Watts Charges and Epstein Credits
Who Pays What Between Separation and Divorce?
When a couple is in the process of getting divorced but hasn’t yet decided how to divide up their assets, the financial aspects of day-to-day living can get complicated. As an example, one member of the couple may continue to live in their Community property home, while one or both of them make the house payments. Because only one of them is enjoying the exclusive ability to live in the home, while the other may live in a rental, how is the rental-occupier to be financially reimbursed? Or, here’s another example, the couple owns two vehicles as Community property. After separation, one member of the couple primarily uses the car they purchased just two years ago, while their soon-to-be-ex uses the older, less valuable car.
What each spouse pays for between the separation and divorce period sometimes gets sorted out during divorce proceedings through what are called Watts charges and Epstein credits.
Here’s how they work:
An Epstein Credit enables a spouse who is using their personal money post separation to pay for Community expenses to be reimbursed by the other spouse for those expenses. For example, if one spouse is making the entire house payment, they may be able to be reimbursed for half of those payments in the divorce settlement agreement. Epstein credits are generally viewed by the court to be mandatory payments from one member of the couple to the other. For Epstein credit to occur, the charging spouse must give a timely written notice to their soon-to-be-ex that they will be seeking credit for the payments they are making.
Proper documentation is essential for Epstein credits. Without the right documentation, tracing what was paid and by whom can be difficult, especially if a joint account is used to make payments. The couple can often avoid contentious Epstein credits by agreeing early on how they will financially share their Community assets during the separation period.
A Watts Charge allows one member of the couple to charge their spouse for 1/2 of the usage of a community property asset after separation. In our example above, where only one spouse is living in the couple’s residence, the spouse not living in the home may ask to be reimbursed through a Watts charge for what the residence might have fairly rented for. Watts charges can apply to any type of real property that is primarily used by one spouse, such as a primary residence, vacation home, vehicle, furniture or other real property. The courts will place a value on the usage of Community assets and will make the spouse using the assets “settle up” during divorce proceedings.
For a Watts charge to occur, the charging spouse must give a timely written notice to their soon-to-be-ex that they will be seeking credit for post-separation use of Community property. Watts charges are sometimes viewed by the court to be discretionary, rather than mandatory, payments from one member of the couple to the other. The couple can often avoid contentious Watts charges by agreeing early on how they will financially share their Community assets during the separation period.
Sometimes couples will make use of both Watts charges and Epstein credits during their separation. When that happens, the credits and charges may offset each other, and neither spouse ends up financially ahead.
Contact me for assistance
There are many important financial considerations when getting divorced. If you live in the San Francisco Bay Area and would like to speak with an experienced divorce attorney with a Master of Laws in Taxation, please contact my office for a consultation.
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