There are many different types of property. In a dissolution (divorce), property includes tangible property, such as a house, cars, bank accounts, stocks and bonds and retirement accounts, and intangible property such as intellectual property. In a divorce, the term “property” means both assets and liabilities and “property division” means the division of the assets and liabilities of each party.
Typically, property division involves four steps: a) identifying the property type, b) characterizing it as community property, separate property, or mixed/hybrid property, c) estimating the value of property through the appropriate method (for example, if it is intellectual property we will have an intellectual property expert value it; if it is a car, we can use Kelley Blue Book; an actuary is used for retirements accounts, etc.), and d) dividing the property. Sometimes a division can result in neither party getting the property, the property being sold and dividing the proceed of the sales between the parties, and other outcomes.
In many cases, there is a substantial amount of property tied up in divorce proceedings which can result in complex and contentious disputes and significantly impact your financial future. At Moshtael Family Law, we recognize the seriousness of these matters and work hard to reach fair and favorable outcomes for our clients.
Division of Marital Property
In a divorce, property could mean assets or liability. Before dividing property, it must be identified, characterized, and valued. Certain types of property may have a different methodology for valuation. For example, with a business, its valuation will be done by a forensic accountant or a business appraiser. To identify assets during the process of discovery, both parties disclose what they each own and owe. Discovery is important because one or both parties could try to hide assets during their divorce.
The characterization of property follows standardized rules related to date of acquisition, date of separation, title presumption and more. For example, if an asset was acquired during marriage, we presume that it is community property subject to a rebuttable presumption. If an asset was acquired after the date of separation or prior to the date of marriage, we would presume that it is a separate property asset.
Title Presumption looks at the manner in which title is held. An asset might have been purchased during the marriage and be presumptively considered community property. However, the title to that asset could be held only in the name of one spouse. For example, if a building was purchased during marriage and title is held in the wife’s name only, the title presumption would rebutted by the community property presumption.
We also go beyond characterization because some assets are a mixture of community property and separate property and are considered hybrid. For example, you can have a separate property asset with a community interest in it. There could also be a community asset with a separate property right of reimbursement.
Let’s consider a home that was purchased during the marriage. In dividing it, let’s assume that the husband has proof that he used separate property money that he earned before the marriage for the down payment.
Under that scenario, if the husband can trace the funds to his separate property source, he has a Family Code Section 2640 Reimbursement to a community property asset. Even though the asset is community, it does not necessarily mean that the equity in that asset will be divided 50/50. If his traceable separate property down payment was $100,000, he will be reimbursed this amount from the top, with no interest, and everything that remains will be divided equally between him and his spouse.
In many cases, a business that was acquired or formed before the date of marriage is divided. It is presumptively considered separate property, and let’s assume further that no title change occurred during the marriage, so it remained separate property for the whole course of the marriage. Nevertheless, the community could have an interest in the business if its value increased during the marriage.
This is known as Equitable Portion. We use different accounting formulas to determine how much of that business is community interest. When valuing the asset, the general rule in family law is to try to value the asset as close as possible to the time of trial so we are looking at present value. However, there are circumstances under which you can file a motion to use an alternate valuation on a date other than the one as close as possible to the time of trial.
For example, what if there is a community property business that one spouse has been running and after the date of separation they continue running the business. Let’s say you can prove that this spouse has been committing waste to the business intentionally. The business is now suffering not because of the economy or market forces, but because this spouse has sabotaged the business.
In this case, it would not be fair to value the business at current value. We can argue that the other spouse’s goal is to get the valuation down as low as possible to pay out less to the other spouse. In that case, it would make sense to value the business as close as possible to the date of separation to get a higher valuation because one person is responsible for reducing the value.
What if it is a business run entirely by one spouse. For example, let’s say it’s a law practice with one attorney and a receptionist and the value of the business increases after the date of separation. We could argue that because it is a business driven primarily by the success of the one spouse who runs it, the rise and the fall in value is because of that spouse working extremely hard after the date of separation to increase the value.
We can also argue that all the work that has been put in to increase the value of the business is separate effort and the increase in valuation is due primarily to that spouse’s time and energy. Therefore, there are several scenarios in which you can request that a judge use an alternate valuation.
The issues of property division are generally dealt with at the time of trial. That implies that we don’t get to go to court early in the divorce or in the middle and ask the judge to divide properly before we settle or go to trial. For example, you typically cannot file a motion to sell a house in the middle of a divorce unless there is some form of risk to the house such as foreclosure, being behind on the mortgage, waste being committed to the property, etc. In these cases, we can ask the judge to allow the parties to sell the house to preserve its equity. The parties could also agree to sell early and not wait until the end of the divorce.
Generally, you cannot distribute community property prior to the trial unless the parties agree to it. However, you can request a bifurcation. That is, you can ask the judge to deal with an issue of property prior to the ultimate trial. Therefore, rather than having one large trial that addresses every asset and property, you could convince the judge to have a “mini trial” earlier in the case on one or more pivotal issues.
The argument would be, “Your honor, if you resolve this issue for us now, the rest of the case will be settled. This is the biggest issue we are fighting about and if you fix it for us we think we can work everything else out.”
For example, let’s say that two parties entered into a premarital agreement and now they are getting a divorce. Who is going to get what? It makes sense in this case to have a bifurcated trial on the validity of the agreement instead of waiting until the end of the case to divide up the property because once the judge decides whether the agreement is valid or not, it immediately dictates who gets what pursuant to that agreement.
That is another way to deal with the character of an asset. If you have a contract with your spouse that dictates whether something is community property or separate property, it means you have both agreed to opt out of the standardized rules. As long as the agreement is not against public policy, spouses can agree/contract out of the standardized rules. Similarly, spouses can enter into a postmarital agreement to control how everything will be divided in the event of a divorce.