Dividing Property an a California Divorce Action
There are three basic steps in dividing property in a divorce action:
- Characterization: First it must be determined whether the property is “community property”, “separate property”, or “quasi-marital property.
- Valuation: Next the property must be given a value either by agreement or appraisal.
- Division: After the property has been characterized and valued, the goal of the court is to confirm separate property to the owner of that property and to evenly divide community property.
Separate Property – General Concepts: Property acquired before marriage is the acquiring spouse’s separate property, as is property obtained during marriage that can be traced to a premarital acquisition. Like community property, separate property does not lose its character as such by a mere change in form or identity.
The court must therefore determine when the property was “acquired”. For property characterization purposes, “acquired” contemplates the “inception of title” . . . generally meaning the time (before marriage, during marriage, or after separation) when the original property right arose, not the time when it subsequently matured into full legal title.
Property acquired during marriage by “gift, bequest, devise, or descent” (i.e., inter vivos or testamentary gift or intestate succession) is the acquiring spouse’s separate property.
A spouse’s “earnings and accumulations” after a judgment of legal separation are his or her separate property; and so are a spouse’s “earnings and accumulations” while living separate and apart from the other spouse.
“Separation” requires more than a rift in the spouses’ relationship. The date of “separation” occurs only when the parties have come to a parting of the ways with no present intent to resume their marriage and their conduct evidences a complete and final break in the marital relationship.
Community Property – General Concepts:
All property acquired during marriage and before separation, other than by gift or inheritance, is presumptively community property.
Income derived from a spouse’s labor, time or skill during marriage and prior to separation is community property. Such “earnings” includes any compensation for services, regardless of the form in which it is received. For example, to the extent it reflects employment during marriage, community “earnings” can include:
- Stock in lieu of salary.
- Employer contributions to an employee profit-sharing plan.
- Incentive stock options.
- A conveyance of real estate from the employer in the form of a gift, but which is in reality deferred compensation in lieu of a pension.
- Vacation pay, or the right to receive certain other financial benefits as deferred compensation upon termination of employment.
- Other employment fringe benefits based on a contract right to future benefits after separation (even though unvested and unmatured): To the extent “earned” during marriage, these interests are allocatable to the community.
Profits from a spouse’s business (sole proprietorship, partnership or closely-held corporation) are “earnings” to the extent attributable to either spouse’s participation in the business. Conversely, income and profits not reflective of either spouse’s labor or skill are strictly a return on the capital investment, characterized in accordance with the separate or community property status of the original investment.
Transmutation: Both before and during marriage, spouses may agree to change the status of any or all of their property (presently owned or thereafter acquired); i.e., they can convert separate into community property, community into separate property, or separate property of one into separate property of the other. The process is commonly referred to as “transmutation.”
“Quasi-Community Property”: For purposes of a property division in marital actions or the rules governing marital property debt liability, “quasi-community property” is (i) real and personal property, wherever situated, which would have been community property had the owner spouse been domiciled in California at the time of acquisition, and (ii) any property acquired in exchange for such property.
The establishment of a California marital domicile may trigger California “quasi-community property” law, under which the parties’ common law separate property will be treated as if it were community property for certain purposes.
Quasi-Marital Property: The characterization of “marital” acquisitions as community property necessarily assumes the parties were validly married. Nonetheless, in a nullity proceeding to terminate a void or voidable marriage, California “quasi-marital property” law recognizes normal community property rights in favor of a party who has “putative spouse” status (good faith belief in validity of marriage).
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