Getting Reimbursements During your Divorce
Introduction:
When you hear someone say “2640” or “2640 claim”, they are referring to California Family Code Section 2640. This statute governs a divorcing spouse’s right to be reimbursed for separate property they contributed to the acquisition or improvement of community property. Today we want to provide you with information about what contributions are entitled to reimbursement and what needs to be proven to receive your reimbursement, and what steps you can take to identify if you or your ex-spouse may have a 2640 claim.
Step 1: Identify If Separate Property Was Used
First, you must determine if reimbursement is appropriate by identifying if separate property was used to benefit community property.
Separate property is defined as:
a) property that was owned before marriage
b) property that was received during marriage by gift or inheritance, or
c) property identified in a pre/post-marital agreement as remaining separate property.
Sometimes property goes through different forms. In this case, it is critical that any property you would like to receive reimbursement for is traceable to a separate property source.
Here is an example of property tracing:
Brock is married to Lewis. During their marriage, Brock inherits a car from his father. Brock sells the car and uses the proceeds to purchase stocks. After the stocks grow, Brock sells the stocks and uses the sale proceeds to contribute to the downpayment on a home.
Essentially, the source of the money Brock contributed to the downpayment is directly traceable to the inheritance from his Father, even though the property has changed forms multiple times.
What does this mean?
If you are claiming that you have a right to reimbursement of separate property funds, you must prove that you used separate property funds by providing documentary evidence that establishes you used separate property.
Property tracing can become more complicated in a longer marriage. Financial institutions only maintain records for 7 years. If you have not maintained your own records, and more than 7 years have passed, you may find yourself in a situation where you cannot prove that the funds used to benefit community property.
Step 2: Identify For What Expense The Property Was Used
Under California law, not every expenditure of separate property will qualify for reimbursement. California Family Code 2640 specifically states that parties can be reimbursed for only specific expenses. These expenses include, and are limited to:
- Down Payments
- Payments that reduce the principal of a loan that was used to finance the purchase of the property
- Payments for improvements
- Payments that reduce the principal of a loan that was used to finance the improvement of the property
These limitations mean that there are many circumstances where someone may spend their separate property on community property, but not be entitled to reimbursement. Here are two common situations where this is the case:
Situation A – When someone has used separate property to pay down the mortgage on a residence. Mortgage payments include payment of principal and interest. While you can be reimbursed for the paydown of the principal, you cannot receive reimbursement for the payment towards the interest.
Situation B – When separate property is used to pay for maintenance on property. While it may be necessary to maintain the function of the property, it is not an improvement and therefore will not entitle you to be reimbursed for those funds.
Step 3: How much am I entitled to be reimbursed?
For the sake of simplicity, let’s review a common scenario as an example:
Rose and Jack have been married for 10 years. 2 years into their marriage, Rose’s mother died. Rose received $100,000 from her mother. Rose and Jack decided to buy a home. Rose used her $100,000 inheritance as the down payment on the home. Jack and Rose placed the deed in their names as community property and have used their community property income to pay the mortgage, property taxes, and maintenance on the home.
In the Jack and Rose example, their real property has had 8 years to grow in value. It would not be surprising for Rose to ask for reimbursement of her $100,000 plus interest, or for an increase to reflect the present-day value.
California Family Code 2640, explicitly states that a person entitled to reimbursement receives that reimbursement without interest and that they will not have a change in monetary value of their contribution to reflect present value.
Here is another scenario. Let’s say the property becomes less valuable than the initial contribution. In this case, the party being reimbursed is not entitled to receive more than the value of the asset. This means that it is possible to contribute separate property to an asset, to then be entitled to a reimbursement, but ultimately receive less than what you gave because of a decrease in the value of the property.
Step 4: Have You Waived Your Right To Reimbursement?
There are two major defenses against a claim for reimbursement.
1) The property used was not separate property
2) The use of the separate property was intended as a gift and the right to reimbursement was waived
It is possible, and it does happen, that in the course of someone using their separate property to acquire or improve community property, they give up their right to be reimbursed. This can occur by indicating in writing (such as an email or text) that the money is a gift to the marriage. It can also occur through conduct that supports the understanding that the money was intended as a gift. It is also possible that the word ‘gift’ isn’t used, but instead there is a writing that says, “I don’t need to be paid back,” or other similar statements.
Is there anything else to know?
One common reason that people create a premarital agreement (or a post-marital agreement) is to address claims such as the claim for reimbursement we are discussing today. Marital agreements give couples the opportunity to identify what they each have, acknowledge what the other owns separately, and clearly define property rights.
Premarital agreements can include provisions detailing how the use of the separate property is to be documented — Is it on a spreadsheet? Do the statements need to be maintained? — and whether or not people can receive reimbursement. There are couples who decide upfront that any use of the separate property is a gift under all circumstances. In these cases, should the couple decide to end their relationship, claims such as the 2640 reimbursement claim are not at issue and will never be raised.
Conclusion
Property division isn’t as simple as “half is yours and half is mine.” There are many opportunities and reasons that the division of assets and debts can become more complicated to unravel. If you are navigating a divorce case and are unsure of how to present a claim for reimbursement or defend against one, please give us a call or schedule a consultation to discuss your case.
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