Community Property Rights in California

Community property means equal joint ownership of assets acquired by either spouse during marriage and which are not otherwise classified as separate property by law. Both spouses have an equal right to manage community property during marriage.

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Community property includes, but is not limited to, any of the following assets acquired during marriage: Personal property (income, financial accounts, stocks, securities, cash, vehicles, furniture, jewelry, etc.), real property (land and houses), intellectual property (patents, trademarks, copyrights, inventions), retirement benefits (pension, 401k, IRA, CalPERS, profit sharing, etc.), business interests (business assets, account receivables, goodwill value of a business, etc.), and more.

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Separate Property Defined

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Separate property includes assets 1) acquired before marriage, 2) obtained after divorce or legal separation, 3) received as a gift or inheritance to one spouse during marriage, or 4) acquired with separate property.

 

For example, premarital income (separate property) used for a down payment on a house will remain separate property and the spouse who supplied the down payment may receive an undivided reimbursement of that separate property down payment at divorce.

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Dividing Community Property

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A family law judge will equally divide the fair market value of the community property upon divorce, unless, the spouses have agreed to an alternative division of their community property in a marital settlement agreement (MSA), a prenuptial agreement, or inter-marital agreement (aka post-nuptial agreement).

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The community property’s fair market value is determined by assessing the value of the community assets and then subtracting community debt. The law does not require a division of each community property asset. Rather, the law requires only that the spouses receive the value of half of the community property, even if the community debt is not divided equally.

 

For example, a community property vehicle cannot be divided in half; however, the value of the vehicle may divided in half. If the community property vehicle is paid off at the time of divorce or legal separation, then the spouse who keeps the vehicle is usually, but not always, ordered to pay the other spouse half the value of the vehicle.

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Note: If the community property asset is a vehicle, and the vehicle has remaining payments owed to the finance company at divorce or legal separation, then the spouse who keeps the vehicle is usually, but not always, the spouse that is ordered to continue the payments on the vehicle and the non-paying spouse is usually, but not always, ordered to transfer his or her interest of the vehicle to the paying spouse.

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Community & Separate Debt

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Community debt includes the financial obligations assumed by either spouse during marriage. This includes debts incurred by the spouses’ minor children if the spouses’ minor children commit a crime that results in restitution (payment for damages to victims).

 

Community property is responsible for the repayment of community debt even when the debt is assumed for the benefit of only one spouse; however, after marriage, a spouse who solely benefited from a community debt is usually, but not always, assigned the repayment of any unpaid portion of that debt. For example, at divorce, the unpaid cost of a college education acquired during marriage is usually assigned to the spouse who received the education.

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Separate debt includes financial obligations acquired 1) prior to marriage, 2) after divorce or legal separation, or 3) during marriage by one spouse, who is legally separated from his or her spouse, and when he or she kept separate finances from his or her spouse during marriage.

 

For example, educational loans acquired before a marriage are not considered a community debt. Similarly, spouses who are legally separated and keep separate finances are not usually liable for the debts of his or her spouse that are acquired during legal separation.

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Note: It is legally possible to remain married, but legally separated. Many spouses obtain a legal separation where one spouse’s situation may potentially subject the other spouse to community debt.

 

For example, a legal separation is common where the parties want to remain married but one spouse develops a drug addiction, or a gambling addiction, or where one spouse’s spending habits are not in line with his or her income, or where one spouse’s separate property business is acquiring debt and leveraging that debt with community property.

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Dividing Community Debt

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A divorce court judge may, but is not required to, equally divide community debt at divorce. A judge will use equitable considerations when assigning community debt. Important equitable factors that a divorce court judge may consider when assigning and dividing debt at divorce include: 1) which spouse benefited from the community debt, or 2) which spouse is more capable of paying the community debt.

 

For example, a financially wealthy person who married a non-financially wealthy person may be assigned any unpaid debt, at divorce, related to an expensive family vacation that was taken by the spouses during their marriage.

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Transmutation Explained

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Transmutation occurs when spouses agree, in writing, to change the character of an asset from community property to separate property, or vice versa. Inter-marital agreements, prenuptial agreements, and marital settlement agreements are commonly used to transmute the character of community property or separate property assets. Transmutations are not valid if the transmutation is intended to render a spouse insolvent against a third party creditor.

 

For example, if a wife gets into a car accident, and the wife believes that she will be sued because of her car accident, she cannot transfer (transmute) any part of her community property interest to her husband’s separate property interest in order to avoid a community property debt (i.e. lawsuit monetary damages). In fact, in some situations, a post-lawsuit transmutation of community property may be considered a fraudulent and criminal transaction.

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Commingling Assets

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When a spouse mixes his or her separate property with community property the separate property and the community property is considered commingled. Commingled property is presumed to be community property unless a spouses can trace his or her portion of the commingle property to his or her separate property source.

 

For example, if husband inherits a $100,000 separate property interest from the death of his father, and thereafter, husband combines his separate property inheritance with his wife’s jointly owned bank account, then the total amount in the jointly owned bank account might considered community property, which is owned by both spouses. However, husband, upon divorce or legal separation, might be able to trace the commingled funds to a separate property source (the inheritance), and thereafter, have those funds returned to him as his separate property.

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Important: Separate property funds that are commingled in a joint bank account will usually, but not always, become the property of the surviving spouse after the death of his or her spouse. The same is true for married couple who holds a home in joint tenancy with the right of survivorship.

  

Community Property at Death

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In general, but with several exceptions, a spouse may bequeath (will) his or her portion of community property to a person (or entity) other than his or her spouse. This is true even if the surviving spouse objects. Without a will, a spouse’s devisee (natural heir) may inherit, even over the surviving spouse’s objection, up to half of the community property value.

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Note: When spouses hold title to a community property asset as joint tenants with a right of survivorship, such as a house or bank account, that community property asset automatically becomes the separate property of the surviving spouse upon the death of his or her spouse. Therefore, even if a spouse creates a will, which is intended to leave his or her portion of community property to a person other than his or her surviving spouse, that will has no effect on property that is automatically transferred to the spouse of the deceased at the will maker’s death.

 

To protect a spouse’s right to bequeath his or her share of the value of a community property home or bank account, to a person or entity other than his or her surviving spouse, that spouse might consider changing how he or she holds title to a community property home or joint bank account.

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Diving a Community Property Home

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If spouses cannot agree on how to divide a home upon divorce the divorce court judge will order that the home be sold and that any recovered value be equally divided between the spouses. If the couple’s finances permit, it is common for the primary custodial parent to be granted the right to reside in the home with his or her children until the youngest child completes high school. During that time, the spouse who reside in the home is usually, but not always, required to make mortgage, insurance, and property tax payments.

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When the parties are ordered to sell a community property home, the spouse who remains in the home, if any, is usually given a reasonable amount of time to sell the home at fair market value, if possible. If the spouse who remains in the home cannot, or will not, sell the community property home at fair market value, then the spouse who does not remain in the home is usually given an opportunity to sell the home.

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Also, transferring title of a community property asset from one spouse to another, such as using a quitclaim deed to transfers interest in a community property home from one spouse to another, does not relieve the transferring spouse of his or her financial obligations to pay for that asset (i.e. home mortgage). This means that sometimes a spouse cannot afford to “buy the other spouse out” of his or her interest in the community property home by refinancing the home in name of only one spouse (the spouse interested in buying out the other spouse). When this happens, the family law court will order the community property house sold (subject to limiting conditions, see above).

 

Important: If the community property house cannot be sold because of market conditions, then the parties might have to take a loss on their respective share of any equity in home.

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Note: Separate property used as down payment for a community property home is subject to full reimbursement, without offset, to the spouse who provided the separate property down payment.

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Dividing a Business at Divorce

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A business operated by one or both spouses during marriage may have community property value at divorce. This depends on several factors, including 1) the amount of time the business operated before marriage as compared to during marriage, 2) the amount of time, energy, and skill the community allocated to the business, 3) the impact of market conditions that affected the business during marriage, 4) the growth of the business that occurred during marriage (asset growth, good will value growth, etc.), 5) the ability of the business to succeed without community support, and more.

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Note: California does not create a community property ownership interest in a spouse's professional license, such as license held by a lawyer, doctor, dentist, etc.; however, the value of the professional license may assessed for community property purposes.

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Note: When one spouse owns and operates a business during or after marriage there may be a question as to either the true value of the business, or an allegation that there are hidden assets of the business. In either case, a forensic accountant may conduct a 730 evaluation of the business to discover its true value for community property purposes and/or to discover actual cash flow of the business.

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In some situations, a community property business cannot be equally divided without dissolving the business and dividing the assets or the dissolved business. This happens where a community property business is jointly owned and controlled and neither spouse wants to relinquish that ownership or control upon divorce or legal separation. A family law judge may order the appointment of a receiver to assist the spouses sell the business assets for fair market value and/or divide the business property assets, if any.

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Diving Retirement Benefits (QDROs)

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When a spouse accumulates an interest in an employment related retirement (i.e. pension, 401K, IRA, CalPERS, stock options, etc.), the part of the retirement benefit value that was earned during marriage is usually community property.

 

For example, if husband acquires $100,000 in a pension related to his employment during marriage, then his spouse is equitably entitled to half of that retirement ($50,000) upon divorce or legal separation of the parties. This is true even is husband’s spouse did not work during marriage. Of course, if the spouses entered into a valid prenuptial or post-nuptial agreement that predetermines a different division for retirement earned during marriage, then those prenup or post-nup terms will usually prevail over the presumed community property equal division rule.

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It may sometimes be difficult to calculate the benefit of the retirement to the community where a spouse’s employment related stock options have not “vested” or when the bonus structure of a spouse’s employment depends on length of employment. A Qualified Domestic Relations Orders (QDRO) may be prepared to determine the community property value, if any, to a spouse’s retirement benefit, including the current “cash out” value of the benefit or the future payout value of the benefit.

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For more information on community property law, contact our family law attorneys today for a free case evaluation. Call today!

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