California Community Property Law and Division in Divorce Cases
California is a “community property” state, which means that generally, assets acquired and debts incurred by either spouse during the marriage belong equally to both spouses. This means that upon divorce, from the total fair market value of the community assets, the joint obligations of the parties are subtracted, yielding the net community estate. Unless agreed otherwise, each spouse must receive half of the net community estate. Sounds simple enough, right? Ordinarily, it is not difficult to determine whether a particular asset is community or separate property. However, situations occur which can complicate the matter. This e-book is meant to be a general guide to community property division in divorce cases.
Separate v. Community Property
It is a common misconception that once a couple marries, all property becomes community. This is simply not true. Community property is defined by Family Code Sec. 760: “… all property, real or personal, wherever situated, acquired by a married person during the marriage while d0miciled in this state is community property.” The key qualifier is property acquired during marriage. Conversely, Family Code Sec. 770 defines separate property as follows:
- All property owned by the person before marriage.
- All property acquired by the person after marriage by gift, bequest, devise, or descent.
- The rents, issues, and profits of the property described in this section.
In addition, once the parties separate, the earnings and accumulations of that spouse are his or her separate property.
Examples of Community Property
- Income earned during marriage, prior to the date of separation.
- Stocks acquired during marriage, including employer benefit equity compensation including stock options and RSUs.
- Lottery winnings during marriage.
- The marital home purchased during marriage.
- Bank accounts, retirement accounts, and other financial accounts opened and accrued during marriage.
Examples of Separate Property
- Bank account balances prior to marriage.
- Real property owned prior to marriage;
- Rental income received from real property owned prior to marriage;
- Inheritances, received, before, during and after marriage.
The law requires that the net value of the assets received by each spouse must be equal. The law does not require an “in kind” division of the community property, which would mean you would have to divide each physical object.
What Is the Date of Separation and Why Do I Care?
As discussed above, property acquired after the date of separation is separate property. The date of separation is not the date the divorce has been finalized and can occur prior to the date the Petition for Dissolution has been filed. In some cases years before the Petition for Dissolution has been filed. Date of separation is defined as “the date that a complete and final break in the marital relationship has occurred . . .” This final breakdown must be proven by the following evidence: (1) a spouse has expressed to the other spouse his or her intent to end the marriage; and (2) conduct of the spouse that is consistent with his or her intent to end the marriage. So simply telling your spouse you want a divorce is not enough. You would need to show conduct on your part showing you intended to end your marriage, such as moving out of the marital home, opening separate accounts, and filing taxes separately.
In most cases the date of separation is not disputed and will have little impact on the final outcome of the case. However, as California uses the date of separation as the essential date for determining property interests, property acquired by a spouse after the date of separation is considered to be that spouse’s separate property, while property acquired before the date of separation is community property, so the date of separation can be a critical fact that must be determined. Sometimes, courts must hold a separate trial just to determine the date of separation, before any other matters can be decided.
What about debts, who pays for debts at divorce?
When dividing a debt, the first task is to determine the debt’s character: that is, whether it’s “community” or “separate.” Like with community property, community debts are those incurred after the date of marriage, but before the date of separation. Debts incurred during marriage belong to both spouses equally, even if only one spouse incurred the debt. For example, if during marriage one spouse owned a credit card and incurred credit card debt, both spouses are still equally responsible for the charges made on that card. Conversely, debts incurred before marriage or after separation are separate debts and belong only to the spouse that incurred them.
Determining who gets the marital home can be one of the most contested issues in a divorce. A house is often the family’s most valuable asset. In addition, people have an emotional attachment to their home, and when there are children involved, additional emotional and practical considerations come into play.
If the marital home is purchased during marriage, it is presumed community property. In the most straightforward case, the spouses bought the home together during marriage (using only community property funds) and are both on the title. In this case, the home is community property, and both spouses share an equal interest.
If the marital home is community property, it can be sold, with the profits divided, or one spouse can buy the other spouse’s interest and take on the mortgage.
However, division of the marital home can be complicated if one spouse owned the house prior to marriage. For example, assume Husband owned the home prior to marriage, the parties married lived in Husband’s home during marriage, and they paid all mortgage payments during the marriage. When this occurs, the law recognizes that the community has acquired an interest in the home. The idea is that joint funds are being used to benefit a separate property interest, i.e., the separate property equity. The formula for apportionment is that the community acquires a pro tanto (dollar for dollar) interest in the ratio that principal payments on the purchase price made with community property bear to payments made with separate property. Hence, any increase in value (appreciation) must be apportioned accordingly between the separate property and the community property estates upon separation or dissolution. This rule is known as the Moore/Marsden rule.
A second common occurrence is when the spouse transfers a title to the community during marriage. For example, Husband owns a house prior to marriage and then later transfers the title to Husband and Wife jointly. This is called a transmutation. Family Code section 2581 creates a presumption that property which is acquired in joint names during the marriage is community property. Husband’s house is now community property. Husband would, however, have a right to be reimbursed for the equity in the home at the time of the transfer. Family Code Sec. 2640 requires that requires that traceable separate property contributions to the acquisition of community property must be repaid from the value of the asset before any remaining community property equity can be found to exist and hence be subject to division. So, if the value of the home at the date of transfer was $100,000 [value meaning fair market value – total debt], upon divorce and sale, Husband would be entitled to $100,000 off the top before the remaining proceeds are divided.
Retirement Accounts/Employee Benefit Plans
When a married person accumulates an interest in a pension, retirement, profit sharing, or other employee benefit plan during the marriage, the part that was accumulated during the marriage is community property and subject to division in the dissolution. (If the owner of the benefits contributed to the plan before marriage or after separation, those amounts aren’t included in the division.) Most often the court will reserve jurisdiction to have each spouse receive a proportionate share of the benefits when they are paid, pursuant to a Qualified Domestic Relations Order, or QDRO. For example, if the husband had 20 years of contributions into a pension plan, with 10 of those years coinciding with the years he lived with his wife, the community property share of his pension plan would be 50% (10 divided by 20). Thus, the wife would be entitled to 25% of the husband’s pension checks (half of 50%).
Another option would be for the parties to hire an actuary, an expert who deals with statistical and financial evaluations of insurance policies, annuities, and pensions, to determine the cash value of the community interest, and Husband simply pays Wife half.
Can Separate Property Become Community Property?
The transmutation of property is a bit more complex under California law. By definition, transmutation means property has changed in one of three ways:
- Community property is transmuted to separate property.
- Separate property is to transmuted to community property.
- One spouse’s separate property is transmuted to the other spouse’s separate property.
This transmutation of property can occur “by agreement or transfer, with or without consideration.” However, in order for these transmutations to be valid, certain rules must be followed. Chief among these rules are the following:
- The transmutation must be in writing.