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).
Absent an in-kind division or sale and division of proceeds, valuation of each item in the community estate is an essential prerequisite to the court’s responsibility to effect a net equal division. Valuation is ultimately a question of fact, to be resolved in the exercise of the trial court’s broad discretion based on the range of evidence presented. The trial court’s determination will be upheld on appeal so long as supported by substantial evidence in the record.
Obligation To Disclose Value: Each spouse’s fiduciary obligations in the management and control of the community estate include the duty (a) to fully disclose to the other spouse “all material facts and information regarding the existence, characterization and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable”; and (b) upon request, to “provide equal access to all information, records, and books that pertain to the value and character of those assets and debts.”
The Parties May Agree On Value: The parties are free to enter into an agreement concerning the value of community property and they are encouraged to do so by the court.
Fair Market Value: Unless the parties stipulate or agree to accept some other measure of value (e.g., cost or book value), an equal division of the community estate must be predicated on fair market value. For purposes of effecting an equal property division upon marriage dissolution or legal separation, “fair market value” of a marketable asset is the highest price on the valuation date that would be agreed to by (i) a seller, who is willing to sell but under no obligation “or urgent necessity to do so,” and (ii) a buyer, who is ready, willing and able to buy but under “no particular necessity for so doing.”
Date Of Valuation: With few exceptions, community assets and liabilities subject to the court’s disposition ordinarily must be valued “as near as practicable to the time of trial.”
Proof Of Value: Competent valuation evidence may be proffered by any of the following methods:
- Expert Testimony: A qualified expert can testify as to value (e.g., appraisers, accountants, actuaries or real estate brokers/salespersons)..
- Owner’s Testimony: The property owner or owner’s spouse is competent to testify as to the value of his or her own property even though not qualified to testify as an expert..
- Comparable Sales: A witness offering opinion testimony may take into account as the basis of his or her opinion evidence of the price paid for the property if recently purchased; or evidence of market prices or recent sale prices for comparable (similar) property. However, mere offers to buy or sell certain property are inadmissible to prove the property’s value..
- Buy-Sell Agreement: The agreed-upon buy-out price or buy-out formula for purchasing a business interest (e.g., shares of stock in a closely-held or professional corporation) as between the business principals is admissible on the question of value in a community property division proceeding between the spouses. However, such a buy-sell agreement is not conclusive. Based upon the evidence presented, the family law court has broad discretion to accept or reject the valuation formula in a business buy-out (or stock purchase) agreement.
Court’s Broad Discretion: Generally, where the parties are unable to agree on a disposition of their community estate, trial courts have broad discretion to determine the manner of division in order to accomplish a net equal division.
General Approaches: Typically, the court will adopt one or more of the following approaches:
In-Kind Division: The Court divides fungible assets (bank accounts, shares of stock, etc.) in kind, whereby each spouse is awarded one-half.
Asset Distribution Or Cash-Out Division: The Court distributes one or more items to one spouse and items of equal value (which may include an equalizing promissory note) to the other.
Sale & Division Of Proceeds: The Court orders an asset sold, with the proceeds divided in proportions necessary to effect a net equal division of the overall community estate.
Deferred Partition By Conversion To Tenancy In Common: The Court awards each spouse an undivided one-half interest in certain items to hold as tenants in common (typically, the family home), deferring partition until feasible to effect a sale and division of the proceeds.
If you feel that you may have a potential case pertaining to family law please call (805) 879-7523 or click here to email us and have an attorney contact you about your case.