The Court of Appeals just issued what could be a very important opinion on the issue of commingling separate and community funds in certain accounts. The name of the case is Marriage of Cooper and it is a stark reminder of the perils that may result from mixing separate and community funds in the same account. This case stands for the proposition that once separate property funds are deposited into an investment account held in both parties’ names, those funds lose their separate property character and become community property. However, the spouse who contributes his or her separate property to the jointly titled account has a right of reimbursement under Family Code section 2640. So what does this mean in plain English and how will it affect future cases?
This case upsets the conventional wisdom on this issue in many ways. The family code usually requires something called a transmutation before converting separate property into community property, as outlined in Family Code section 852. A transmutation is a written document explicitly changing property from community to separate, from separate to community, or from one spouse’s separate property to the other spouse’s separate property. Therefore, even if separate monies were deposited in an account held in both parties’ names, those monies would still remain separate unless there was a writing explicitly converting them to community.
However, Marriage of Cooper held that no such writing is required if property is held in joint form (i.e. property held in the name of both parties) because, under Family Code section 2581, property held under joint form falls under a community property presumption. Accordingly, only a right of reimbursement exists under Family Code section 2640. The practical effect of this is that the contribution of the spouse with the separate property is capped at the amount of the contribution. Any future growth would belong to the community.
Let’s look at an example. A married couple starts an investment account held in both of their names during the marriage. No community funds are ever put in that account. Wife deposits $5,000 of her separate property stock in that account. Over the next 10 years, that $5,000 stock is worth $10,000. What are Wife’s rights?
Under the conventional wisdom, Wife’s could recover the entire $10,000 as that entire amount is traceable to her separate property and there was no transmutation. However, under the holding in Marriage of Cooper, Wife’s recovery is capped at the amount of the initial investment, which would be $5,000. This is a big difference and it is another reason to keep separate and community funds in different accounts!
Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.