By Warren R. Shiell
The following information is specific to California.
After separation and before the divorce in finalized one spouse stays in the family home while the other spouse pays the mortgage. What are the consequences?
It's often the case that after separation one spouse moves out of the family home ("the out-spouse") while the other spouse stays in the home with the children ("the in-spouse"). The out-spouse, usually the husband, may offer to maintain the status quo by continuing to pay the mortgage payments and other payments such as property taxes to maintain the property. In such a situation the in-spouse should be warned that there may be serious consequences of such an arrangement at the time of trial.
One consequence is that the out-spouse paying the mortgage payments may be entitled to what are called “Epstein” credits because they are paying separate property earnings towards a community property debt unless there was an agreement to waive such reimbursements or such payments were a form of child or spousal support.
The other major consequence is that if the reasonable rental value of the family home is more than the mortgage payments, the in-spouse may be required to re-imburse the community for the difference in these payments between the date of separation and the date of trial. These are called Watt's charges after the case that established the rule. FN6. The general rule is that where one spouse has the exclusive use of community assets during the date of separation and trial, that spouse may be required to compensate the community for the reasonable value of that use. Consider this example. Husband and Wife separate. Wife and the kids stay in the family home after separation. Husband agrees that he'll continue to support the family and pay the mortgage and other expenses. The mortgage payments are $1,500 per month. If Wife had to pay the fair market rent for the property she'd pay $2,500 per month. Husband pays the mortgage for 10 months from the date of separation to the date of trial. Husband could argue that he should be re-imbursed Watt's charges of $10,000 ($2,500 - $1,500 x 10). In a division of community property he'd be entitled to an extra $5,000. Husband could argue that he should also be entitled to Epstein credits of a further $15,000 ($1,500 x 10) which would increase his share of community property by $7,500.
This would mean that Wife's entitlement to community property would be reduced by $25,000 when she thought that Husband was supporting her and maintaining the status quo? Isn’t this grossly unfair? FN8 You'd think so but that didn’t stop the Court of Appeal awarding Epstein credits and Watts charges in similar circumstances in In re Marriage of Jeffries (1991) 228 Cal. App. 3d 548. But wait a minute. Isn’t there an exception to the rule where payments are made "in lieu of spousal support?" The answer is yes "but" this has to be clearly spelled out before the Court will treat such payments as support. In Jeffries, there was even an Order of the Court that said the payments were "in lieu of spousal support." However, the Order also said that the Court retained jurisdiction to characterize these payments and determine whether the Husband should be entitled to reimbursements.
In another case the Court of Appeal reached exactly the opposite conclusion to Jeffries. FN7. In that case the husband also paid the mortgage pursuant to a temporary court Order "in lieu of spousal support" and at trial claimed Epstein credits and Watts charges. The Court of Appeal held that public policy and the language of the Court order required that the Court deny the husband's claims for Epstein credits. The Court then decided that since the wife was, in effect, paying the mortgage she would not have to pay any Watt's charges because the monthly mortgage payments were the same as the fair market rental value of the home.
The only solution to this mess is for the parties and their attorneys to agree early on in the proceedings whether a spouse’s payment of community debts (such as the mortgage) and one spouse living in the family residence should be treated as spousal support which does not generate Epstein credits or Watt's charges. If it's treated as spousal support any agreement or Order should contain explicit language that mortgage and other payments by the out-spouse and exclusive residence by the in-spouse in the family home "shall be treated" as spousal and child support and the paying spouse shall not receive any reimbursements such as Watt's, Epstein, Jeffries credits and charges.
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FN1. Brooks v. Robertson (2008) 169 CA4th 176.
FN2. Marriage of Marsden (1982) 130 CA3d 426; Marriage of Moore(1980) 28 C3 366.
FN3. Family Code §3800.
FN4 IRS Publication 936 “Home Mortgage Interest Deductions.
FN5. Marriage of Fonstein (1976) 17C3 738.
FN6. Marriage of Watts (1985) 171 CA 3d 366.
FN7. Marriage of Garcia (1990) 224 CA. 3d 885.
FN8. This is the conclusion of one Family Law Commissioner: "It is fundamentally unfair for one spouse to move out and to allow a post-separation living arrangement to stabilize on one set of financial assumptions and then, without warning to the other spouse, introduce for the first time at trial a concept as pernicious as a Watts credit claim to set up an entirely different set of financial assumptions." Commissioner Richard Curtis (2003)
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