California is commonly referred to as a community property state. This doesn’t mean that any property owned before marriage magically becomes community upon marriage. Nor does it necessarily mean that all property acquired during marriage is divided equally.
It means that, in the absence of an agreement providing otherwise, income, expenses, assets and debts acquired during marriage are presumptively community property while those acquired before marriage, after separation or by gift or inheritance during marriage are presumed to be separate property.
In order to determine if your income, expenses, assets or debts are community or separate property, you must ask and answer the following questions:
- Was the property acquired during marriage and before separation?
- What was the source of the property (i.e. salary earned during marriage)?
- Did you and/your spouse or partner take any action that changed the character of the property (e.g. pre or post nuptial agreement or property deed)?
- Are there any legal presumptions that affect the characterization of the property?
If a couple acquires property during marriage but before they are domiciled in California, the property, even if located in a separate property or equitable distribution state, is presumptively quasi-community property. Upon divorce in California, quasi-community property is treated like community property.
Overcoming the community property presumption
The presumption that property acquired during marriage by a married person is community property may be overcome upon a showing that the asset, even though purchased or received during marriage, is separate property.
A spouse may overcome the presumption by proving the asset in question was a gift, bequest or inheritance made by a third person for the exclusive benefit of one spouse (not both); the rents, profits, income, sales proceeds, dividends or interest received during marriage were generated by an asset acquired before marriage; or the asset was purchased using the rents, profits, income, sales dividends or interest received during marriage but generated by a separate property asset.
If a spouse believes that an asset is separate property, he or she has the burden of proving that it is. In some cases, the burden may be met easily and in others, great effort and cost may be expended.
Examples of overcoming the community property presumption in California:
(1) Before marriage your spouse opened a bank account with a $10,000 deposit. The account remained open but untouched during your ten-year marriage. In the divorce, dissolution of a domestic partnership or legal separation process your spouse proves that the account is his or her separate property by producing bank account statements that trace the assets history. If the bank account statements clearly show that the funds on deposit in your spouse’s account were never commingled with, or transmuted into community funds, (described below) your spouse’s bank account will be characterized as his or her separate property and not subject to division in the divorce, except under special circumstances.
(2) Before marriage your spouse opened a bank account with a $10,000 deposit. During marriage your spouse closed his account and used the funds as the down payment for your first home, title to which was held as “husband and wife. Also during marriage, you and your spouse used your wages to pay down the mortgage on your first home, which was eventually sold. The house sales proceeds, plus the inheritance you received exclusively from your father, were combined and used to purchase your second home, title to which was also held as “husband and wife.” In a California divorce your spouse can prove that his initial $10,000 was his separate property and must be reimbursed to him during the divorce. Your spouse can prove this by tracing the $10,000 from his or her original bank into the first house and then into the second house without being spent, commingled or transmuted (described below). (This process is called a “tracing”. It can be a very complicated process and can require a forensic accountant to do an in-depth and extensive analysis of the movement of funds through various bank accounts and assets during the marriage. Because it can be a very expensive process, the hypothetical tracing of your spouse’s $10,000 may not be worthwhile because the costs could outweigh the benefits.)
Commingling community property
Husbands and wives commonly commingle their community and separate property assets during marriage. They do this by depositing both community and separate property funds into a single joint account and/or by making purchases, transferring money, reinvesting and even borrowing funds from third party sources.
In California the mere mixing of separate and community assets does not change the character of the property from separate to community and vice versa. However, in order to prove that property is a spouse’s separate property, the spouse making the separate property claim must trace the property to the original separate property source. If a spouse cannot produce a tracing his or her separate property claim will be denied and the asset treated as community or the separate property of the other spouse (if sufficiently traced).
Transmuting community property
In California a transmutation is an interspousal transfer (between spouses) or an agreement that changes the character of property. There are three general transmutations that may occur in marriage: (1) the transmutation of community property into the separate property of one spouse; (2) the transmutation of one spouse’s separate property into community property; and (3) the transmutation of one spouse’s separate property into the separate property of the other spouse.
In California very valuable assets are not transmuted unless the transmutation is in writing and includes an express declaration by the spouse whose interest is being transmuted, that he or she intentionally made, consented to, or accepted the change in characterization of the asset. (Transmutations in California that occurred prior to January 1, 1985 are governed by the law that was otherwise applicable.)
The law of transmutation generally does not apply to commingled assets or assets of minimal value, such as clothing or other gifts intended for and used solely by one spouse (e.g. your husband’s fishing rod or your women’s snow shoes). Transmutations are also usually subject to fraudulent transfer laws, which means that courts will scrutinize the facts and circumstances leading to the transmutation to ensure it was not the result of fraudulent activity.
How is community property actually divided
If community property can be easily and actually divided, a Judge will order the equal division of each and every divisible asset.
If it is practically impossible to equally divide community property, a Judge usually will order the asset sold and the net sales proceeds equally divided by the spouses or partners. If there isn’t a market for the property, a Judge may award to each spouse or partner, community property of substantially equal value. In the event this is impossible and the community property leaves one spouse with property worth more or less than the other, an equalizing payment must be made to the spouse or partner receiving the property of lesser value.
Examples of community property division:
(1) Husband and wife are each awarded one-half of the couple’s bank accounts, retirement accounts and net house sales proceeds, or
(2) Husband is awarded bank account number 001, his car and his 401k account and wife is awarded bank account number 002, her car and her IRA, or
(3) Husband is awarded the couple’s condominium, his car and his 401k account and wife is awarded the couple’s beach house, her car and her IRA. The parties’ car, husband’s 401k account and wife’s IRA are all of equal value, however the beach house is worth $20,000 more than the couple’s condominium. Because the beach house is worth $20,000 more than the condominium, wife will pay husband $10,000, or one-half of the $20,000 difference in the value of the properties, to equalize the division of property and ensure that husband and wife each receive exactly one-half of the community property estate.
Community property waivers
Generally, a spouse may waive his or her right to community property in a pre or post-nuptial agreement provided the agreement satisfies all applicable laws. A pre or post-nuptial waiver of community property may be reversed during marriage or at the time of divorce, if spouses mutually agree.
If you would like to determine whether property is community or property or how the property might be divided in a California divorce, legal separation or dissolution of a domestic partnership, click here to schedule a consultation and case assessment with me in person or over the telephone.
This article is not legal or financial advice. You should contact a lawyer, accountant and/or financial professional in your state to discuss the specifics or your case and applicable laws.
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