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Property Division Guide

Overview

In a divorce, a lot of time and money are generally spent deciding who gets what. Assessing and evaluating marital assets can be complicated, and California is a community property state, which means that property should be divided evenly, which can become very complex. In a divorce (also known as a marriage dissolution) in addition to dividing assets, significant time may be spent assessing and dividing liabilities such as loans and other debts. Before property is divided, it needs to be identified, characterized and valued. In addition to physical, tangible property such as houses, cars, and stocks and bonds, marital property can also intangibles such as intellectual property. Assets and liabilities acquired by both spouses during the marriage belong equally to both parties, so in a divorce in the state of California, they are divided equally.

Marital assets are characterized as either community property – an asset acquired during the marriage, separate property – property acquired after the date of separation or prior to the date of marriage, or hybrid property – property that one party may have invested money acquired before the marriage in but that belongs to both spouses and has appreciation value.

Even though California law calls for the equitable division of property, that does not mean that all assets need to be liquidated, it just means that both parties should receive assets of the same value from the community property. If a couple is able to agree on how to divide their property and debts, they may only need a judge to sign off on their agreement and issue a final order. If a divorcing couple is not able to agree on how to divide their assets, they will need the court to assist.

4 Steps to Property Division:

Typically, there are 4 steps involved in dividing property in a divorce:

  • Identifying all property and the type of property it is
  • Characterizing property as either:
    • Community property
    • Separate Property
    • Hybrid/Mixed Property
  • Estimating the value of the property
  • Dividing the property.

 

How Property Value is Assessed

Tangible property is usually assigned its actual fair market value. For investments, intellectual property, and retirement accounts, an expert, such as an actuary, is brought in to assist in determining the value. Real estate value is typically assessed by a professional appraiser. Valuables such as art, antiques, and jewelry are also typically appraised for resale value by a professional.

Hidden Assets

Spouses have a fiduciary responsibility to one another to disclose all assets, liabilities, income and expenses as they go through the divorce process. During the marriage, both spouses also are expected to openly communicate with one another regarding assets and liabilities and dealing fairly with one another.
A hidden asset is something that one spouse has not disclosed to the other, or an asset that seems to have gone missing during the divorce process. Spouses who hide assets are penalized by the court by steep monetary sanctions or penalties.

An attorney, through a process called discovery, can work to trace and identify any hidden assets, and then work with a forensic accountant to assign the value to the assets, identify which assets are community property and which assets, if any, should be categorized as separate property.

Hiding assets is considered to be a breach of fiduciary duties, and sometimes, the court will impose monetary sanctions for the spouse who hid assets for attorney fees for the spouse who had to initiate the discovery process.

 

Business Valuations

As discussed previously, community property is divided equally in a divorce in the state of California. Privately held businesses are considered to be community property (unless there is a prenuptial agreement in place to protect the business) and therefore, are subject to equal division in a divorce.

When determining the value of a business, there are many factors that are taken into consideration, including the business’s assets, debts and liabilities, the value of the business’s accounts receivable and other intangible assets (such as intellectual property), and the business’s goodwill.

The court also takes into consideration the earning capacity of the business, its financial condition, the current economic outlook, prior sales of ownership interests, and other intangible assets. Like with other community property assets divided during a divorce, the business valuation process aims to determine a fair market value for the business.

 

Prenuptial (Prenup) and Postnuptial (Postnup) Agreements

A prenuptial agreement is a contract that allows couples to make a financial agreement in advance of their wedding in the event that they get divorced in the future. Such an agreement ensures that any assets one spouse takes into the marriage remain with them in the event there is a dissolution of the marriage. A savvy lawyer can draft an agreement that will protect a party’s personal and business assets before the marriage takes place as a practical matter.

A postnuptial agreement is an arrangement between a couple following their marriage that sets certain terms of the relationship. Postnups are most often requested when one spouse comes into a significant amount of money or has new financial assets, like a family business that was left to them. Another reason for a postnup may be if one spouse is worried about a change in behavior related to spending from the other spouse that could have an impact on the couple’s financial stability, such as gambling or overspending on luxury items. Other times, couples get a postnup if the couple intended to create a prenuptial agreement before the marriage but did not do so.

 

Stock Options

In California, stock options are treated as property and are appropriately divided, though this can be complex. Often times, lawyers work with forensic accountants to properly evaluate and divide stock options.

Earnings during a marriage are considered to be community property, so if one spouse is compensated at work during the marriage with stock options that vest or partially vest during the marriage, the stock options will most likely be treated as community property.

There are three formulas that are used to determine if stock options are separate or community property, and the formulas take into consideration when the parties got married and when they separated, what the vesting dates were for the stocks, and whether the stock options were granted for past service, or to attract or retain the employee.

Commonly Used Terms Related to Marital Assets

Community Property: Assets jointly owned by a married couple.

Discovery: The legal process for getting information about the other party for your case, which can include interrogatories and depositions.

Marital Property: All property acquired by the couple during the marriage.

Prenuptial Agreement: A contract signed by spouses prior to marriage to determine how Property will be divided if the couple divorces.

Postnuptial Agreement: A contract that is signed after a couple is already married that determines how Property will be divided if the couple divorces.

Qualified Domestic Relations Order (QDRO): A court order giving one spouse a share of the other’s pension or retirement funds.

Separate Property: Assets that belong to only one spouse because they were acquired before marriage or through a gif or inheritance.

 

Frequently Asked Questions Related to Marital Assets in California

Will I get to keep my house in the divorce, will it go to my spouse, or will we have to continue to co-own it after the divorce?
If you bought a house together during your marriage, using community property funds, the house is community property. If this is the case, there are several options that will be considered including:
Selling the house and dividing the profits, particularly if neither spouse can financially take full ownership of the house
A buy-out – one spouse takes full ownership of the house and pays the other spouse’s portion. Insurance, utilities and repairs, property taxes and monthly mortgage payments would all belong to the spouse who is buying out the other’s interest in the property.
To minimize the impact of the divorce on young children, the court in some cases will order a “deferred sale of a house” which is a scenario where both spouses continue to own the home for a set period of time, with the custodial parent having use and possession of the home during this time.

Will the court determine who gets our household items, like furniture and appliances?
No. The value of your household goods is typically not included in a property settlement. Generally, spouses should try to divide such assets together, using the asking price for such items or fair market value.

How do spouses hide assets from one another and how can I tell if my spouse is hiding money?
There are many deceptive ways for one spouse to hide assets from the other. The most common ways that spouses hide assets are opening bank accounts that the other spouse doesn’t know about, selling Property without the other’s spouse’s knowledge, funneling money through a third-party bank account, or transferring property to a third property. Monitoring your joint bank accounts for changes in withdrawal patterns and checking for any discrepancy from the financial activity that both of you participated in to run your household prior to the divorce proceedings.

My spouse and I separated, moved into different homes and divided up our stuff on our own. Do we need to go to court?
Technically, all property belongs to both spouses until it is awarded to one by a judge, so you will still need to delineate what each spouse is taking as part of your divorce proceedings.

Does my pension belong to me or my spouse if we get divorced?
Any contribution that was made to your pension before the marriage is considered to be separate property, however, any contributions that were made to your pension after the date of your marriage are community property and your spouse is entitled to half of that.

I saved my own money, put it in a separate account, and made a significant purchase (car, boat, etc.). Is this considered to be my property?
No. Even if you are the only one with the title to a car or boat that you purchased with money you earned, your spouse is still entitled to half. All money earned during the marriage, whether housed in separate accounts or a joint account, is considered community property.

Is an engagement ring considered to be a marital asset?
An engagement ring is considered to be a “gift in contemplation of marriage.” If the marriage doesn’t take place, the person who purchased the ring may get it back. If the marriage does take place, the engagement ring is considered separate property, as it was a gift acquired before the marriage. However, there are a few exceptions, like if the ring was a family heirloom, for example.

 

What Questions Should I Ask My Lawyer?

When dividing marital assets, it is critical to work with an attorney who understand complex and sophisticated financial situations so that you can ensure that you receive what you are entitled to in the divorce. In selecting a lawyer, consider their background, and experience in this area of law. In addition, you may want to consider asking your lawyer the following questions:

  • Do you have experience in situations where the assets and liabilities are similar to ours?
  • What is your experience with high -conflict situations?
  • Can you help me determine if my spouse is hiding assets?
  • Do you have experience working with couples who both have retirement accounts (if applicable)?
  • What kind or experts will you work with to assess the value of our assets and business?
  • How can I protect myself and my finances during the divorce process?

 

Other Resources

California Courts: Divorce or Separation

Orange County Law Library

Orange County Bar Association

This guide was produced by Moshtael Family Law. If you have any questions or need some guidance or further information regarding marital assets, please contact Moshtael Family Law. We offer free consultations and look forward to helping you.

Orange County, Los Angeles County, San Bernardino County, Riverside County

Receipt of information on www.MoshtaelLaw.com is not intended to create, and receipt does not constitute, an attorney client relationship. The information is not intended to substitute obtaining legal advice from a California family law attorney. No person should act or rely on any information in this site without seeking the advice of an attorney.