1. Wendy and Henry's Rights at Divorce
Henry and Wendy were married in California. California is a community property state. Property acquired during marriage is presumed to community property (CP). Property acquired before marriage or after permanent physical separation is presumed to be separate property (SP). In addition, property acquired by gift, bequest, or devise, is that spouse's SP. The character of property is determined by tracing back to the source of funds used to acquire that property.
At divorce, each CP asset is divided 50/50 in kind, unless a special rule requires deviation from the equal division requirement or if the spouses agree in writing or by oral stipulation in court. Each spouse's SP remains that spouse’s SP.
Characterization
Property acquired during marriage is presumed to be CP. A spouse can rebut this presumption by tracing back to the source of the property and showing that SP was used to purchase the property.
Here, the necklace was acquired in 2011, while Henry and Wendy were still married. Thus, the necklace is presumed to be CP. However, Henry will be able to rebut this presumption by tracing back to the source of the funds used to purchase the necklace. Henry used $25,000 of his $100,000 inheritance to purchase the necklace. Since an inheritance is SP regardless of when it was acquired, Henry will be able to rebut the CP presumption by tracing his SP funds. The next issue is whether Henry and Wendy changed the character of the property when Henry gave the necklace to Wendy.
Transmutation
Spouses can change the character of any asset from CP to SP, SP to CP, or from one spouse's SP to another spouse's SP. This is called a transmutation. To be valid, there must be an express declaration in writing that is signed or assented to by the spouse whose property interest is adversely affected. The writing must expressly state that a change in the property ownership is being made.
Here, when Henry gave Wendy the necklace, no transmutation occurred because there was no express declaration in writing signed by Henry that stated that a change in the ownership interest in the necklace was being made. However, there is an exception to the transmutation rule for gifts of a personal nature.
Exception - Gift of Personal Nature
A transmutation is not necessary to change the character of an item when there is a gift from one spouse to another of an item of personal nature. For this exception to apply, the item must be of a personal nature, used primarily by the spouse who was gifted, and the item must not be substantial taking into account the circumstances of the marriage.
Here, the necklace is an item of a personal nature because it is jewelry that is worn by a person. Furthermore, Wendy, the spouse who was gifted with the necklace, is presumably the one who primarily uses the necklace. The issue here would be whether the necklace was substantial in value taking into account the circumstances of Henry and Wendy's marriage. The facts do not tell us about Henry's employment but we do know that he has a job. Furthermore, we know that Wendy has a corporate job. Nevertheless, the spouses came into the marriage with no savings and Henry had a monthly child support payment. Considering that the necklace was $25,000, it was most likely substantial taking into account the circumstances of their marriage. Therefore, the necklace would most likely remain Henry's separate property and did not change into Wendy's separate property.
Distribution At Divorce
At divorce, a spouse's SP remains his or her SP.
If the necklace was substantial in value taking into account the circumstances of Henry and Wendy's marriage, then the necklace would remain Henry's SP. If it was not substantial taking into account the circumstances of marriage, then the necklace was changed into Wendy's SP.
Personal Injury Award
The character of a personal injury award is determined when the cause of action arose, not when the spouse receives a settlement or judgment. If the cause of action arose during marriage, then the personal injury award is CP. If the cause of action arose before marriage or after permanent physical separation, then it is SP.
Here, the car accident settlement arose out of Wendy getting injured in a car accident in 2012. Thus, the cause of action arose in 2012. Although there may be an issue as to whether the economic community ended in 2013 or 2015 (discussed below), the community was certainly continuing in 2012, and thus the personal injury award would be CP.
Division At Divorce
The general rule is that each CP asset is divided 50/50 in kind at divorce. One special rule that requires deviation from the equal division requirement is for personal injury awards. At divorce, a personal injury award will be awarded entirely to the injured spouse unless the interests of justice require otherwise.
Here, the personal injury award will be awarded to Wendy at divorce since she was the injured spouse. We would need more facts to determine whether the interests of justice would require that the community receive part of the award, such as where part of the settlement was reimbursement for medical expenses that were paid from community funds. As it is, the personal injury award of $30,000 will be awarded entirely to Wendy at divorce.
c. The Stock Option Profits
The rents, issues and profits of community property are community property. Stock options get special treatment under the rules when the stock options are granted during the marriage but are not exercisable until after the marital community ends. It first must be determined when the marital community ended.
End of The Marital Community
The marital community ends when there is permanent physical separation and an intention not to resume the marriage. Intention not to resume the marriage by one spouse only is effective so long as it is communicated to the other spouse.
Here, Henry and Wendy permanently separated and Henry moved away in 2013. Thus, we have permanent physical separation. The issue is whether the spouses intended to resume the marriage. Henry moving away permanently is indication of an intention not to resume the marriage, but we would need more facts about intent to make that determination. Wendy filing for dissolution in 2015 is certain evidence of an intention not to resume the marriage. Thus, it is certain that the economic community ended in 2015, but it most likely ended before that, in 2013 when Henry and Wendy permanently separated and Henry moved away.
Stock Options
The community interest in stock options depends on which formula is used. Which formula is used depends on what the intent of the employer was in granting the options. If the employer's intention was to reward the employee for past services, then the formula is: The numerator is the years that the employee was married until the economic community ended and the denominator is the years the employee was married until the options became exercisable. The community gets a larger percent under this formula because community labor is community property. If the employer's intention was to grant the options as an incentive to continue working for the company the formula is: The numerator is the date the option was granted until the economic community ends and the denominator is the date the option was granted until the date the options became exercisable. The fraction represents the community property interest.
Here, Henry would argue that the employer was granting the options as remuneration for past services because when Wendy was granted the options, it was in part because she has been a very effective employee. Wendy would argue that it was an incentive to keep working and doing a good job because she was told when she began working there that she would receive stock options in the near future if she performed well. Since it is a difficult determination on these facts, the stock options will be analyzed using both formulas.
Here, when Wendy was hired in 2010, she was married to Henry. Henry and Wendy permanently separated in 2013, which is when the economic community ended. Thus the numerator is 3. The options became exercisable in 2014, so the denominator is 4 (2010-2014). Thus, the community interest in the stock option profits would be 3/4.
Here, the options were granted in 2012 and the economic community ended in 2013. Thus, the numerator is 1. The options were granted in 2012 and became exercisable in 2014, making the denominator 2. Thus, the community interest in the stock option profits would be 1/2.
Division At Divorce
If the employer’s primary intent in granting the options was to reward Wendy for past services, then the community interest in the $80,000 stock profits is 3/4, or $60,000. The $60,000 would be divided equally between Henry and Wendy; thus each would receive $30,000 of the profit. Wendy would end up with $50,000 ($30,000 (her half of the CP) and $20,000 (SP interest) and Henry would get $30,000.
If the employer’s primary intent in granting the options was to incentivize Wendy to keep working, then the community interest in the $80,000 stock profits is 1/2, or $40,000. The $40,000 would be divided equally between Henry and Wendy; thus each would receive $20,000 of the profit. Wendy would end up with $60,000 ($20,000 (her half of the CP) plus $40,000 (SP interest)) and Henry would end up with $20,000.
2. Should Henry be required to reimburse the community for child support payments and if so, what amount?
Child Support Payments
Child support payments from a previous marriage are treated like a debt incurred before marriage. The CP is liable and the parent spouse's SP is liable. The other spouse’s SP is not liable. The community is entitled to reimbursement for child support payments made with community funds to the extent that separate property was available and not used. A spouse's salary during marriage is community property.
Here, the child support payments were for Henry's child from a prior relationship so his SP is liable and the CP is liable. Henry paid $1000 a month for child support payments from his salary. Henry's salary is community property because it is from his labor during marriage. Since CP funds were used to pay the child support payments, the issue is whether there was Henry's separate property available that could have been used instead.
Reimbursement
Here, the spouses had no money saved coming into the marriage in 2008. Henry received an inheritance of $100,000 in 2011. Thus from 2008-2011, the community is not entitled to reimbursement because there was no separate property available. Henry tied up $75,000 of the $100,000 in a municipal bond and used the other $25,000 for Wendy's necklace. Since the bond had profits of $300 per month that went to Henry, that is SP that was available (as stated above, rents issues and profits of SP are SP, and this was SP because it was inherited). Thus, the community is entitled to reimbursement for at least $300 of the $1000 paid in child support until the economic community ended in 2013.
At Divorce
The community is entitled to $300 a month from 2011-2013 (when the economic community ended). So the calculation is 24 months multiplied by $300, which equals $7200. At divorce, the $7,200 will be divided equally between Henry and Wendy.
Wendy will get $3,600 and Henry will get $3,600.