Splitting Assets in a California Divorce

However, understanding the intricacies of asset splitting is important for those dealing with real estate, financial accounts, investments, retirement accounts, and more. This guide offers actionable insights to protect your financial future, from uncovering hidden assets to negotiating fair settlements.

What are Examples of Assets that Can Be Split in a California Divorce?

The following are some of the assets that can be split in a California divorce. This is not a list of every asset but the most common in divorce cases.

• Real Estate: Family home, commercial property, vacation properties, rental properties, timeshares.
• Personal Property: Vehicles, household items, jewelry, art, collections.
• Financial Accounts: Bank accounts, investment accounts, retirement accounts.
• Business Interests: Ownership stakes in businesses. These may be businesses one or both spouses operate or businesses in which one or both spouses have a passive investment.
• Income and Employment Benefits: Bonuses, restricted stock units, stock options, deferred compensation.
• Insurance Policies: Cash value of life insurance or annuities.
• Other Assets: Intellectual property, royalties, memberships.

What is Community Property in California?

Community property includes all assets acquired by a married couple during their marriage from a marital source. Both spouses equally own these assets, usually (although not always) despite whose name is on the title or who earned the income during the marriage. There are exceptions to these rules.

Definition of Community Property

California Family Code 760 defines community property as: "except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property."

Examples of Community Property

Community property includes the abovementioned assets and anything else acquired from a community property source during the marriage.

Separate Property in California Divorce

Separate property belongs to one spouse and is not shared equally. This usually includes assets owned before the marriage, gifts, inheritances, and property acquired after separation. It also includes income from such assets.

Definition of Separate Property

Family Code 770 states:

"(a) Separate property of a married person includes all of the following:

(1) All property owned by the person before marriage.

(2) All property acquired by the person after marriage by gift, bequest, devise, or descent.

(3) The rents, issues, and profits of the property described in this section.

(b) A married person may, without the consent of the person's spouse, convey the person's separate property."

Examples of Separate Property

• Assets Acquired Before Marriage: Assets owned before marriage usually remain separate, but exceptions exist.
• Gifts and Inheritances: Usually considered separate property if not commingled to the point the separate property interest cannot be traced.
• Property Acquired After Separation: Considered separate if not from a community property source.
• Income from Separate Property: Remains separate if not commingled beyond tracing.
• Assets Acquired with Separate Funds: Also remain separate if not commingled beyond tracing.
• Personal Injury Awards: Personal injury settlements or awards are generally considered separate property, but exceptions exist.

Commingling may make separate property claims difficult to prove. Transmutations (discussed later in this article) can also change separate property to community property.

How Community Property Assets are Divided in a California Divorce

Methods of Dividing Community Property

• In-Kind Division: Each spouse receives an equal part of each asset type. For example, if the spouses have an investment account, each spouse may receive half of that account through a rollover or transfer.
• Asset Offset: One spouse receives a specific asset, such as the family home, while the other receives assets of equal value, such as investment accounts or other property. This method can be risky if the assets have different tax consequences or have significant depreciation or appreciation potential.
• Buyout: One spouse buys out the other's interest in a specific asset, such as a business or real estate. One spouse pays the other 50% of the community property value.
• Selling Assets: Assets are sold, and the proceeds are divided equally. This is common with real estate or personal property that cannot easily be divided.

The Equal Division Rule

Community property is generally divided equally. Steps to division include identifying, valuing, and inventorying all community property assets and then dividing the total value equally. Spouses can agree to an unequal division.

1. Identifying Community Property: The first step is identifying all community property assets.
2. Valuing Community Property: Once all community property is identified, each asset should be assigned a value. This can involve real estate appraisals, business valuations, and review of financial account statements.
3. Creating an Inventory: Both spouses should create a comprehensive inventory of all community property, including real estate, personal property, bank accounts, retirement accounts, investments, business interests, etc.
4. Dividing the Property Equally: California law states that community property (assuming no exceptions) should be divided equally. This does not necessarily mean a physical split of each asset but an equal division of the total value of all community property. This rule does not bind spouses; they can agree to an unequal division.

Exceptions to the Equal Division Rule

While community property is usually divided equally between the spouses in a divorce, exceptions exist. Here are situations where an equal division may not occur:

1. Agreements Between Spouses: Valid prenuptial and postnuptial agreements can change property division. Settlement agreements during the divorce process can also result in an unequal division of property.
2. Misconduct and Breach of Fiduciary Duty: If one spouse has engaged in financial misconduct or breached their fiduciary duty, such as wasting community assets, hiding assets, or fraudulently transferring assets, the court may award the other spouse a larger part of the remaining community property.
3. Commingled Assets: When separate property and community property have been commingled, it can complicate the division.
4. Reimbursement Claims: If one spouse used their separate property to benefit the community / improve its value, they may be entitled to reimbursement, resulting in an unequal division of assets.
5. Tax Implications: Where dividing property equally would result in significant tax consequences for one or both spouses, the court may adjust the division to mitigate these consequences and ensure a more equitable outcome.
6. Business Interests: If the community property includes a business, the court may award the business to the spouse better equipped to manage it, with the other spouse receiving other assets to balance the division or receiving a buyout of 50% of its value.

Valuation of Assets During Divorce

Assets are usually valued to ensure a proper division of community property. This involves identifying all assets, determining the valuation date, providing documentation, and possibly using expert testimony.

Methods for Valuing Specific Types of Property

The following are examples of valuations. They are not the only way.

• Real Estate: Comparative Market Analysis (CMA) or professional appraisal.
• Personal Property: Market value or replacement cost.
• Financial Accounts: Review the money in the account statements or investment market value.
• Retirement Accounts and Pensions: Current account value.
• Business Interests: Typically, a professional valuation by a forensic accountant and/or industry expert.
• Stock Options and RSUs: Current value of the options or RSUs.
• Life Insurance Policies: Typically cash surrender value.

Common Challenges in Asset Valuation

Challenges include the complexity of assets, fluctuating values, hidden, commingled, unique, illiquid, and intangible assets.

Handling Debts in a California Divorce

Like asset division, debts incurred during the marriage are generally considered the responsibility of both spouses. Debts are identified, allocated, and negotiated. The division does not affect creditors' rights, so debts must often be refinanced or adjusted if one spouse takes responsibility for its payment.

Community Debts vs. Separate Debts

• Community Property Debt: Incurred during the marriage and typically used to benefit the household.
• Separate Property Debt: Incurred before marriage or after separation and used only to benefit one spouse. Sometimes, debts incurred during the marriage can still be that incurring spouse's separate debt. Sometimes, we see this with debts incurred that breach a spouse's fiduciary duties.

Protecting Your Financial Interests

To protect financial interests during a divorce:

1. Gather and Organize Financial Documents: Create a list of assets and debts and collect financial statements.
2. Understand Community and Separate Property: Identify and keep separate property distinct from community property.
3. Consult with Professionals: Hire experienced family law attorneys and financial advisors.
4. Track Spending and Income: Keep detailed records of expenses and income.
5. Ensure Proper Valuation of Assets: Obtain professional appraisals and valuations.
6. Consider Tax Implications: Understand tax consequences and plan accordingly.
7. Plan for Future Financial Stability: Negotiate reasonable spousal and child support arrangements consistent with California law.
8. Negotiate Wisely: Aim for a reasonable settlement agreement consistent with the facts and California law.

Importance of Legal Representation

Legal representation improves your chances of a reasonable division of assets and debts, proper valuation, and navigation of court procedures. Attorneys help negotiate settlements, handle complex issues, and prevent future legal problems.

Special Considerations in High Asset Divorces

High-asset divorces often involve more complex financial portfolios, business interests, collectibles, tax implications, investment accounts, real estate holdings, and privacy concerns (for high-profile spouses). Proper valuation, legal and professional fees, and post-divorce financial planning are common in these divorces.

Hidden Assets

High-asset divorces sometimes include hidden assets. Identifying hidden assets is best accomplished with forensic accountants and/or private investigators, thorough discovery processes, and careful review of financial documents. Legal tools such as subpoenas and court orders can compel disclosure.

FAQs About Asset Splitting in California Divorce

Can Prenuptial Agreements Affect Asset Division?

Prenuptial agreements can specify separate and community property, protect individual assets, and outline spousal support and debt allocation. They must be voluntary, with full disclosure, and often involve independent legal counsel for each side. Prenuptial agreements are sometimes poorly planned and drafted, and it is common to encounter challenges in prenuptial agreements.

How Does Commingling or Transmutation of Assets Impact Division?

Commingling usually occurs when separate property is mixed with community property, making it difficult to distinguish between them. Proper tracing and maintaining detailed records are essential to prove the separate nature of commingled assets.

Spouses can intentionally change the character of separate property to community property through transmutation. This typically requires a written agreement stating the intent to change the property's character.

For a transmutation to be valid, it must be in writing, expressly declare that the character of the property is being changed, and be signed by the spouse whose interest is hurt.

However, just because this happened does not mean the transmutation is valid. California's laws sometimes create a presumption of undue influence when one spouse obtains an advantage. That presumption can be rebutted.

How Can You Protect Your Financial Interests During a Divorce?

1. Gather and Organize Financial Documents: Create a list of all assets and debts and collect recent financial statements.
2. Understand Community and Separate Property: Identify separate property and avoid commingling.
3. Consult with Professionals: Hire an experienced family law attorney, tax professionals, and financial advisors. Complex cases may require other attorneys, such as business, real estate, intellectual property, or employment law attorneys.
4. Track Spending and Income: Keep a detailed household expenses and income record.
5. Ensure Proper Valuation of Assets: Obtain professional appraisals for real estate, businesses, and valuable personal property.
6. Consider Tax Implications: Understand the tax consequences of dividing assets, selling property, and receiving spousal support.
7. Plan for Future Financial Stability: Negotiate reasonable spousal support and child support arrangements to ensure financial stability post-divorce.
8. Negotiate Wisely: Aim for a reasonable settlement agreement that considers both current financial needs and future financial security.
9. Protect Real Estate Interests: Ensure clear agreements on who will take responsibility for the mortgage and other property-related debts. Protect your credit because trusting your spouse to pay a debt that is also under your name is often a poor choice.
10. Review and Update Legal Documents: Update wills, trusts, and beneficiaries on insurance policies, retirement accounts, and other financial accounts. However, be careful not to do this in a way that violates your fiduciary duties or the Standard Family Law Restraining Orders. Legal advice before taking action is important.