REAL PROPERTY, PERSONAL PROPERTY AND BUSINESS DIVISIONS IN DIVORCE

California is a “community property” state, which means that assets and debts acquired by one or both spouses during marriage are generally the property of both spouses equally, with some exceptions, such as property acquired by gift or inheritance. Property acquired prior to the date of marriage and after the date of separation is presumed to be the separate property of the acquiring spouse, unless the property is acquired using community funds.

What is Community Property?

The following assets acquired during marriage are generally deemed to be community property:

• The family residence
• Other real estate, including investment properties and rental units
• Business ventures, including closely-held businesses and S-Corporations
• Stock options and deferred compensation, such as pensions
• Retirement plans (401k, IRA, pensions, military, PERS, etc.)
• Collectible items, including antiques and coin collections
• Insurance policies and insurance proceeds
• Personal property, including furniture and electronics
• Intangible assets, including goodwill and intellectual property.

Assessing which assets are community property and which assets are separate property can often be a difficult undertaking. The California Family Code has very detailed provisions relating to characterization and division of property resulting from a marital relationship. It is often necessary to use the services of a financial planner, tax professional or forensic accountant to assist in securing the best strategy for the ultimate division of these assets and debts.

Characterizing Property and Preliminary Issues

Analysis of property issues involves determining the character of property and discussing whether any outside influence may apply to such characterization. The following are questions to be considered in resolving property issues:

• Whether the parties entered into a premarital agreement
• Whether the parties entered into a post-nuptial or community property transmutation agreement after the date of marriage
• How title is held
• Whether either party has a right to reimbursement of separate property
• Whether either party deeded property to the other during marriage
• Whether a breach of fiduciary duty claim exists resulting from transactions of the parties during marriage
• Whether community property was contributed to acquire separate property or pay down separate mortgages

Determining the character of real estate, business interests and certain other property can be a highly technical and time-consuming endeavor. Property can be considered community, quasi-community, separate, or a combination (mixed). Property acquired outside the State of California that would be community if it had been acquired within the State, which is called quasi-community property, can also be considered community property. The date of acquisition of an asset or debt is an important initial question. Assets and debts acquired during marriage are presumed to be community in nature. Assets acquired before marriage and by gift, bequest, or inheritance are separate in nature, and include the increase in value (appreciation) of those properties. There are exceptions to these general rules, such as when assets are commingled or transferred (transmuted) from one spouse to another.

Date of Separation

The date of the parties separation is a legal term with significant importance. The date of separation generally occurs when spouses physically separate from each other and one spouse subjectively intends to end the marital relationship and does an act to objectively manifest his or her intent. The date of separation is important in all marital dissolution cases because the acquisition of assets, debts or income after the date of separation by either spouse will be considered their separate property. For example, credit card charges by one party after the date of separation are generally assigned to the acquiring spouse, even if the debt was incurred on a credit card in joint names.

Valuing Real Property and Business Interests

During divorce proceedings, it is necessary to value all items of community, separate and mixed property. This may be done by the parties based on their own opinions or with the help of a jointly hired forensic accountant.

It is always advisable to resolve property issues through settlement or in mediation meetings, but sometimes a judge may need to resolve valuation issues. Either party may offer expert testimony in court or during settlement conferences regarding the value of an asset or obligation. Alternatively, courts may appoint a joint expert to provide the court with a written valuation of real estate, business interests or other property. Such an appointed expert’s report is submitted to the court upon agreement between the parties or upon the motion of either party. In proceedings involving the division of substantial real estate or business interests, valuation experts are extremely helpful. Real estate appraisers provide information regarding the market value of real property. Business experts value accounts receivable, payable, fixed assets, goodwill and work in progress to arrive at a going interest value of a business.

Specific Business Interests and Valuation Issues

Divorce cases involving the valuation and division of business interests can be complicated, not only because businesses may be inherently complicated to value, but because self-employed spouses may cause litigation to be more confusing or protracted. There is no widely accepted valuation rule for the courts to apply for valuing business interests. The financial records of a business, including tax returns, profit and loss statements, balance sheets, customer invoices, and financial investments are important pieces of information to be analyzed. Of significant relevance is the type of business, number of employees, and market share of the business.

Deferred Compensation (ie. Pensions, 401ks, IRAs)

Deferred compensation assets in marital dissolution proceedings can be divided by agreement, or by the court, if they are community or party community in character. Deferred compensation includes pension plans, 401ks, IRAs, military pensions, and stock options.  Experts are often needed to assist in valuing these assets. In order to protect the non-owning spouse’s interest, it is generally necessary to file a joinder motion with the court to ensure that the plan administrator is brought into the family law case to make certain the parties interest in the plan is properly divided. Most deferred compensation assets are divided in divorce proceedings using the Time Rule (the interest in the plan acquired during marriage to the community and the rest to the owner/spouse). A specific order is created to effectuate the division of such assets. The document utilized by the courts is referred to as a Qualified Domestic Relations Order, or QDRO.