Community Property Summary
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.
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), business interests (business assets, account receivables, goodwill value, etc.), and more.
Separate Property Defined
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.
Dividing Community Property
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.
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.
Community & Separate Debt
Community debt includes the financial obligations assumed by either spouse during marriage. 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 assigned the repayment of any unpaid portion of that debt. For example, at divorce, the unpaid cost of a college education acquired during marriage may be assigned to the spouse who received the education.
Separate debt includes financial obligations assumed 1) prior to marriage, 2) after divorce or legal separation, or 3) during marriage by one spouse who kept separate finances from his or her spouse during marriage. For example, educational loans acquired before a marriage are not considered a community debt.
Dividing Community Debt
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.
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.
When a spouse mixes his or her separate property with community property the separate property and 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.
Community Property at Death
In general, but with several exceptions, a spouse may bequeath (will), even over the surviving spouse’s objection, his or her share of the community property value to any person or entity. 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.
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. To protect a spouse’s right to bequeath his or her share of the value of a community property home or bank account that spouse might consider changing how he or she holds title to that home or bank account. See a divorce attorney or estate planning attorney for more information.
Diving a Community Property Home
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 required to make mortgage, insurance, and property tax payments.
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.
Dividing a Business
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 (assets plus good will value), 5) the ability of the business to succeed without community support, and more.
Note: California does not create a community property ownership interest in a spouse's professional license; however, the value of the professional license may assessed for community property purposes.
Note: When one spouse owns and operates a business during or after marriage there may be a question as to the value of the business or hidden assets of the business. In either case, a forenseic accountant may conduct a 730 evaluation of the business to discover its true value for community property purposes and/or discover actual cash flow of the business. For more information, see 730 Evalutation.
Diving Retirement Benefits (QDROs)
When a spouse accumulates an interest in a retirement (pension, 401K, IRA, CalPERS, etc.), the part of the retirement benefit value that was earned during marriage is community property. 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.
For more information on community property law, contact our family law attorneys today for a free case evaluation. Thank you.
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