One important discussion in post-divorce negotiations is the division of marital property and assets. Depending on the cooperation of both spouses, property division can be resolved rather straightforwardly. However, complications may arise, however, when the property involved is not easily determined as community or separate property. Keep reading to learn more about the distinction, and how this will make an impact on your property negotiations.
Community Property vs. Separate Property
What Constitutes Community Property?
Couples going through a divorce must decide how to divide their property and debts either on their own or through a court. Under California’s community property laws, assets and debts spouses acquire during marriage belong equally to both of them (thus considered community property), and they must divide them equally in a divorce. Some couples are able to reach a property division agreement on their own, but couples who cannot agree must resolve the negotiation in court.
Three important considerations when deciding on division of property are determining what property (or debt) is community; agreeing on a value for the community property; and deciding how to divide that property. Keep in mind that there is a strong presumption under California divorce law that the assets a couple accumulates during the marriage are community property owned equally by the spouses.
What Is Considered Separate Property?
Any property one spouse owned alone, before the marriage, or acquired by gift or inheritance during the marriage, is that spouse’s separate property in California. Separate property also includes items purchased with or exchanged for separate property, earnings on separate property, and any increase in the value of separate property, as long as the property owner can prove the claim with financial records or other documents. Separate property belongs exclusively to the spouse who owns it and is not generally divided in a divorce.
California law also provides that property spouses acquire before a divorce but after the date of separation is separate property. Note that the date of separation is not necessarily the date one spouse moves out of the marital home, but the date that one spouse decides to end the marriage. It requires some act of physical separation combined with other actions clearly demonstrating that the spouse has decided to end the marriage. The date of separation can become a big issue if, just before the divorce, one spouse either earned an unusual amount of money (e.g., a large bonus at work or a lottery win) or spent a significant amount of money. If the couple cannot agree on a separation date, the court will decide after considering the evidence.
A couple can agree either before or during marriage to change an asset that was originally separate property into community property, or vice versa. However, such agreements must be in writing and must clearly state the intentions of the parties in order to be valid; simply changing the title of the property is not sufficient.
Be aware that a spouse might change a separate asset into a community asset without meaning to by combining—or “commingling”—separate property with marital property. A premarital bank account belonging to one spouse can become marital property if the other spouse makes deposits to it; or a house owned by one spouse alone can become marital property (either in whole or in part) if both spouses pay the mortgage and other expenses.
Note that many types of assets can be partially community and partially separate, such as retirement accounts one spouse contributed to before and after the marriage, or a business one spouse started before marriage and continued operating after marriage. Distinguishing community property from separate property can become very complicated, especially if one spouse owns an asset to which the other contributed labor or funds to during the marriage. In such situations, it is best to consult an attorney for advice.
Dividing the Property
As mentioned earlier, spouses (or the court, if they cannot agree on their own) generally assign a monetary value to each item of property. Retirement assets can be challenging to evaluate and may require the assistance of an actuary, C.P.A., or other financial professionals. Once a value is assigned to the property, the couple will either agree to split the money or ask the court to do it for them.
Under the divorce rules in California, spouses can divide assets by:
- assigning certain items to each spouse;
- allowing one spouse to “buy out” the other’s share of an asset; or
- selling assets and dividing the proceeds.
Note that if they choose to, spouses can agree to hold property together even after the divorce. Some reasons for doing so could be to keep a family home until children are out of school or holding an investment property, hoping that it will increase in value.
A couple must also assign all debts accrued during the marriage, including mortgages, car loans, and credit card debts, to one of the spouses. Couples dividing debts should be aware that their separation agreement or divorce order is not binding on creditors, who may continue trying to collect a community debt from either spouse. If the court assigns a debt to one spouse, the other can ask the court to put a lien on that spouse’s separate property as security for payment of the debt. However, it is generally better practice to try to pay off all the marital debts when the judge finalizes the divorce.
Questions? Contact Claery & Hammond, LLP.
If you are negotiating marital assets following a divorce, it is best to have a lawyer by your side to make sure you address all the property you are entitled to. The distinction between community and separate property – assets and debts – can become muddled in certain situations, making negotiations harder. Our lawyers at Claery & Hammond, LLP have years of experience practicing family law and can help you in the negotiations room and the courtroom as you divide your community and separate property.
Schedule a free consultation with us at Claery & Hammond, LLP today.