DIVISION OF PROPERTY: How the courts decide if it’s “YOURS or OURS”?

In a marital dissolution (“divorce”) proceeding, a court must characterize property as either community property, quasi-community property, or separate property in order to determine the rights and liabilities of the parties with respect to a particular asset or obligation. See In re Marriage of Valli, 58 Cal. 4th 1396, 1399 (Cal. 2014).

In most dissolution cases, the parties’ assets (and/or debts) must be (1) identified, (2) characterized (separate or community), (3) valued, and (4) divided. It is not uncommon that some or all of these issues are in dispute in a marital dissolution proceeding.

It is the general rule in California that the character of property is fixed as of the time the property is acquired. In other words, a spouse’s community property interest arises at the time the property is acquired; it is not affected by a change in the form of the property and may be altered only by judicial decree or joint action between the parties.

Generally, community property consists of all property (real and/or personal property, no matter where situated) acquired by a spouse during marriage prior to separation while domiciled (i.e. residing) in California, except for property acquired by gift or inheritance. Cal. Fam. Code § 760. This includes out-of-state real property (although the manner by which an “equal division” of out-of-state community real property is carried out may be affected by the laws of the state where the property is located).

Typically, separate property consists of that which was owned by a spouse prior to marriage or otherwise acquired by a spouse during marriage without the expenditure of time, effort, or labor, such as by gift or inheritance. Additionally, a spouse’s “earnings and accumulations” while living separate and apart from the other spouse and/or after a judgment of legal separation are his or her separate property. See Cal. Fam. Code §§ 771 and 772.

California recognizes that spouses share “present, existing, and equal” ownership interests in community property. See Cal. Fam. Code § 751. In other words, under California law, each spouse has an equal one-half ownership interest in the whole of community property and is entitled to equal rights of management and control (subject to intra-spousal fiduciary obligations). Upon dissolution of the marriage, community property is to be divided equally between the parties unless the parties mutually agree to an alternative disposition.

Given the integral nature of characterization in this process, in some instances, experienced forensic accountants are engaged to assist the attorney in the areas of identification, classification, tracing, valuation, and division. Forensic accountants are also used to assist in determining the income available for the payment of child and/or spousal support and determining the marital standard of living as a component in the spousal support evaluation (see Spousal Support and Child Support sections).

OTHER INFO ON PROPERTY ISSUES

In the event that spouses relocated during marriage, California community property law also determines a spouse’s rights and interests in marital property acquired during the duration that they were an out-of-state resident. Quasi-community property consists of all property acquired by a spouse during marriage while they were domiciled outside of California (for example, in a common law state). Although the act of crossing state lines itself does not affect the character of property, for purposes of defining marital property debt liability and property division rights upon marriage termination, marital acquisitions will generally be treated as community property. See Cal. Fam. Code §125.

Property which is not characterized as community (or quasi-community) is the separate property of the spouse.

It is the general rule in California that the character of property is fixed as of the time the property is acquired. In other words, a spouse’s community property interest arises at the time the property is acquired; it is not affected by a change in the form of the property and may be altered only by judicial decree or joint action between the parties. See In re Marriage of Rossin, 172 Cal. App. 4th 725, 732 (Cal. App. 6th Dist. 2009). Business during marriage usually does not change its character to community property. See In re Marriage of Koester, 73 Cal. App. 4th 1032, 1037 (Cal. App. 4th Dist. 1999). Likewise, it is the general rule that property derived from a community property source typically remains community property, and property derived from a separate property source remains separate property. See Hicks v. Hicks, 211 Cal. App. 2d 144, 152-153 (Cal. App. 4th Dist. 1962). For example, absent a valid agreement between the parties specifying otherwise, rents, issues, and/or profits from a pre-marriage residence received during marriage remain that spouse’s separate property. Thus, the resolution of characterization disputes in a divorce often boils down to ascertaining and characterizing the source of the property in question.

Nonetheless, other factors impacting the characterization of property in a marital dissolution proceeding may be raised to rebut the general rule above, including the operation of various legal presumptions (specifically those concerning the manner in which title is taken or presently held), the determination of whether the spouses “transmuted” the property in question (i.e. agreed to change its character from separate to community or from community to separate), and/or whether the spouses “commingled” their property to the extent that tracing the source of funds used to acquire property during marriage to a separate or community asset is impossible. See In re Marriage of Rossin, 172 Cal. App. 4th 725, 732 (Cal. App. 6th Dist. 2009). In some cases, the character of property can be mixed or have separate and community components of value. For example, if one spouse uses his or her separate property to acquire or improve community property, that spouse is entitled to reimbursement for all or a portion of their contribution upon dissolution of the marriage; or if a spouse has a 401(k) plan in existence prior to marriage and continues to contribute to the 401(k) plan during the marriage, there will be both separate and community interests in the same 401(k) plan benefits.

Obviously, a number of factors, such as the length of the marriage, the wealth of the spouses, and the manner in which such wealth is held, determine the complexity of community property issues in a given case. Discovering the identity of all property, community or separate, involves the discovery process: oral depositions, written interrogatories, subpoenas, and orders for production of documents – especially where one spouse is much more informed and/or has exercised management and control of the family’s assets and wealth. Although spouses owe fiduciary duties to each other, including an obligation to fully disclose the identity of all assets and debts, it is not uncommon for spouses to be less than forthright in fulfilling these duties. Aggressive and thorough counsel will discover the nature and identity of assets so as to achieve a complete and fair division of the community estate.

Experienced and knowledgeable counsel can assist in avoiding litigation, but, on occasion, underlying factual questions must be submitted to the court for resolution. Given the integral nature of characterization in this process, in many instances, experienced forensic accountants are engaged to assist the attorney in the areas of identification, classification, tracing, valuation, and division. Forensic accountants are also used to assist in determining the income available for the payment of child and/or spousal support and determining the marital standard of living as a component in the spousal support evaluation (see Spousal Support and Child Support sections).