Can Spouses Be Found to Have Gifted Their Share in Community Property to the Other? Problems Affecting SP Residences.

Community Property Gifts to the Separate Property of the Other Spouse

When the community estate pays money towards the separate property assets or expenses of the other spouse, is it always entitled to be reimbursed?

Not always. It is possible for a court to find that a contribution in favor of the other spouse on the CP dime is a gift, and so not capable of reimbursement. However, this is an outcome that trial and appellate courts may seek to avoid and it is highly transaction and subject matter specific.

The Common Family Residence Owned by One Spouse Situation

It is not uncommon that when parties marry, one or both spouses already own certain assets like – for purposes of this article – a home. Unless and until the other spouse is added to the title on the home (which is a “transmutation”), that property always remains the SP of the titled owner. There are two situations that commonly arise in such circumstances: 1) there is a mortgage that is paid down with CP funds or earnings during the marriage, along with real estate taxes and home insurance; and/or 2) improvements and/or repairs may be made to the property using joint (CP) funds. In neither situation does the application of these funds change the character of the title and ownership. But under the law as it has evolved over the past 40 years, there is often a right of reimbursement. However, that right can sometimes be waived, or gifted, to the other party.

We’ve written extensively about “Moore-Marsden” (M-M) reimbursements and apportionment. Where community property funds (including the earnings of either party, in the absence of a premarital agreement saying that earnings in the parties’ marriage will not belong to the community estate) are used to pay a mortgage, over time principal is reduced (except as to ‘interest-only’ loans). The property may go down in value, its value may remain flat, or it may appreciate by the time the parties separate and begin to war over identifying and splitting the community pie. M-M holds that unless a right to be reimbursed for these contributions and the resulting increase in net equity in the home has been waived, the CP estate must be reimbursed for its share in the overall acquisition of the property. The amount of the reimbursement will be a ratio function of the increase in equity as represented by the principal reduction and any increase in value. However, for this reimbursement to exist there must be a calculable increase in the net equity of the party claiming the separate property interest as measured from the date of marriage to the date of calculation (for instance, assuming a transmutation prior to separation) or date of separation (where there was never a change in title during the marriage). It is certainly possible that the M-M reimbursement amount will be found to be zero, most obviously where the property’s value has declined. Or in shorter marriages, where little appreciation has yet occurred.

M-M is founded on the idea that CP funds used for the “acquisition” of property should be reimbursed in order to avoid what would otherwise amount to a constructive fraud upon the party who does not benefit from an increase in the other's separate property net, at the expense of the community (or really the spouse's half). Constructive fraud does not speak to “intention”; it is a legal fiction that is imposed in order to protect the financial interests of the disadvantaged spouse, where they did not consent to the outcome. “Acquisition” that may give rise to a reimbursement right is limited to payments that increase equity, and does not include interest, real estate taxes, or insurance.

Where property that is owned by one spouse alone is improved on the community dime, where for instance the spouses or one of them renovates the home, this is not considered to be an “acquisition” in the sense of M-M and those funds play no part in a M-M calculation. There is another avenue for reimbursement for improvements nonetheless, discussed below, although the right to a reimbursement is not guaranteed. It can be effectively waived. Many lawyers fail to analyze whether their facts support a waiver.

Until 1975, husbands under the law had the sole right of management and control of the community property. Yes, as hard as it is to imagine, only 40 years ago California husbands had the exclusive right to make financial decisions affecting their wives’ rights and interests in the parties’ assets. As a consequence and to equalize the playing field, a rule developed that where a husband in managing these assets made the decision to use community funds to improve the wife’s property, it was presumed that he was making a gift of his half of that CP to the wife – and that she owed no obligation to reimburse the husband for any of it. This result did not require any kind of writing or formal waiver by the husband, and could be based upon evidence of “oral transmutations”, i.e., pillow talk.

Note the operative word in the previous paragraph is “presumed.” Presumptions are very important in determining who has the burden of proof on any given issue in CA divorces and family law proceedings, and when they exist in favor of one party they put the other on the defensive to overcome them.

In 1975, Civil Code section 5125 and 5127 were enacted (current Family Code sections 1100 and 1102), to declare that husbands and wives henceforth would share equally in the right to manage and control the community estate. And yet the rule presuming a gift where one spouse used community property to allow the other spouse to “acquire” (or increase) that spouse’s equity position did not go away. It matters which spouse controlled the funds and so made the decision on any given transaction – i.e., that it is not the spouse who owned the separate property whose financial position was being aggrandized, since that party should not have the power to make a gift to themselves. Clearly, those funds should be reimbursed (and indeed the rule is that the reimbursements should be the larger of the actual cash value paid or the value of the enhancement). Generally speaking, community payments made by one spouse that improve the other spouse’s separate property continue to be presumed to be a gift, and in such cases no right of reimbursement-back exists absent proof of an agreement that the contribution would be reimbursed – which can be oral. Marriage of Camire (1980) 105 Cal.App.3d 859. Camire was decided post 1975, and noted the change in the law providing that spouses have equal management and control of the community property, but nonetheless applied the former gift rule, and presumably would have done so if the genders had been reversed.

This gift presumption, though, has been viewed unfavorably by the courts in certain settings, and so its reach has come to be limited. For instance, no gift presumption exists where the CP payments are used to pay a SP mortgage. E.g., Marriage of Moore (1980) 28 Cal.3d 366. Some years after Civil Code section 5125 was enacted, the court in Marriage of Frick (1986) 181 Cal.App.3d 997, 1020, opined “Beginning in 1975, both spouses were granted equal management and control of the community real and personal property, with limited exceptions. (Civ.Code, §§ 5125 and 5127.) However, we do not believe this change in the law should alter the basic principles discussed above. Indeed, we believe the effect of this change should be to place each spouse in the same position as the husband was before 1975. If either spouse appropriates community funds for his or her own benefit, without the consent of the other spouse, the community should be reimbursed. Even if in theory both spouses have an equal right to management and control, if one spouse acts in his or her self-interest to the detriment of the community interest, the community should be entitled to restitution.” (The Frick husband managed the community assets. However, the wife was denied a reimbursement because she failed to present evidence that husband had in fact used CP funds to make the relevant expenditures, or their cost/value).

The gift presumption has been further eroded. In Marriage of Wolfe (2001) 91 Cal.App. 4th 962, apparently dealing with a situation where the husband controlled certain joint funds and used them to improve his own separate real estate property with the installation of a drip agricultural system, the court refused to apply the gift presumption to SP improvements made with CP funds. It ruled: “There is little logic in a rule that presumes an unconditional gift when one spouse uses community funds to improve the other spouse's property. Husbands and wives rarely plan for dissolution of a marriage, and if they did, it is fanciful to suppose that a spouse would wish the divorcing partner to walk away from the marriage with property enriched by an infusion of community funds and with no obligation to reimburse. The presumption is simply not grounded in human nature or experience. Nor is it in accord with public policy, which presumes acquisitions during a marriage to be community [citation omitted], and disfavors changes in characterization without strict adherence to formalities; this ensures thoughtful deliberation before decisions with potentially far-reaching consequences are made. [Citation omitted] As we explained, our courts do not indulge such a presumption when community funds are used to assist in the purchase or to reduce an encumbrance on a separate asset. The application of community funds results in what amounts to co-ownership of the asset. [Citation omitted]. There is no reason to presume a gift when funds are applied to improve separate property."

The Gift Doctrine, However, Is Not Yet Dead

Despite Frick and Wolfe, the gift presumption is still on the books and even if there is no presumption, you might be able to win the gift argument if there is a sensible reason explaining why the spouse managing the community made the contributions to the other's SP, supported by evidence of an agreement. Neither case said that funds applied to improve separate property cannot be a gift, but only that the transaction would not be presumed to constitute a gift. Circumstances remain where a party may be able to prove that a gift was intended, based upon an oral agreement.

By the way, it certainly remains the rule that one spouse can make a gift of their own separate property to the separate property of the other spouse without a right to reimbursement later, and that they are presumed to do so in a number of different types of transactions (most commonly where a spouse pays joint credit card debt with separate property). People are understood to more likely intend a gift when the thing they give up belongs to them alone, and the reason for protections against self-serving transactions are not implicated to the same degree (although one can always claim undue influence) when one is managing their own property only.

Winning at the trial court level will, as usual, probably be a predicate to winning on the gift issue on appeal. Or, when this issue gets revisited by the appellate justices in the future, the gift rule may go bye-bye, at least insomuch as the facts apply to CP contributions to SP, as opposed to SP contributions to the other's SP.

Author: T. W. Arnold