Learn how Epstein Credits and Watts Charges can mean big dollars in a divorce
Their name don't offer much help but this article will. Epstein Credits and Watts Charges often come up in a California divorce case. Spouses usually learn about Epstein Credits and Watts Charges from their lawyers. It is common for one or both of them to become a contested issue.
This article is not legal advice and is not intended to apply to your specific case. If you are going through a divorce in Orange County or expect to do so, you may contact our divorce lawyers for an affordable strategy session.
What is an Epstein credit?
The word "Epstein" Credits comes from the case Marriage of Epstein. Marriage of Epstein is a 1979, published California case. Epstein Credits were partially codified (meaning, they partially became part of the California Family Code) in Family Code section 2626. This code section states, "The court has jurisdiction to order reimbursement in cases it deems appropriate for debts paid after separation but before trial." Jurisdiction means power. This code section does not replace Epstein Credits as Marriage of Epstein has defined or explained Epstein Credits. The code complements the case.
What does all this mean? It means an Epstein Credit is a form of reimbursement. A spouse who pays community expenses or community debts after separation with his or her post separation money may receive a reimbursement for the other spouse's one-half share of that expense or debt. This includes, as one example, payments made toward a real property mortgage. Epstein Credits may apply to a variety of situations. Epstein Credits are not limited to any particular type of asset or the payment of any particular type of expense or debt.
Are there exceptions to Epstein Credits and the reimbursement rights?
This Epstein Credit and reimbursement rights has several exceptions. The family court may not order reimbursement if the following exist:
- The spouses have an agreement that there would not be a reimbursement;
- The one who seeks reimbursement should not receive it because the payment was intended as a gift. This is not easy to prove;
- The one who seeks reimbursement (for a mortgage payment, as an example) exclusively used the asset (such as the home for which the mortgage was made); or
- Illustration: If a husband lives exclusively at the family residence and makes the mortgage payment, the husband may not receive the Epstein Credit and reimbursement unless he can show the home's fair rental value was less than the mortgage payment.
- The payment was to discharge the paying spouse's child support or spousal support obligation.
An attorney's advice about your specific situation is important here. Please don't try to navigate such issues on your own.
What are Watts Credits or Watts Charges?
Sometimes, they are called Watts Credits. Sometimes, they are called Watts Charges.
The words Watts Credits or Watts Charges comes from the 1985 case called Marriage of Watts. For this article, we will call it a Watts Charge.
A Watts Charge is a "charge" against the other spouse for one-half of a community asset's use after separation. This value attached to the use is the foundation for a Watts Charge. It can apply to real property, a car, and just about any asset that has a use value. If we use the family residence as an example, the use value is the fair rental value. This fair rental value is for the real property's exclusive use by the other spouse. Therefore, if the husband lives at the family residence exclusively after separation, the wife may "charge" him one-half of the house's monthly, fair rental value as a Watts Charge.
What are the exceptions to Watts Charges?
The exceptions are if:
(a) the spouses had a different agreement that would negate the Watts Charge,
(b) the same gift analysis as stated above applies, or
(c) this fair rental value was taken into consideration when determining support.
Another common offset exists between a Watts Charge and an Epstein Credit. For example, if a husband exclusively occupies the family residence but that husband also makes the entire mortgage payment, those two may offset each other. If the fair rental value is $3,000 per month and the mortgage payment is $3,000 per month, that may be a complete offset. But one being less or more than the other may result in a partial offset.
It is possible to be hit with Epstein Credits and Watts Charges. A scenario like that came up in a case called Marriage of Jeffries. The Court in Jeffries gave the husband the Epstein Credit reimbursement and awarded the Watts Charge against the wife. The Court did this because the husband made the mortgage payment on a home the wife exclusively occupied after separation, in addition to the temporary support husband paid.
How do you prove an Epstein Credit?
You prove an Epstein Credit by careful tracing of the post separation expense payment to a separate property source.
For example, if the wife made the mortgage payment on a house the husband exclusively occupied after separation, the wife should keep records of the mortgage payment due and the payments she made from her post separation income and/or bank account. Epstein Credit tracing gets messy if documentation is not carefully kept. For example, in the same hypothetical, let's say the wife made the mortgage payment but she did it from a joint account that also included in it community funds from during the marriage. See the issue? How is it traced to a separate source? Did she pay the mortgage from her post separation income that went into that joint bank account or from the community property funds that were already in the bank account? If money is commingled, the divorce lawyer may recommend a forensic accounting.
Regardless of the asset and the payment, good record keeping is a must. One way to avoid this hassle is to pay community debts or expenses from community sources.
How do you prove a Watts Charge?
Watts Charges require admissible evidence on the value of an asset's use. Using the family residence as an example, that is the residence's monthly fair rental value. Can a spouse really testify to such a thing? Yes, but it will be far smarter to have an expert witness do so. The spouse may not be able to establish that he or she has the necessary competence to give an opinion on such a subject. Licensed and certified real estate appraisers are often used for such a purpose.
The choice of expert depends on the asset. A residence will require a different expert than a car or business equipment.
Who pays the bills after the spouses separate and before Epstein Credits or Watts Charges are even determined?
Spouses usually separate before they divorce. That separation is typically a physical one and when that happens, one question is who will make the house payment when the spouses cannot agree? The spouse who stays at the house? But what happens if that spouse doesn't have income?
Fortunately, Family Code sections 6324 helps. Family Code 6423 states: "The court may issue an ex parte order determining the temporary use, possession, and control of real or personal property of the parties and the payment of any liens or encumbrances coming due during the period the order is in effect."
When a higher earning spouse faces a spousal support request but does not live at the family residence, he or she can use this code section and other California law to ask the court to order his or her spouse to pay the mortgage and other residence related debts or expenses. The Family Court has discretion as to what it may order. This isn't a black or white issue.
The higher earning spouse should consider seeking such an order because, without it, he or she may end up paying support and getting stuck with the mortgage payment. The higher earning spouse doesn't necessarily need to proceed on an ex parte basis. A spouse may wish to raise this issue in response to the other spouse's spousal support request.
The spouse who isn't receiving support can also use this code section if the other spouse refuses to pay the mortgage payment. That will provide the lower earning spouse protection until he or she receive support.
Epstein Credits and Watts Charges are complex issues
Do not try to figure out whether Epstein Credits or Watts Charges apply to your case without proper legal advice. Have a private consultation with and retain a family law attorney to represent you and help you with such issues.
Our family law firm has offices in Newport Beach and Santa Ana. The number for our central office is (714) 937-1193. We offer an affordable strategy session. We hope you enjoyed this article.
For some related reading, check out our article on Family Code section 2640 and reimbursement of the separate property downpayment on a home.