PROPERTY VALUATION AND DIVISION
California Community Property
California is a community property state. In California, there is a presumption that all property acquired during marriage, from the date of marriage to the date of separation, is community. There are however some exceptions to this presumption. The most notable exceptions to this presumption are that if either spouse receives a gift or inheritance during marriage from a third party specifically to an individual spouse, then that property will be presumed to be the separate property of the spouse receiving the gift or inheritance. Community property includes all assets and debts acquired during the marriage, regardless as to which spouse acquired the asset or incurred the liability. This includes the wages of each spouse, bonuses, lottery winnings, and credit card debt. Pursuant to California law, both parties to a marriage are entitled to an equal division of the community property estate, including the assets and liabilities. Additionally, property that is acquired after the date of separation but is purchased with community property funds will also be presumed to be community. The same is true for bonuses received by one spouse following separation if the bonus was earned during marriage. In general, your labor during marriage and the fruits of your labor during marriage are presumed to be community property.
California Separate Property
Separate property is all property that was owned by either spouse and brought into the marriage or property that was acquired by a spouse following the date of separation. In a divorce or legal separation proceeding, the separate property of each spouse will be assigned to that spouse. However, the burden of proving a separate property claim is on the spouse making the claim. Additionally, once a solid date of separation has been established, all earnings generated by one spouse or liabilities incurred by the spouse following the date of separation will generally be deemed to be the separate property of that spouse. A legal document or court filing is not necessary to have a date of separation. In general, a date of separation is a moment in time that can be identified when one or both parties manifested an intent to end the marriage, to live separate and apart, and then acted on that intent. However, a moment in time that could have been treated as a date of separation may be blurred or even erased. For example, if a couple gets into a fight, decides to end the marriage, but then resumes intimate sexual relations and enters into couples counseling to try and save the marriage, then they no longer have a date of separation. Moreover, the California Supreme Court has stated that for there to be a date of separation the parties must be living separate and apart and that living separate and apart means the spouses are living in separate residences and at least one spouse has the subjective intent to end the marital relationship, as objectively evidenced by words or conduct reflecting a complete and final break in the marriage relationship. However, some justices have stated that there may be circumstances in which spouses could establish separate residences under one roof.
To learn more about dates of separation, and/or community property vs. separate property claims, call (530) 214-8700 today to schedule a consultation.
Commingling Community and Separate Property
Whether property should be characterized as community property versus separate property is not always clear. Married couples often commingle their community and separate property assets during marriage. In California, the mere mixing of separate and community property assets does not necessarily change the character of the property. As long as each asset remains identifiable after being somehow mixed, the property will remain either separate or community. However, if it is impossible to trace the source property, the commingled assets will be treated as community property. The key to characterizing assets and debts as separate or community is to clearly trace the asset to its source.
To learn more about comingling of funds and tracing, call (530) 214-8700 today to schedule a consultation.
Reimbursement for Community and Separate Property Contributions
Even though property may have been acquired before marriage, this does not necessarily mean that the community does not have an interest in that property. For example, if a home is purchased by one spouse prior to marriage, but a mortgage is taken out against the home, and the principal is then paid down with community funds during marriage, then the community has acquired an interest in the separate property home and the community is entitled to reimbursement. The proper amount of reimbursement will be a combination of the amount of principal paid down with community funds and the increase of the equity in the home during the marriage. This calculation of the community’s interest is commonly referred to as a Moore-Marsden calculation.
Similarly, if separate property funds are used to acquire community property, then the separate property estate is entitled to a dollar-for-dollar reimbursement. For example, if one spouse has $50,000 in a separate savings account that was acquired prior to marriage, but then uses those funds as the down payment for the purchase of a home during marriage, then while the home is properly characterized as community property, the separate property estate is entitled to a $50,000 reimbursement in the event of divorce. However, unlike community property payments against the pay down of principal, the separate property estate does not receive any share of any increase of equity in the home from the time of purchase until the conclusion of the dissolution of marriage of legal separation proceeding.
Call (530) 214-8700 today to learn more about Moore-Marsden calculations, reimbursements to the community, and reimbursements to the separate estate of one spouse when separate property funds are used to acquire community property during marriage.
Retirement Accounts and Qualified Domestic Relations Orders
Retirement accounts are often mixed assets comprised partially of separate property and partially of community property. Retirement accounts are most often divided using the time rule. Using the time rule, the community property interest in a retirement account or plan is calculated by dividing the service credits, contributions, and/or dollars earned or accumulated during marriage by the total number of service credits, contributions, and/or dollars earned or accumulated throughout the life of the account or plan. Plans not covered by the Employee Retirement Income Security Act of 1974 (“ERISA”) most often need to be joined to the family law proceeding before they can be divided. CalPERS and CalSTRS are two examples of such plans. However, most plans covered by ERISA need not be joined. Even so, it is important that a notice of adverse interest be provided to plans that are not joined to ensure that the non-employee spouse’s interest in the plan is protected. Retirement accounts, pensions, and defined-benefit plans are often divided with the use of domestic relations orders (“DROs”) or qualified domestic relations orders (“QDROs”). DROs and QDROs are court orders that explain to the plan administrator how the accounts are to be divided. QDROs and DROs are most often prepared with the assistance of an actuary.
The QDRO/DRO process is typically as follows:
- The plan is joined to the family law proceeding and/or a notice of adverse interest is provided.
- A request is made to the plan to provide a model QDRO/DRO and any associated rules, policies, and procedures.
- The QDRO/DRO is drafted, agreed upon by the parties, and submitted to the plan for preliminary approval.
- Once preliminary approval is received, the QDRO/DRO is then filed with the court.
- After being filed with and endorsed by the court, the QDRO/DRO can then be provided to the plan administrator.
- The plan administrator will then divide the plan pursuant to the terms of the QDRO/DRO.
Call (530) 214-8700 today and schedule a consultation to learn more about DROs, QDROs, and the division of retirement accounts and plans.
Business Interests and Valuations
Businesses started during marriage are community property. However, the community may have an interest in a separate property business started before marriage that continues to operate during marriage if the community has not already been adequately compensated for the spouse’s efforts expended on the business during the marriage. There are two (2) main approaches to valuing a community property interest a separate property business. The Pereira Approach is one of the two manners in California community property law that explains how to deal with community funds and/or labor used to enhance the value of separate property. Under this approach, the court will add the original principal amount of the business, which is separate property, to a reasonable rate of return expected from the nature of that business. The result is considered separate property. Any remaining amount of the business above and beyond that figure is considered part of the community. An integral part of this approach is of course determining the original principal amount of the business and obtaining an accurate present day valuation of the business. Forensic accountants and business valuation experts are used for this purpose. This method is preferred when the management of the spouse was the primary cause of the growth or productivity of the business. In the case where the character of the business, as opposed to the individual efforts and management of the spouse, is the main reason for the growth and productivity of the business, a Van Camp Approach is most often used. This method of apportionment measures the adequacy of the compensation paid to the community for the spouse’s work efforts expended on the separate property business during the marriage. To the extent that the compensation was less than the value of the labor provided to the business, the court may apportion part of the separate property to the community. In theory, the underpayment to the community by the business could be treated as an investment in the business by the community, and any increase in value during marriage apportioned to the community on the basis of that investment.
The date of valuation used can also have a significant impact on the value assigned to a business. California law directs the court to value all assets and liabilities as near as practicable to the time of trial. However, the court is also given discretion to select an alternate valuation date when good cause is shown and to accomplish an equal division of the community property estate in an equitable manner. Alternate valuation dates are often applied in business valuation cases where the spouse controlling the business may have depressed the value of the business following the parties’ separation, or where the individual efforts of one spouse supporting the business following the date of separation has led to a significant increase in the value of the business.
Call (530) 214-8700 today to schedule a consultation and learn more about the nuances and complexities of business valuations.
Transmuting Separate and Community Property
In California a transmutation is an interspousal transfer or an agreement that changes the character of property. Property may be transmuted from community property into separate property, from separate property into community property, or from one spouse’s separate property into the other spouse’s separate property. A transmutation of valuable assets must be made writing and the writing must include an express declaration of the spouse whose interest is being transmuted. The declaration must prove the spouse’s intention was to transmute or change the character of the property. However, when a transmutation is claimed, the spouse who benefited from the transmutation must prove that the change of the character of the property was done without undue influence. There is a presumption of undue influence in dealings between spouses and this presumption must be overcome for there to be a valid transmutation. Fraudulent transfer laws also apply and the courts will scrutinize the facts and circumstances leading to a transmutation to ensure it was not the result of fraudulent activity.
Call (530) 214-8700 today to schedule a consultation to learn more about the complexities and nuances of California community property law and the division of property incident to a legal separation or dissolution of marriage proceeding.