in time to be properly calculated. These include: a) what was the original purchase price; b) what was the original mortgage and downpayment; c) what was the property worth at the date of marriage (DOM); d) what was owed to the lender at that time; e) what was the property worth at the date of separation; f) what was owed at that time; g) what is the property worth on the date of the calculation (i.e., the trial date); h) and what is the principal pay-off at that time?
This is a good example of why family law and divorce cases can become quite expensive. Obtaining these records, particularly if you are the 'out spouse' can be difficult, and sometimes a forensic accountant is the best option for calculating these apportionments. Find a local CPA with family law experience to help you trace the funds. You need an experienced family law attorney for these types of matters as well.
In your case, with a lengthy marriage and little owing, you have significant Moore Marsden entitlements.
Author: T.W. Arnold, III, CFLS