While it is common for couples to separate while their divorce is pending, this separation can raise a couple of unique issues with regard to distribution of the spouses’ property rights and financial responsibilities. For example, if the spouses are legally separated, any income earned during the separation period may qualify as “separate” (rather than “community”) property, yet one or both spouses may continue to use this income to pay joint debts and liabilities. Conversely, if one spouse makes exclusive use of a community asset during the couple’s separation (i.e. if one spouse lives alone in the family residence or takes sole possession of a vehicle), this exclusive use could give rise to a claim for compensation or reimbursement by the non-user spouse.
In California, these issues are typically resolved through what are known as “Epstein credits” and “Watts charges.”
Epstein Credits in a California Divorce
Decided in 1979, In re Marriage of Epstein established the long-standing rule governing reimbursement of expenses paid with separate funds following a pre-divorce separation. The court’s decision in the case was later codified as California Family Code Section 2626.
As a general rule, if a husband or wife uses separate assets to pay community debts during a marriage, he or she is not entitled to reimbursement. For example, if one spouse brings significant wealth into a marriage and uses that wealth to pay off a mortgage, car loan, or other debt that is jointly incurred, that spouse cannot later seek to recoup the amounts paid in a divorce.
However, under In re Marriage of Epstein and Section 2626, a spouse can seek reimbursement for use of separate income to pay community debts following a separation. As stated by the Supreme Court of California:
“[A]lthough a spouse is generally not entitled to reimbursement for separate funds utilized to meet community obligations, that rule does not apply to expenditures subsequent to separation. Accordingly, [a spouse] may claim reimbursement for sums expended after separation to preserve and maintain the family residence, unless such sums were paid to fulfill [the spouse’s] support obligations.”
This form of reimbursement has become known as an “Epstein credit.” While Epstein credits will be fairly straightforward (or inapplicable) in many situations, for high-net-worth couples in particular, ensuring accurate calculation and payment of Epstein credits can be an important added component of the divorce process.
Watts Charges in a California Divorce
Watts charges cover what is essentially the opposite scenario: when one separated spouse uses community assets to the exclusion or detriment of the other. In the 1985 case of In re Marriage of Watts, the California Court of Appeals held that a spouse who is deprived of the use or value of community property following a separation may be entitled to reimbursement when the spouses divorce.
Let’s return to the prior example of one spouse residing alone in the family home. If the rental value of the home is $5,000 per month and each spouse is entitled to half of the couple’s community estate, then the non-residing spouse could potentially seek a “Watson charge” of $2,500 per month for each month of exclusive residence.
These are just general rules. As is often the case in divorce matters, there are several exclusions and special circumstances that can affect both spouses’ legal rights. If you have questions about how Epstein credits and Watts charges may come into play in your divorce, we encourage you to contact us for a confidential initial consultation.
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Richard M. Renkin is a North County, CA divorce attorney who brings over 30 years’ experience to representing spouses in complex and high-net-worth divorces. To request a confidential initial consultation, please call 619-299-7100 or inquire online today.