California is commonly referred to as a community property state. This is often misunderstood to mean two things.
First, that upon marriage all of a bride and groom’s property becomes community property (not true). Second, that all property, regardless of when and/or how it was acquired, is divided equally in divorce (not true).
What it really means to be a community property state is that, if and when a couple divorces in California, California’s community property laws are used to determine how the couple’s assets and debts will be divided.
Under California’s community property laws, if you and your spouse do not have an agreement providing otherwise, property acquired during marriage is presumed to be community property.
The community property presumption, that property acquired during marriage and before the date of separation is community property and must be equally divided by the spouses, may be overcome by evidence that proves:
- The property acquired during marriage was a gift, bequest or inheritance made by a third person for the exclusive benefit of you or your spouse
- The original source of the property acquired during marriage was a separate property asset and the property was never transmuted (transformed) into community property
- You and/or your spouse took some action that changed the character of the property
If a spouse believes an asset is his/her separate property, not community, he/she has the burden of overcoming the presumption (proving the property is separate despite the fact that it was acquired during marriage).
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, if your spouse proves that the account was opened before marriage and the funds were never commingled or transformed into community property, the $10,000 deposit will be confirmed as his or her separate property. If you disagree and demand proof, your spouse can produce bank account statements that trace the accounts history during and immediately prior to marriage. 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.
(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 sales proceeds from the first home you purchased together plus the inheritance you received from your father, were then combined and used to purchase your second home, title to which was also held as “husband and wife.” If in the divorce your spouse proves that his initial $10,000 was separate property and he/she traces the funds into the purchase of your first and second homes, the $10,000 will be considered his/her separate property and reimbursable to him/her during the divorce. Your spouse can prove this with bank statements that trace the funds.
Commingling community property
Husbands and wives usually commingle their community and separate property assets during marriage. In California, the mere mixing of separate and community assets does not necessarily change the character of the property. As long as each asset remains identifiable, the property will remain either separate or community. However, if it is impossible to trace the source property, the commingled assets will be treated as community property.
Transmuting community property
In California a transmutation is an interspousal transfer (between spouses) or an agreement that changes the character of property. Property may be transmutated from community property into separate property, from separate property into community property and from one spouse’s separate property into the other spouse’s separate property.
A transmutation of valuable assets must be made writing and the writing must include an express declaration of the spouse whose interest is being transmuted. The declaration must prove the spouse’s intention was to transmute or change the character of the property. And, even if a properly worded written declaration is produced during divorce, a presumption of undue influence arises and the benefitted spouse must overcome it. In other words, if you transferred $1,000,000 of separate property to your spouse during marriage and you signed a document stating that it was your intent to transmute the property, your spouse will nonetheless be presumed to have unduly influenced you in order to get you to transfer the funds to him/her and he/she must prove that that was not the case. (Fraudulent transfer laws apply and the 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 handled and divided
If you go to trial and ask a Judge to resolve the property issues in your divorce, the Judge is required by California law to divide all of the community property equally.
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 husband and wife each receive exactly one-half of the community property estate..
If you and your spouse participate in divorce mediation and negotiate a settlement, you do not need to determine whether or not assets are community or separate. You also do not need to divide community property equally and can instead divide or allocate your community property assets in any way you choose.
If you would like to determine whether property is community or separate 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 provides a broad overview of community property laws and is not exhaustive. It also is not legal or financial advice. Please contact a lawyer, accountant and/or financial professional in your state to discuss the specifics or your case and applicable laws.