How is Property Divided in a California Divorce?
Division of real estate, cars, accounts, stocks, businesses and more
Learn how California law divides property in a divorce
How is property divided in a California divorce? Almost without exception, a divorce will involve dividing property. Property includes real property and/or personal property. Real property is real estate such as the family home, rental property, investment property, commercial property, land and even a timeshare. These are the most common types of real property divided in a California divorce. Personal property is everything that is not real property.
Some people do not realize personal property's definition is so broad.
If you asked most people what "personal property" meant, they might refer to their furniture, furnishings, appliances and personal effects. All of those items are personal property but so are vehicles, bank accounts, retirements, stocks and bonds, and even the family dog. When you look at personal property the way California family law views it, the concept of dividing it in a divorce becomes easier to understand.
You and your spouse have the power to divide the property as you mutually agree is appropriate
The judge does have the final decision regarding your property division agreement with your spouse. However, rarely does a family law judge refuse to sign a judgment on the division of property. So long as both spouses complete the appropriate documents (including but not limited to your mandatory disclosures) and your attorneys draft the agreement properly to divide the real property or personal property, the family law judge will approve the agreement.
Therefore, when you read this article, keep in mind you and your spouse are free to enter into a division of property that is completely or partially different from what we explain here. This article goes into the more common scenarios for dividing property. This article is not legal advice and not intended to apply to your specific situation.
Dividing The Family Home in a California Divorce
If the family home is entirely community property, spouses usually sell the family home and divide the net proceeds or one spouse buys out the other spouse's community property interest. The buyout usually includes payment of one-half of the equity to the other spouse and a modification of the loan to remove the bought-out spouse from the mortgage.
The bought out spouse then signs a deed that transfers his or her interest to the other spouse.
This buyout protects both spouses
It protects the buying spouse by giving him or her clean title to the family home. It verifies each spouse's intent for the family home to be the buying spouse's sole and separate property. This also protects the bought out spouse because it gives him or her one-half of the community property equity and removes him or her from the mortgage so that loan does not hang over the bought out spouse's head.
A buyout does not always include payment of cash. A buyout may include an offset against other property. To learn more about buyouts, please check out our informative article called buying out your spouse's interest in the family home.
If the home is not entirety community property, then the buyout is only of the community property portion. Sometimes, one spouse pays the down payment on the home with his or her separate property funds. That spouse may have a claim to reimbursement of that down payment off the top of the proceeds. This is a Family Code 2640 claim.
Dividing other real property in a California divorce
Spouses may divide other real property such as rental or investment property, land or commercial property in a similar way. Rental or investment property typically generates income. For that reason, the spouses should take care to ensure the division is reasonable in light of the income the property generates.
Dividing commercial property
The same may be true about commercial property. If the spouses own a community property business that one or both of them operate and that business operates at the location of the commercial property, it may make sense for the person awarded the business to receive the commercial property and pay the other spouse for his or her community property share of both. However, that is not an approach appropriate in every case.
The spouses may treat land very similar to the family home. However, if the land has the potential to produce income, spouses must again take care in evaluating how its income producing potential affects a reasonable division of it pursuant to California law.
Can spouses continue to co-own community property after divorce?
Yes, spouses can continue to co-own community property as part of their agreement. There is no rule that mandates spouses sell property or buyout the other spouse. However, if spouses intend to do this, the judgment should be clear regarding each spouse's ownership and responsibility. Separately, the spouses should consult with a civil transactional attorney who can advise them on the co-ownership terms, especially if the community real property is income generating or may become income generating in the future.
Did you know our family law firm has referrals to highly experienced and knowledgeable civil transactional attorneys? We have a nice rolodex (yes, we rather aged ourselves with that word) of professionals when our family law clients need referrals to other attorneys or professionals.
Dividing Furniture, Furnishings and Appliances in a California Divorce
Smart family law attorneys rarely like to get involved in dividing such items. For most married couples, these items do not have enough monetary value to justify a significant investment of attorney time (and your money) into their division. Spouses will typically discuss division of such items among themselves and the judgment will incorporate that agreement.
It is unusual for spouses to sell all of the furniture, furnishings and appliances as part of an agreement.
Spouses usually divide the items with each spouse keeping certain items as their sole and separate property. The goal is to reach an equal division of these items.
In those situations where the furniture, furnishings and appliances are of a significant value, spouses through their lawyers can hire an appraiser who will value the items. This may be a joint appraiser or each spouse can have their own, depending on how negotiations go.
Spouses may use the lottery method to divide such property in a divorce.
As a last resort, some spouses use the lottery method to divide such property. The lottery method means at a flip of a coin or other method, one spouse will choose one item, followed by the other spouse choosing the next. Even the lottery method can get complicated if there is significant difference in the value of property.
Dividing antiques, art, memorabilia and coin collections in a California divorce.
Spouses usually divide such items similar to furniture, furnishings and appliances. The main difference is such items usually do require an appraiser to value them if they are of significant market value or have the potential for such value.
How is jewelry divided in a California divorce?
Spouses typically keep the jewelry gifted to them by the other spouse or other family members during the marriage. For example, each spouse will typically keep his or her respective wedding rings. Spouses will also typically keep their watches or jewelry gifted to them for birthdays, holidays or anniversaries.
Sometimes, a spouse may not intend a jewelry purchase as a gift.
Some jewelry purchases may be an investment. In such a situation, spouses will appraise the jewelry and divide it by its sale or a buyout of one-half of its community property value.
How are vehicles, boats and trailers divided in a California divorce?
Spouses usually divide cars, motorcycles, boats and trailers by first determining its fair market value and then deducting the loan. This then results in the net value. There are websites such as kbb.com and Edmunds.com that help value such items of personal property. Spouses may rely on those websites to determine the gross value. Spouses typically use the private party value to determine its market value.
How are Bank Accounts Divided in a California Divorce?
Bank account division is simple if the spouses keep good records of the source of money deposited and expenses paid from the bank account.
If the money in the bank account is entirely community property, the spouses may simply divide the bank account's balance as of the date of separation. They can then establish their own bank accounts. They should be cautious doing this if either of them has already filed a divorce petition to avoid violating the Standard Family Law Restraining Orders printed on the back of the Family Law Summons.
What if one or both spouses paid debts incurred during the marriage (or other community debts) from that bank account after the separation date?
Since community debts are both spouse's responsibility, debts paid from community proceeds usually do not result in a reimbursement to either spouse. However, this scenario has several moving parts. As one example, what is the date of separation? That is critical to the community versus separate analysis.
What we wrote above applies to savings accounts, checking accounts and credit union accounts.
Challenges of dividing back accounts when one spouse is the much higher income earner
One of the challenges of dividing bank accounts is situations where only one spouse is the income earner or the much higher income earner. Sometimes, the homemaker in that scenario takes care of the family's finances including payment of expenses. That homemaker or lower earning spouse will not have the ability to pay those expenses if the other spouse closes a bank account or refuses to deposit money in it. Fortunately, there are solutions to these problems and they often involve:
- The spouses collaborating with each other to come up with a proper child support, spousal support or other support amount, or
- The spouses will come to an arrangement for payment of those ongoing expenses.
How are brokerage accounts divided in a California divorce?
Brokerage accounts are similar to bank accounts, unless the brokerage account has tax-deferred money or equities within it and a withdrawal or transfer may trigger certain tax consequences. For these reasons, before spouses divide a brokerage account, they should consult with their financial advisor and tax professional.
There is no substitute for proper legal representation.
These issues can get complicated quickly and spouses often do not appreciate the consequences of their actions. Consultation with an experienced and knowledgeable family law attorney is necessary.
Term, Whole and Universal Life Insurance Policies
There are different types of life insurance policies.
The three most common types are:
- term life insurance policies,
- whole life insurance policies and
- universal life insurance policies.
Term life insurance policies typically provide accidental death coverage to one or both spouses for a set number of years.
Term life insurance policies are typically between 10 to 30 year terms. The insurance company pays a set dollar amount set forth by the insurance contract upon such death.
A whole life insurance policy usually provides coverage for life. The insurance company may set the premium amount for such a policy and that premium may remain the same amount during the insured’s life. Such policies also have a cash value that grows during the policy’s lifetime. This growth is typically tax deferred until used through a withdrawal.
Universal life insurance policies are similar to whole life policies. With a universal life insurance policy, the policyholder usually has some flexibility to allocate his or her premiums toward the death benefit versus the cash value.
How Are Life Insurance Policies Divided in a Divorce?
The following are only some of the more common ways although these are not exclusive:
1. The owner and insured receives the life insurance policy and he or she is then free to name any beneficiary he or she wants.
2. The agreement requires the owner or insured to name the other spouse and/or the children as beneficiaries of the policy, completely or in part. This may be for a set number of years, through the end of the policy term or perpetual.
3. The life insurance policy may be security for payment of support or paid out to the other spouse as a means to avoid leaving her or him without support in the event of the insured spouse's death. These provisions are different from each other and are often confused.
Division of life insurance policies not only require spouses to consult with an experienced and knowledgeable divorce attorney but also the spouse’s life insurance professional. Spouses should not assume the life insurance company would simply go along with whatever the spouses write in their judgment.
With whole or universal life insurance policies, the spouses must also determine whether to liquidate that value or leave it intact and offset the community property portion through division of other property or debts.
Under any scenario where spouses divide life insurance in a divorce, they must read the insurance policy carefully and consult with their insurance professional before making any decisions.
How are stocks divided in a California divorce?
For the purposes of this section, we only refer to private and restricted stock and not stock of publicly traded companies. Spouses may divide private or restricted stocks in several ways.
Liquidation of stock
Spouses may liquidate the stock. This usually has tax consequences. In addition, certain restricted stock units (called RSU) may have limitation periods (a window of time) as to when a stockowner can sell the stock.
Offsetting stock with other property
Like any property, one spouse can keep 100% of the stock in exchange for the other spouse receiving an asset of the same value.
Dividing stocks “in kind”
Spouses may divide stocks in kind, whereby each spouse receives one-half of the community property portion of the stock.
Take stock fluctuation potential into account when dividing them during a divorce
Since stocks are a fluctuating asset and there is a risk versus benefit there, the spouses may want to take that risk versus benefit into consideration regardless of what agreement they reach.
How are Retirements, 401(k) and Pensions Divided in a California Divorce?
There are many different types of retirements. They include but are not limited to the following:
- Individual Retirement Accounts also called IRAs. There are different types of IRAs including Simple, SEP, Roth and others.
- 401(k) Plans
- 403(b) Plans
- Profit-Sharing Plans
- Defined Benefit Plans or Defined Contribution Plans, which usually fall under the category of a pension.
- Money Purchase Plans
- Employee Stock Ownership Plans (ESOPs)
- Different types of governmental plans
- 457 Plans
Public employee retirements
Retirements may be through public related employment and those include CalPERS (California Public Employees' Retirement System), and CalSTRS (California State Teachers' Retirement System). There are also Federal employee retirement systems and plans.
Retirements that are through public entities add a layer of complication. This includes retirements for teachers, police officers and firefighters, employees of universities, and state and federal employees. Military retirements are more complicated especially with new decisions that have come down in our California appellate courts.
Retirement division requires consultation with an attorney who is an expert on division of retirements.
Most family law attorneys will utilize such an attorney expert when dividing the retirement including division of the retirement through a domestic relations order or qualified domestic relations order.
Dividing a Business in a California Divorce
How do you divide a business in a California divorce?
Dividing a business in a California divorce may be the most complicated aspect of most divorces.
This is especially true if there are multiple businesses or one large business.
It is beyond the scope of this article to go into the details of dividing a business. Such an article is a guide by itself and we provide you with a link below.
The following are some, although not all, of the factors a court may consider when dividing a business.
- Date business operations commenced
- Business' value increase during the marriage
- Business' current value
- Type of business involved
- Documents executed by the spouses related to the business
- Ownership interest of the business owner and operator
- Role of the business owner in operations
In this section of the article, we will go through each of the 7 factors.
As you go through it, it is normal to have questions about your business or your spouse's business. Write those questions down. We wrote this article in large part so you can gain knowledge and start asking the smart questions.
When you are finished with this article, contact us for an affordable strategy session. We will answer your questions and take the mystery out of the business valuation process.
The date the business operations commenced
While the form of the business (corporation, LLC, partnership, etc.) is not a determining factor in whether a business has a separate property component to it, the date the business started may be important for that analysis.
If one spouse started the business prior to marriage and the business had a value as of the date of marriage, the business owner's family law attorney will likely conduct an analysis through the use of forensic accountant as to the business' value as of the date of marriage.
Records or information helpful to this analysis include but are not limited to:
- The business' tax returns,
- The business profit and loss statements,
- The business' goodwill as of the date of marriage,
- The business' operations as of the date of marriage.
This is a starting point to determining the business' separate property interest.
The business' value increase during the marriage
If one spouse started the business before marriage, one of the factors in determining the community property value of that business is the increase in the business' value during the marriage.
This is partly common sense.
If marital earnings, savings or efforts helped the business grow during the marriage and that business has a greater value because of one or more of the above, the community may have an interest in that increase in value.
Similarly, if the business has lost value (and likely a decrease in the business income supports this fact), that is also a consideration as to whether the community has any interest in the business.
Is the analysis that simple? No. There is more to it than just any increase or decrease in the business' value although that increase or decrease in value is an important threshold consideration.
The business' current value
California family law generally values property as of the date nearest to a trial. That means the business' value that may matter the most is that value close to the trial date.
Spouses are of course welcome to come to a different agreement and often do if there are not wild fluctuations in the business' value from one point in time to the date of trial.
We call this an "alternate date valuation." This alternate date may be the date of separation or any other date the spouses may agree should be the valuation date.
In addition, if the spouses cannot agree, either spouse may ask the court to value the business on an alternate date than the date closest to trial. There are strict procedural requirements for such a request.
That nearest the trial date evaluation does not necessarily mean that is what the spouses divide. Remember a business may be separate property, community property or a combination of both.
The type of business involved
The type of business may make a significant difference in its valuation.
For example, a professional service business that is a one or two person operation is valued differently than a manufacturing business that produces consumer products.
A construction business where the business owner is a contractor is valued differently than, for example, a consulting business that focuses on the financial market.
Forensic accountants assist family law attorneys to determine the value of the business in light of the industry.
What would a willing buyer pay for that business and for what price would a seller sell that business?
The analysis in some respects starts there and then gets deeper into the business' fair market value, which includes but is not limited to assets, inventory and goodwill.
Documents executed by the spouses related to the business
Several different types of documents may affect whether and how spouses divide a business in a divorce.
Such documents may affect the valuation process and determination. Examples include but are not limited to the following:
- Operating agreement in an LLC that is managed by both spouses.
- Shareholder agreements in a corporation managed or operated by both spouses.
- Spousal consent forms that a non-operating spouse may sign upon or after the corporation's formation.
- Buy-Sell agreement the spouses execute that may set forth the valuation of the business or other terms if there is events such as a dissolution of marriage.
While the terms of such agreements do exist with some corporations, limited liability companies and partnerships, the terms may significantly vary from one agreement to another.
Documents the spouses executed as part of an SBA loan.
How much of the business does the divorcing business owner actually own?
Are there partners in a partnership? Fellow members in an LLC? Shareholders in a corporation?
If a divorcing business owner owns 50% of the business and a business partner or fellow principal owns the other 50%, then are the spouses dividing 50% of the business?
The answer is probably yes although the spouses and especially the non-business operating spouse should perform his or her due diligence regarding the ownership interests to ensure it is not a sham.
This due diligence generally takes place during the "discovery" process of a dissolution of marriage.
The role of the business owner in operations
The other factor is the role the divorcing business owner plays in the business.
Assume one spouse started the business before the marriage. The question is the business' increase in value attributed to the community efforts during the marriage.
What if a business owner is actively and daily involved in the business operations and without his active and daily involvement, the business would not survive?
What if the business owner has minimal involvement in the business operations and the business through its employees or technology operates itself?
This may have a significant impact on the business' community property value when conducting this legal analysis. How much of an impact it has depends on the case's facts.
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Our family law firm has offices in Los Angeles, Orange County and San Diego. We handle dissolution of marriage actions, both prejudgment and post judgment, in each of the seven Southern California courts. We are highly experienced in California dissolution of marriage cases that involve complex property issues.
Nothing in this guide is intended as legal advice. It is not intended to apply to your specific situation. For legal advice and a discussion about your situation, we are available for an affordable strategy session and ready to help you.