What is Community Property?
California is a community property state in which spouses are entitled, with some exceptions, to an
equal division of community property and debts in a divorce (called dissolution in California).
Community property is all property, in or out of state, that either spouse acquired during the marriage
through the efforts of either spouse or with community property funds. This means that, even if only
one spouse worked during the marriage and the other stayed at home raising children, both spouses
are entitled to one half of the community property. "During marriage" refers to the time period from the
date of marriage to the date when the parties legally separate. The date of separation is often
contested because it determines the extent of the community property estate. The courts have said
that separation occurs where one spouse subjectively intends to end the marriage and does
something to evidence that intent. It could be moving out of the family home, telling your spouse the
marriage is over, arranging for a new place to live, etc.
What is Separate Property?
The parties are entitled to keep their separate property which is not divided in a dissolution. Separate
property is any property that is acquired before the marriage, including any rents or profits received
from those items; property received after the date of separation with separate earnings, inheritances
that were received before or during marriage; and gifts solely to one spouse.
Do debts and credit cards also have to be divided?
Debts are also classified as either community or separate property debts. With few exceptions, debts
incurred during the marriage are community property debts that will be divided equally in the
dissolution. It does not matter whose name is on the debt.
For example, credit card debts incurred during the marriage are community property debts regardless
which spouse's name is on the credit card. Student loans are one of the main exceptions to this rule.
In certain circumstances, the community may be entitled to a reimbursement if the couple pays off one
spouse's student loans during the marriage. Debts that you incurred before marriage or after
separation are separate property debts. (read more on debts)
What happens to the Family Home?
The family home in California is often the marriage's most valuable asset. The division of the family
home can be complicated if there are minor children and one spouse wants to stay in the home. The
community property interest in the home is further complicated where the property is in the name of
one spouse and was acquired prior to the marriage but the mortgage payments have been paid from
community earnings. Parties should also be aware that if one spouse remains in the property after
separation they may be incurring indebtedness to the other party if the fair rental value of the property
exceeds the mortgage, taxes and insurance payments on the home. These are called Watts claims.
The reverse may also be true. If the spouse living in the house is paying the mortgage which exceeds
the fair rental value, they may be entitled to what's called Epstein credits. (read more on Family Home)
Am I entitled to a share in my spouse's pension?
Another valuable asset in a marriage is a pension or retirement plan. The non-employee spouse is
entitled to a portion of the plan that was earned during marriage. To ensure that any pension
settlement is enforceable it is advisable that any settlements regarding pensions are contained in a
"Qualified Domestic Relations Order" (QDRO) signed by the Court. (read more on Pensions)
How do I figure out the extent of my husband or wife's property?
Each party is required by California law to file a preliminary and final "declaration of disclosure" with
the Court that they have served an Income and Expense Declaration and Schedule of Assets and
Debts on their spouses. The final declaration can be waived by the written agreement of the parties.
The disclosures will list each spouses community property assets and debts and separate property.
Most disputes involve the extent and valuation of community property assets. If a spouse tries to hide
assets, your attorney can employ various discovery tools forcing a spouse or a third party to turn over
financial records. For example, they can subpoena the records of third parties such as banks and
CPA's. In complicated cases it may be necessary to employ the services of a forensic accountant. It is
a good idea to minimize this risk by taking some simple steps as part of any pre-divorce planning. You
should make copies of important financial documents such as tax returns, W2's, bank and brokerage
statements and keep them in a safe place.
The law requires the parties to make full disclosure of all their assets and liabilities and also any
business investments and opportunities. The case of Marriage of Rossi, illustrates what can happen
when one party tries to conceal assets. In 1996 Denise Rossi won $1.3 million in the California State
Lottery. She chose to conceal the winnings from her husband and filed for a divorce 11 days after
learning of her winnings. She had been married for 25 years. 2 years after the case was over and a
Judgment had been entered, her ex-husband discovered that his ex-wife had won the lottery. He filed
a Motion and the judge gave all of the $1.3 million dollar lottery winnings to the husband, since the
wife had intentionally not disclosed her winnings in the divorce proceedings. News reports indicate that
Denise ended up filing for bankruptcy. (read more on How to Find Hidden Assets?)
Don’t forget some often overlooked assets!
Some assets that are easily overlooked but may turn out to be valuable include:
• Tax refunds
• Frequent flyer miles
• Season tickets
• Prepaid insurance
• Vacation pay
• Club memberships
Are their tax consequences of a property settlement?
It's important that you consider the tax consequences of any property settlements during a dissolution.
Generally, IRC section 1041 provides that transfers to a former spouse incident to a divorce are not
taxable. However, if either spouse agrees to sell an asset as part of a settlement there may be a tax
consequence. For example, if parties agree to sell the family home and divide the net proceeds they
may have to pay capital gains tax on any gain. The Tax Reform Act 1997 gives each spouse a
$250,000 exemption from gain realized on the sale or exchange of the principal residence. Similarly,
the tax consequences of distributions from pension plans now or in the future should also be
considered. (read more on Taxes in Divorce)
Contact a Los Angeles Divorce Attorney at Law Offices of Warren R. Shiell to discuss your
property division issues.
Please call to make an appointment at 310.247.9913.
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