When it comes to dividing marital property in a divorce, the laws vary from state to state. California is one of a handful of states that follows the “community property” model. Under California’s community property law, all of the assets and income acquired during a marriage are considered “community property,” and are therefore owned equally by both spouses, unless there is a prenuptial or postnuptial agreement that says otherwise.
Technically, both spouses have equal rights to their marital property – they each have a 50% interest regardless of who earned the money or whose name happens to be on title. However, that does not mean that a divorcing couple is forced to divide everything down the middle. On the contrary, the couple has the right to deviate from the 50/50 model as long as the arrangement is fair.
If a couple cannot reach an agreement on property division, this is where a judge steps in. Essentially, if a judge has to decide, he or she will split the couple’s marital assets down the middle in accordance with California’s community property laws.
Community vs. Separate Property
When a couple’s assets are being divided in a divorce, only the marital or community property is subject to division; separate property is NOT divided in a divorce. As a general rule, separate property includes:
- The property acquired by one spouse before the marriage.
- Gifts received by one spouse during the marriage.
- Inheritances received by one spouse alone during the marriage.
- Property purchased with or exchanged for separate property during the marriage.
It is not uncommon for spouses to convert or commingle separate property with community property, thereby making the separate property a part of the marital estate. Often, spouses do this unwittingly or because they are careless. For example, if a spouse receives an inheritance and he deposits it into the couple’s joint bank account, the separate property (the inheritance) becomes marital (community) property.
Additionally, if a spouse has separate property before the marriage, any increase in value will be counted as marital property. For example, let’s say that Anne’s home in Northridge was worth $900,000 when she married Jim, but when the couple divorced, her home had increased in value to $1.5 million. In that case, the original value of the home, $900K is Anne’s separate property, but the $600K in increased value over the couple’s 10-year marriage is community property, and Jim is entitled to half, which is $300K.
A couple can ensure that their separate property remains entirely separate by executing a prenuptial or a postnuptial agreement. It’s also important to note that a spouse has the power to change separate property into community property by converting it so their spouse is a joint owner. In doing so, the spouse who originally owned the property is indicating that he or she intends to gift their property to their spouse through marriage.
In the case of high-net-worth couples without prenuptial agreements, it can get very complicated, especially if the couple had significant assets before the marriage and they commingled funds, or they have real estate in other states, or they have restricted stock, or retirement accounts, or any combination of the above. In complex cases such as these, we recommend adding financial professionals, such as CPAs, actuaries, and forensic accountants to the divorce team.
Dividing Community Property
There are many ways to divide a marital estate and the more significant the assets, the more creative and complex the resolution may be. Spouses can sell their home and divide the assets. A spouse with a business interest may elect to buy their spouse out of their share of the business by giving them more of a retirement account, or a larger chunk of the proceeds from selling the couple’s marital residence.
If their house is upside-down, they can agree to continue owning the property and renting it out, in effect being co-owners of the property, however, this arrangement doesn’t work for most people. The same can apply to a business, but again, not everyone can divorce their spouse and continue running a business with them day in and day out.
Other couples may hold on to a house as co-owners so their children can continue growing up in the home, especially if it makes financial sense for the family. This is not the ideal solution in most cases however, since few couples want the burden of a mortgage tied to their ex remaining on their credit.
Advocating On Your Behalf
If you have any measurable assets, it’s important to seek the advice of an experienced divorce attorney. Unfortunately, one of the mistakes that divorcing spouses make is they let their spouse take everything, or they let their spouse walk away with the lion’s share of the marital estate because they just want to wash their hands of the marriage, or because they have a lot of guilt and feel responsible for the divorce.
Divorce is extremely emotional and it can make perfectly rational people make irrational decisions, especially as it pertains to property division. Remember, by law, you are entitled to half of the marital property, even if you did not earn it (unless you have a prenuptial or postnuptial agreement that states otherwise).
You may be entitled to a lot more than you think or a lot more than you think you deserve. Don’t let yourself get the raw end of the deal. Instead, reach out to Claery & Hammond, LLP for the experienced and compassionate legal representation you deserve.