The attorneys at Madigan & Lewis, LLP have decades of experience dividing assets in complex divorce cases. In this article, we will provide a simplified overview of the characterization, valuation, and division of assets to help guide you as you contemplate separation or divorce.
California is a no-fault, community property state.
With some limited exceptions, assets acquired by a spouse during marriage, except by gift or inheritance, are presumed to be community property and usually divided equally by agreement of the parties or by a family law judge following a trial. Community property includes the earnings of each spouse during marriage and assets acquired with those earnings.1
When you are separating or getting a divorce, one of the biggest issues you will need to resolve is the division of assets and debts. Married people are not required to split their assets equally. They have the ability to negotiate and agree upon an unequal division of assets, if they both think it is fair. In some cases, married people may have previously agreed to and signed a prenuptial or postnuptial agreement governing the division of assets and debts upon divorce.2 Even if you are able to work out a property settlement agreement with your spouse, it is important to consult with a qualified family law attorney and understand the basic legal rules of property division as those rules will inform your negotiation.
When analyzing a property division issue, the first question we look at is whether the asset in question is divisible.
Not all assets are divisible. For example, in a notable case involving John McTiernan and Donna Dubrow, a Hollywood married couple, the appellate court agreed with John that Donna was not entitled to half of his enlarged earning capacity on account of his elite reputation as a movie director.3
Second, we must identify your date of marriage and date of separation. The date of separation can be a big issue in some cases if spouses do not agree on the date and it has a material impact on the asset division. For some people, the date of separation is the date on which they moved out of the family home, which is easy to determine. For others, it is the date on which they informed their spouse (by words or actions) that the marriage was over and acted consistently with that intent. Any subsequent periods of marriage counseling or reconciliation can muddy the waters and increase the likelihood of litigation regarding the date of separation.4
Third, we characterize the asset by looking at the date on which the asset was acquired – before the date of marriage, during the marriage or after the date of separation. Again, assets acquired by either spouse during marriage are presumed to be community property unless they were acquired by gift or inheritance. Generally, separate property is any of the following:
- Property acquired by a spouse before the date of marriage;
- Property acquired by a spouse after the date of separation;
- Anything purchased by a spouse with separate property money or earned from a spouse’s separate property (e.g., rent from an investment property acquired by a spouse before marriage); and,
- Gifts or inheritances.
If you do own separate property, it belongs only to you, provided you did not give it to your spouse, change the asset’s title, or transmute the asset.5
Fourth, we must value the asset. In some cases, it may be necessary for our office to retain the services of a qualified appraiser or forensic accountant to value the asset. It is not uncommon for two spouses to disagree on the value of a valuable asset and argue over the valuation date or competing valuation reports. In appropriate cases, we can avoid costly disputes by appointing a neutral or joint valuation expert.
Finally, as long as the resulting division is equal, the trial court is vested with broad discretion in dividing community property to ensure that an equitable division is reached. It should be noted that courts will often use more than one method in dividing assets (e.g., divide some assets in kind and award others by the asset distribution method).6
You should also be mindful of the potential tax consequences associated with the division of assets.
Most property transfers that occur as part of a divorce settlement are tax-free.7 However, not all assets are created equal; some may have hidden tax consequences.8 For instance, you may elect to keep and sell certain stocks that have gone up in value since they were purchased, resulting in capital gains taxes. Similarly, it is important to work with a Certified Divorce Financial Analyst (CDFA), Certified Public Accountant (CPA) or other qualified professional before deciding to buy out your spouse’s interest in the family residence so that you can evaluate whether it is a good financial investment for you to make. The spouse who decides to keep the family residence in the divorce and sells it in the future will be solely responsible for the costs of sale and any capital gains tax liability. These tax consequences are sometimes overlooked.
Examples of marital property and debts that may be divided during your divorce include the following:
- Closely-held businesses and business interests
- Real estate, including family homes, vacation homes, and commercial real estate
- Bank and investment accounts
- Stock in privately-held companies or public companies
- Retirement accounts, including 401(k)s, pensions, and IRA’s
- Equity compensation, including restricted stock units (RSU’s), performance stock units (PSU’s), and stock options.
- Private equity interests
- Carried interest and management fees
- Cryptocurrencies and tokens
- Vehicles, boats, and yachts
- Club memberships
- Home furnishings
- Intellectual property
- Life insurance policies
- Credit card debts
- Secured loans and unsecured loans
For more information, reach out to Madigan & Lewis, LLP, experienced Silicon Valley divorce lawyers who can discuss your situation with you and help you decide the best path forward.
1It is a common misconception for clients to believe that if they deposit their community property earnings into a separate bank account titled in their sole name that the money belongs to them.
2The validity of the prenuptial or postnuptial agreement may become a contested issue in your divorce case. Accordingly, any prior agreements will be reviewed closely by your family law attorney.
3Marriage of McTiernan & Dubrow (2005) 133 Cal.App.4th 1090.
4See section 70 of the California Family Code.
5Transmutations are governed by California Family Code section 852 and outside the scope of this article. In short, any agreements between spouses to change the character of an asset must be in writing and clearly state the intention of the spouses.
6Practice Under the Cal. Family Code (Cont. Ed. Bar 2022) Property, § 5.85, p. 190, citing Marriage of Cream (1993) 13 Cal.App.4th 81, 89.
7See section 1041 of the Internal Revenue Code.
8Woodhouse and Guillen, Divorce & Money (13th ed. 2020) pp. 33-34.