Property Division in Divorce: What Are Epstein Credits and Watts Charges?

The Goal is Fair and Equal Property Division

The end goal for property division in a California divorce case is to keep things as fair as possible for both parties involved. Many people believe that as a community property state, California requires assets to be divided “50/50” (we both get half of everything); however, this is not 100% true and is a very common misunderstanding of California law. While it is true that California is a community property state and both parties share equal ownership in their assets, when it comes to property and debt division, the requirement is for assets and debts to be divided fairly and equally.

Getting to the preferred end goal can be daunting. Dividing property during a divorce, particularly for longer marriages, often is complicated because many factors can impact the division of an asset. When this occurs, often the property division involves multiple case laws and family codes.

Important Factors in Property Division

When analyzing property division, we care about many different points in time:

• When was the property purchased: before, during or after the marriage?
• If property was purchased during marriage, did either spouse use their separate property to purchase the property?
• During the marriage, did either party use their separate property to improve this property?
• What has happened with the property since separation?

Epstein Credits and Watts Charges come into play with #4 above: what has occurred with the property after separation. Both are possible tools the court can utilize to get parties to the ideal outcome of a fair and equal division.For the following explanations, we we will reference this hypothetical example:

Sonny and Cher have been married for 20 years. During their marriage they purchased a home. Cher told Sonny that she wanted a divorce, and Sonny decided to move out of their community property home. Sonny moved in with some friends and has stopped contributing towards the expenses of their community property residence. He says that because Cher is the only one benefiting from the home, he shouldn’t have to pay for any of the expenses. Cher is still touring and receiving income from her records and ticket sales and is using this income to pay for the home’s expenses.

What is an Epstein Credit?

The phrase “Epstein Credit” references the case In re Marriage of Epstein (1979) 24 Cal.3d 76, 154 Cal.Rptr. 413, 592 P.2d 1165 (“Epstein”). In this case, the court recognized the need to encourage both spouses to pay community property obligations after separation in order to minimize the impact of separation on creditors and the parties’ credit rating. This case changed family law considerably in California. Before this case, the rule was that when any spouse used separate property for community property purposes — unless the parties made a clear written agreement — then a gift was intended and no reimbursement was permitted. The result of the Epstein case was to provide a fairer rule.

Under Epstein, the right to reimbursement when a spouse uses a separate property, either from earnings or otherwise, to satisfy community obligations, is extended to include post-separation expenses. It is important to remember that both individuals’ income following separation is their own separate property.

So how does Epstein Credit come into play?

Remember the example above: Cher has remained in the community property home after separating from Sonny. Cher is the only spouse paying toward their mortgage, property taxes, and maintenance expenses. She is paying these expenses with her post-separation income.

Under Epstein, the spouse who continues to pay for marital obligations using his or her separate property can have a claim for reimbursement and thus have the other spouse pay for ½.

As we’ve stated, Cher is continuing to solely pay for the mortgage on the house in the monthly amount of $3,000 using her income after separation. Cher remains in the home for an additional 10 months, spending a total of $30,000 of her separate property income on the community property debt. Under Epstein, Cher has the right to ask Sonny to reimburse him for half, or $15,000.

Are there any exceptions to Epstein?

Yes, there are some exceptions to Epstein. Some of the exceptions include:

• There is an agreement between spouses for no reimbursement
• The spouse asking for reimbursement should not receive it because the payment was intended as a gift (This is a challenging one to prove);
• The payment was to discharge the paying spouse’s child support or spousal support obligation.

What about Watts Charges?

Watts Charges (sometimes also called “Watts Credits”) is a rule established by the court in In re Marriage of Watts (1985) 171 Cal.App.3d 366, 217 Cal.Rptr. 301 (“Watts”). This applies in divorce cases where a spouse, after separation, has exclusive possession and use of a marital property. Oftentimes, the court will refer to “in-spouse” and “out-spouse”. In our example, Cher is the “in-spouse” as she remains living in the marital home, whereas Sonny is the “out-spouse” because he has left the marital residence. Watts charges give the “out-spouse” a claim for half of the value of the property’s use, also known as “rental value.”

In our example above, while Cher may have the claim for $15,000 for Epstein Credits for spending separate property on a community property asset, Sonny may also have a claim for a share of the rental value of the home as Cher has exclusive use of the property.

Are there any exceptions to Watts?

Yes, there are some exceptions to Watts Charges. Some of the exceptions include:

• The spouses had a different agreement that would negate the Watts Charge;
• The same gift analysis as stated above applies; or
• This fair rental value was taken into consideration when determining support.

Epstein Credit and Watts Charges on the same case.

This is why we mentioned earlier that property division can become complicated. It is common for both Epstein and Watts to be raised in one case. When this happens, there can be a couple of different outcomes.
Sometimes, Epstein and Watts claims offset each other. Further using the example above, if the mortgage on the house Cher is paying is $3,000/month but the reasonable rental value is $3,000/month, then Wife’s Epstein claim for ½ of the mortgage payment or $1,500 will simply be offset by Husband’s Watts Charges claim for ½ of the reasonable rental value or $1,500.However, there are times when the value of each does not balance out. Let’s look at two different possible variations of our hypothetical.

1) Sonny and Cher purchased their home immediately after marriage. The mortgage is $3,000; however, the value of their home has skyrocketed. The rental value of the home is now $6,000. While Cher would still be able to make the claim that Sonny owes her $1,500 a month for the mortgage, Sonny would be able to make the claim that Cher owes him $3,000 a month for the rental value of the home. When analyzed together, under these facts, Cher could owe Sonny $1,500 a month.

2) Let’s reverse it. Cher is still paying $3,000 a month; however, the rental value of the home is only $2,000. Here, Sonny would owe $1,500 a month for the mortgage, but Cher would owe $1,000 a month for the rental value, the consequence being that ultimately Sonny would owe Cher $500 a month.

Are Epstein Credits and Watts Charges automatically applied by the Court?

The short answer is no. These reimbursement claims are discretionary and the court cannot order them unless either party specifically requests them. More importantly, the requesting spouse must provide detailed evidence supporting their claim. Evidence supporting these claims can include:

• Rental values of nearby homes
• A formal property appraisal
• Mortgage statements
• Property tax statements
• Invoices establishing expenses paid to maintain the home
• Bank account statements establishing the source of money that paid expenses

When presented to the court, the judge will consider a variety of factors including each spouse’s income, the number of children in the home, whether any agreement regarding the expenses and financial arrangement exists.

Oftentimes, these issues are addressed in other ways. These financial factors can be considered when calculating child or spousal support. It can also be factored into the overall equalization payment, or debt assignment.

CONCLUSION
Epstein Credits and Watts Charges are complex issues. Gomez Edwards Law Group, LLP can help you navigate through these issues and protect you and your family’s interest during your separation or divorce. Please contact us to schedule a consultation to discuss the implications of Epstein Credits and Watts Charges in your family law matter.