When you think of Community Property, do the words "half of everything" come to mind? No so fast! In fact, this is not always the result even when a spouse seems to have gifted to the other spouse one-half of the home the gifting spouse owned before marriage but where they both live.
Consider this scenario:
Ken and Jane live in California. Jane owned her own home before she married Ken. By the time they tie the knot, the home had a fair market value of $750,000 and no mortgage. During their first anniversary dinner celebration, Jane deeds the property to "Jane and Ken, As Community Property" and presents Ken with a copy of the recorded Deed. At the time of the anniversary dinner, the fair market value of the home is $1,000,000; the value (and in this case, the equity) had increased $250,000!
Jane is a homemaker and receives no income of any form from any source.
Over the next five years, Ken's earnings from work are used to pay the basic maintenance, repairs, homeowner's insurance and property taxes. Because the home was in excellent condition when they got married, there is no need for major repairs or any improvements.
Things go forward in accordance with the law of averages, and Ken and Jane decide to get a divorce. By the time the divorce is over, Ken will most likely feel that Jane has performed a slight-of-hand trick worthy of a Las Vegas act. Here's why.
Due to the poor economy, the value of the home, at the time Ken files the Petition for Dissolution of Marriage, is still $1,000,000. Neither Ken nor Jane had encumbered the property during the marriage, so the equity in the home also is $1,000,000.
Under current California law, upon divorce, Ken has no interest in the equity in the home. True, Ken may be awarded the home, but if he is awarded the home, he will owe Jane - not the community - $1,000,000.
When Jane deeded the house to "Jane and Ken, As Community Property", whether she realized it or not, she was not gifting Ken one-half the equity in the home. Rather, she was gifting one-half of the appreciation, if any, from that point forward. Why not one-half of the equity in the home? Because when Jane transferred the house from her name alone to both their names as community property, she retained her California Family Code §2640 reimbursement rights. What does this mean? Specifically, as a matter of law, Jane retained the right to be reimbursed 100% of the equity in the home at the time she executed the new deed. Jane's reimbursement right can only be waived if the waiver is in writing and very specific.
Assume that it was Jane's intent to give Ken one-half of the equity in the home when she deeded the property to "Jane and Ken, As Community Property." To accomplish her objective, Jane would have had to document her intent to give Ken an immediate one-half (½) interest in the equity in the home. While there are no absolutely required magical words, such as "I waive my Family Code §2640 right to reimbursement," (although those words are magical!) Courts do require some writing that clearly has the "effect of a waiver," signed by the spouse who has the reimbursement right, in this case Jane. The easiest way to do this would be for Jane to type on the Deed that she was waiving her right of reimbursement under Family Code §2640. Unfortunately for Ken, this is not what happened.
Under §2640, had the value of the home decreased, Jane's reimbursement would have been limited to the reduced equity value. Conversely, had the value of the home increased, and there continued to be no debt on the property, Jane's reimbursement value would have been "capped" at $1,000,000. The equity in excess of $1,000,000 would be community property and divided equally between both Jane and Ken. In other words, if the home had increased in value to $1,250,000 and the property was still owned free and clear, Ken's interest in the home would be $125,000 and Jane's interest would be $1,125,000.
Perhaps when Jane signed the Deed to transfer the property to "Jane and Ken, As Community Property," she knew about §2640 and was intentionally not waiving her right to reimbursement. More likely, Jane (or even her probate attorney, who may have prepared the Deed for them) was not aware of §2640 and thought she was gifting Ken one-half (½) of the equity in the home; then, when the divorce happened, Jane took advantage of what the law provided. Ken had a tough pill to swallow when he found out at the time of the divorce that he was entitled to only one-half (½) of the appreciation (if any) rather than receiving one-half (½) of the equity!
The moral of the story: Whether you are the giver of the gift or the recipient, be aware of California Family Code §2640 so you understand fully what you are giving or what you are receiving. Only with this knowledge will you be able to make sure that your intention and expectation is realized.
This post has been modified since its original publication.
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