Separate property is property that the law recognizes as owned by only one spouse in a marriage. Community property is presumed property obtained during marriage. Those short definitions make property issues sound simple, but they often are not. If you and your spouse were married for any length of time, there’s a good possibility any separate property brought into the marriage may have increased in value.
So, how does such an increase in value affect a divorce settlement?
That depends on the asset and how the asset appreciated in value.
Sometimes one spouse starts a business before marrying. The business is that spouse’s separate property. If the marriage ends, isn’t the business still considered separate property? Not always.
For example, Jay owned a business prior to marrying Jill. He brought the business into the marriage as separate property. However, Jill spent many hours helping him build his mom-and-pop store into a much larger retail operation. When they decide to divorce after 12 years of marriage, what right does Jill have to Jay’s business assets?
Community labor is worth something. Both Jay and Jill’s efforts, during marriage, played a big part in the store’s success. Jill probably is not entitled to own part of the business. However, she is entitled to an interest in the business because the separate property increased in value due to Jay and Jill’s efforts during marriage.
Property purchased during a marriage is generally considered to be community property. However, gifts and inheritances that one spouse receives are the separate property of that spouse. It’s possible, though that a spouse could receive an inheritance that increases in value. The increase may become community property.
Gloria owned a house prior to marriage. Three years after marriage to Bob, Gloria put Bob on the deed. When Gloria and Bob divorce, Bob wants half the equity in the house. Bob may have a community interest in the home.
Calculating the Community Increase
Once it’s determined that the increased value of separate property is community property, how is the increase calculated?
Divorce courts and attorneys may use formulas based on prior divorce cases to figure out property division.
- Moore/Marsden calculations are sometimes used to calculate how much of a home’s value became community property during a marriage. This formula uses separate property appreciation amounts, total principal reduction, and comparisons between purchase price and current value.
- Pereira accounting may be used to figure out how community funds and community labor enhanced the value of separate property. It’s typically used when the business appreciates due to the efforts of the spouse who doesn’t own the business.
- Van Camp accounting typically is used when a business value increases due to the business or to economic factors.
Pereira and Van Camp are two family law cases in which the courts had to decide division of property that increased in value.
Learn More About Separate and Community Property
The attorneys at the Law Offices of Judy L. Burger are experienced at all phases of divorce proceedings. Call us at 415-293-8314 to schedule a private appointment or visit our website. We maintain offices in Marin County, San Francisco, Santa Barbara, Ventura/Oxnard, San Jose, Gold River (Sacramento), and surrounding communities. Our Beverly Hills office will be opening soon.
Divorce can be complex. Untangling finances, figuring out what to do for the children, and determining what’s community property can take time. Adding the complication of an insurance settlement to a divorce certainly doesn’t help.
The Law on Personal Injury Settlements
California law addresses insurance settlements in California Family Code 780 and 2603. While some of the language is vague, the law does address whether settlements are separate or community property.
Injuries During Marriage.
When a personal injury cause of action – the event that led to the injury – occurs during a marriage, then the insurance settlement for those injuries is considered community property. As such, the settlement is split 50-50 between the parties, even if only one party was injured.
Sometimes parties divorce after the accident, but before the insurance settlement is received. The community property/separate property determination is made based on when the injury occurred, not when the settlement is received.
Injuries Incurred Outside the Marriage.
If an injury occurred before parties were married, or after they start living separately, then the insurance settlement belongs only to the injured party. The term “living separately” does not necessarily mean “date of separation.”
For example, an unmarried person is seriously injured in a car accident, then later marries. The cause of action for the personal injury occurred before the marriage. Any insurance settlement is the property of the injured party only.
Reimbursement for Expenses
One exception to the separate property case noted above involves reimbursement for expenses paid by the non-injured spouse. Family Code 781(b) states that expenses paid by the non-injured person from separate property or community property may be reimbursed.
For example, if one spouse may be injured in an accident before the marriage. After the marriage takes place, the uninjured spouse pays expenses that relate to the injuries suffered in the accident. The uninjured spouse may be able to recover at least part of their expenses from the insurance settlement received by the injured spouse.
Learn More About Insurance Settlements and Your Divorce.Judy Burger is a California Certified Family Law Specialist, and founder of the Law Offices of Judy L. Burger. Please call our offices at 415-293-8314 to set up an appointment with one of our attorneys. We assist clients along the Northern to Central California Coast.
Marriage is the ultimate partnership. But it’s more than just two people in love forming a union of two souls. Each person usually brings along property, money, and personal possessions. At least some of that property is considered ‘separate property.’ As a marriage progresses, couples also acquire property, some of which might be intended to be the property of only one member of the couple. It’s important to understand about keeping property separate during a marriage.
California is a community property state, meaning that property acquired by a couple is considered the property of both partners. The same principle applies to debt, with each partner usually being held accountable for debt owed by either partner.
Sometimes parties will bring separate property into a marriage or domestic partnership. During the marriage, gifts or inheritance to one partner are also considered separate property, meaning it’s the property of the person who received the gift or inheritance.
Property and debts acquired after the date you and your partner enter into a separation is also considered separate property.
Commingling of Property
As you might imagine, determining whether something is separate property or community property can be difficult. For example, perhaps one spouse uses their own money to buy a house before marrying. However, during the marriage, mortgage payments were made using money earned by both spouses. Equity built up during the marriage is community property, but the down payment on the house is still separate property.
Keeping it Separate.
Fortunately, there are ways to maintain separate property during a marriage:
- Be careful titling financial accounts and real property. For example, don’t automatically add your new spouse’s name to property you obtained before your marriage.
- Income and dividends from separate property should be kept separate.
- Use separate income to maintain separate property.
- Don’t commingle inherited property and gifts.
- Maintain accurate records of what property was acquired before and during the marriage.
When spouses own property in more than one state, or have lived and worked in a state other than California during their marriage, the separate property/ community property debate becomes more complex.To discuss how to handle separate and community property issues, please call us at 415-293-8314. The attorneys at the Law Offices of Judy L. Burger assist clients in San Francisco, Marin County, Santa Barbara, Ventura/Oxnard, San Jose, Gold River (Sacramento), Roseville, and surrounding communities.
California is a community property state. Everyone says that, but what does it really mean? The following questions tackle a few of the questions you may have about community property.
When one spouse makes more money than the other, will their property still be split 50/50?
Divorcing couples negotiate an agreement called a divorce settlement. The division of the community estate is decided by the couple and their attorneys. Couples may agree to split that is not 50/50.
However, when couples are unable to agree, then the court gets involved. To arrive at a fairly equal division of assets and debts, courts may award part of the community property to one party based on economic circumstances. And, remember that income is considered community property in California.
Is an inheritance received during a marriage considered community property?
Property that is inherited by one spouse usually remains the separate property of that spouse unless one of the following two conditions occurs:
Commingling. The nature of an inheritance changes if the receiving spouse mixes, or commingles, the inheritance with community property.
For example, if Rosie keeps the $120,000 cash she received from her grandmother’s estate in an account that only she owns, her husband John generally can’t take it in the divorce. If Rosie instead deposits the cash into the joint account she has with John, the inheritance is now community property.
Transmutation. This occurs when the spouse who received the inheritance takes action that shows an intent to make the inheritance community property.
Using the example above, Rosie receives the $120,000 inheritance and puts it in a separate account. However, she later uses the money to buy a home that she titles in both her and her spouse’s names. She has transmuted the inheritance from separate property to community property.
A spouse who has commingled or transmuted separate property can request reimbursement if the separate property contribution can be traced back to its source. Rosie could ask to have her $120,000 returned, but she would have to prove that the money came from her inheritance. Keeping accurate, up-to-date records is critical.
Does community debt include a spouse’s credit card bills?
Debts incurred during a marriage are typically community debts.
For example, John uses his credit card to buy a wardrobe full of Louis Vuitton while still married to Rosie. His credit card bills are considered community debt and will have an impact on the value of the community estate. When dividing up their assets and debts, John could take the Louis Vuitton and the debt. However, creditors don’t really care about divorce settlements and may come after Rosie for payment if John defaults.
Is a house purchased by one spouse before marriage considered community property?
When spouses buy a house together using community funds, the house is community property. A house purchased by one spouse before the marriage is the separate property of that spouse.
However, the issue can become complicated if community funds were used for the mortgage or other house-related expenses. Also, the spouse may be found to have an interest in the home if the couple was married for a long period of time.
Call to learn more about community property.
It’s not always easy to understand which assets are considered community property and which ones are not. An experienced California divorce attorney can help you understand how much financial information needs to be disclosed.
Judy Burger is a California Certified Family Law Specialist, and founder of the Law Offices of Judy L. Burger. Please call our offices at 415-293-8314 to set up an appointment with one of our attorneys. We assist clients along the Northern to Central California Coast.
In California, the assets of a married couple seeking divorce must be distributed on an equal basis to the extent they were accumulated during the period of marriage. These assets are known as community property. Sometimes, however, one party owns or has an interest in a business that preexists the marriage. That interest is considered separate property.
Even though a business interest may be considered separate property, part of any appreciation in value that occurred during the marriage may be allocated to community property. In order for that to occur, a value must be established for the business. This is a very complicated task that is performed by a variety of professionals such as business appraisers, certified public accountants, economists, and financial analysts.
Business valuations normally use one of two methods, depending on the nature of the business. These two approaches were established in case law in the beginning of the 20th century and still stand today. Pereira v. Pereira, decided by the Supreme Court of California in 1909, and Van Camp v. Van Camp, decided by the Court in 1921, set the course for allocation of business value to community property.
The difference between the two approaches hinges on the participation of the owning spouse in the operation of the business. Under Pereira, if that spouse was an active operator or manager of the business, appreciation in its market value during the marriage is likely to be considered community property. This is often the case with professional services such as legal or dental practices, as well as with small contractors or retail businesses.
On the other hand, the Van Camp method usually applies if the business was of such a size and structure that the owning spouse did not expend personal effort affecting its income and growth. In that case, appreciation is less likely to be included in community property and subject to equal division. Any amount included would be based on an assessment of the owning spouse’s compensation from the business during the marriage, as well as whether that compensation sufficiently contributed to the accumulation of other community property. This approach would be appropriate for larger manufacturing, contracting, or technology businesses.
The methods of business valuation are complex, and they vary depending on the type of business involved. At a basic level, valuation involves establishing how much a business is worth at the time of marriage and at the time of divorce or separation. The difference in the two values is then considered in light of proper method noted above. Courts will generally accept a business valuation method as long as the evidence on the record legitimately supports the value.
As you might imagine, the value of a business and how it is allocated to marital assets can make a substantial difference in a what both spousal and support orders. If your marriage involves a business interest, you should hire an attorney with substantial experience in complicated divorce cases, especially those involving the valuation of business assets. Judy L. Burger and her team have considerable experience in contested family law matters, and Judy is well-versed in business matters. Submit our Contact form today or call (415) 259-6636 to arrange an appointment.
Similarly, California law places a fiduciary duty on each spouse to act in the best interest of the other spouse. California Family Code § 721 explains that spouses have “a duty of the highest good faith and fair dealing” with each other and that “neither shall take any unfair advantage of the other.” This fiduciary duty includes three core components: (1) allowing access to records of financial transactions; (2) providing accurate and complete information about community property transactions; and (3) treating benefits and profits from certain community property transactions fairly and accounting to the other spouse for them.
In addition, California law provides a duty of full disclosure regarding all community assets. The duty applies during the period of marriage and after the parties separate, until the item is divided by the court or the parties. Indeed, the California laws regarding divorce provide a formal method by which the assets and liabilities of each party are disclosed to the other.
What happens if one spouse does not perform his or her fiduciary duties? The failure to perform these duties is a called a “breach,” and the law sets forth what happens when there is a breach. The consequence that is imposed depends upon the seriousness of the breach and the view of the family court.
Examples of ways that parties may breach their fiduciary duties include hiding assets or transferring assets to try to deprive the other spouse of any interest in them. The law provides several remedies, or consequences, for a breach of spousal fiduciary duties, including the following:
- A court-ordered accounting and determination of rights of ownership;
- The placement of the name of a party on the title of an asset;
- An award of either 50% of an undisclosed or transferred asset or of an amount of money to compensate the injured party for the loss of interest in that asset; and
- Attorney’s fees and court costs.
Breach of the spousal fiduciary duty is serious wrongdoing. If you are concerned that your spouse may be attempting to hide or minimize assets, you need an aggressive lawyer who will fight on your behalf. The attorneys at the Law Offices of Judy L. Burger have extensive experience in contested divorce and property proceedings. Call today to learn how our attorneys can protect your property interests as you go through this difficult time: (415) 293-8314.
The family residence is often the largest asset owned by the parties to a divorce, so the financial interest is often significant. In addition, there can be a sentimental attachment to the home. For these reasons, dividing the parties’ interest in the family home can be easier said than done. The first task is to decide who actually owns the house. You can learn more about determining basic ownership interests here.
It is not always easy to apply property law when dividing the family residence. For instance, what happens if the down payment was made with separate property funds? What if both parties contributed to pay down the mortgage while they were married, but the home is titled in just one name?
When there is a community property interest in the residence, there are three basic ways it can be divided: (1) sell the property outright and apply the profits toward the couple’s community property estate, to be divided; (2) one spouse buys out the other’s interest, assuming the purchasing spouse has adequate funds or credit to do so; and (3) deferred sale.
The first two of these options are fairly straightforward. However, a “deferred sale of home order”, also known as a “Duke” order (named after a significant case on the issue), requires some explanation. Deferred sales are usually considered when the parties have minor children and want the children to be able to stay in the family home until a later date. A custodial parent, in these situations, is given exclusive use and possession of the home on a temporary basis so that the kids can stay there.
In determining whether to allow a deferred sale, the family court must first consider whether it is economically feasible to do so. The court must balance the relative hardship of the parent and children staying in the home with the hardship placed upon the parent no longer living there. The law requires that certain factors be considered in making these determinations. It also requires that the deferred sale of home order contain an end date, such as the date the youngest minor child attains the age of majority or graduates from high school.
In addition to the disposition of the home, the family court will have to determine whether one party must reimburse the other for “contributions for the acquisition of property”. These reimbursements may be required if one party made the down payment on the family residence out of separate funds. They may also be required if separate funds are used to pay down the principal on the home.
As you can see, many factors impact how the family residence is handled in a divorce. How these issues are presented can significantly affect your outcome. Judy Burger is experienced in complex property division matters and how to present those in family court. Please contact her today at (415) 259-6636.