What is Community Property?
In California and other community property states, all assets and debts acquired during the marriage are considered community property that is jointly owned by both spouses.
This is true regardless of whose name is on the title or account.
The law presumes that anything obtained during the marriage was obtained as a result of the efforts of both spouses, even if only one spouse earned the wages.
Community Property State
A community property state is one that recognizes community property laws. There are currently 9 community property states, including California, Texas, Washington, Arizona, Idaho, Louisiana, Nevada, New Mexico, and Wisconsin. Alaska has an opt-in community property system.
In these states, most property acquired during a marriage is considered co-owned community property that is divided equally between spouses if they divorce. Community property laws impact everything from management rights to tax liability.
Understanding community vs. separate property distinctions is crucial in these states, especially when couples divorce.
Community property includes:
- Income earned by either spouse during the marriage
- Assets purchased with community income
- Gifts and inheritances received by either spouse during the marriage
- Pensions, 401(k)s, IRAs funded with community funds
- Real estate and other property purchased with community funds during the marriage
All property is divided equally between the spouses in the event of divorce according to community property laws. This is true even if one spouse was not employed outside the home or earned significantly less income than the other spouse.
What is Separate Property?
Separate property consists of any assets acquired by one spouse prior to the marriage or received as a gift or inheritance during the marriage.
It also includes assets acquired after separation. This property remains the property of the acquiring spouse and is not divided in California divorce.
- Assets owned before marriage
- Gifts and inheritances received during marriage (as long as they have been kept separate)
- Assets acquired after legal separation
- Settlement proceeds for injuries/pain and suffering to one spouse during marriage
- Property excluded from community property by written agreement (prenuptial agreement)
All separate property is awarded to the acquiring spouse upon divorce.
Tracing Separate Property
Identifying whether assets are community or separate property is not always straightforward. Spouses may come with separate and community funds.
When this happens, tracing is used to determine the character of the funds.
For example, if a spouse has a bank account with $10,000 of separate property funds before marriage and then deposits $5,000 of community property funds during marriage, tracing looks at withdrawals to determine whether funds are still separate property or became community property.
This process continues throughout the marriage to trace whether disputed assets were originally separate or community funds.
Gifts and inheritances that have been commingled with community property lose their status as separate property.
However, the spouse can retain a separate property interest in the portion that originated from their separate property.
Division of Community Property
California is a community property area, which means that almost all property acquired during a marriage is considered marital property that is subject to an equitable (fair) division if the couple divorces.
With some exceptions, each spouse owns an undivided one-half interest in all community property.
In a California divorce, the family court divides community assets and debts as evenly as possible. It doesn’t matter which spouse is named on the title or account.
The court has broad discretion to make any orders regarding property that are necessary to ensure the division is equal.
Debts incurred by either spouse during marriage are generally treated the same as community property assets.
Both spouses are liable for the debt, even if only one of their names is on the account. As with assets, community debts are divided equally.
Marital property is another term for community property in California. It refers to any asset or debt acquired during the marriage, which makes it community property belonging jointly to both spouses.
Marital property and community property are interchangeable terms.
Some other key things to know about marital assets in California:
- Income earned from all sources during marriage is marital property, even if deposited in separate accounts. This includes wages, investment income, bonuses, etc.
- Gifts and inheritances received during the marriage are generally marital property. To retain separated property status, they must be kept completely segregated.
- Property purchased together during the marriage is marital property regardless of how the title is held. Houses, cars, and other assets bought by both spouses are divided in California divorce.
- Appreciation of assets during marriage is a marital asset. For example, if a spouse buys a home before marriage and appreciates $100,000 during the marriage, that appreciation is a marital asset to be divided.
- Retirement accounts like 401(k)s and pensions contributed to during marriage are marital property. The increase in value during marriage is divided into divorce.
- Businesses started during the marriage are marital assets, even if they are under one spouse’s name. Appreciation and goodwill are divisible in California divorce.
- Debt incurred during marriage is generally marital debt. Things like mortgages, credit cards, car loans, and personal loans must be divided evenly in most cases.
- Student loans are marital debt if used for living expenses, not just tuition. Courts can order the spouse who did not incur the loan to pay part of it.
The main idea is that anything financially gained during marriage is marital property in California. This broad definition results in an expansive division of assets and debts in community property states.
Understanding the meaning of marital property is key to dividing it equitably at divorce.
Common Community Property Assets Divided in Divorce
Some of the most common types of marital assets divided in California divorce include:
- Bank Accounts – Checking, savings, and money market accounts opened during the marriage are community property regardless of whose name is listed.
- Investment Accounts and Stocks – Brokerage accounts, mutual funds, and stock options acquired during marriage are community property.
- Retirement Accounts – Pension plans, 401(k) accounts, and IRAs into which community funds were deposited are community property. The court must make a fair division of the present value.
- Real Estate – Houses, rental properties, and vacation homes purchased during the marriage are community assets. Equity is divided equally.
- Vehicles – Cars, trucks, and motorcycles bought during the marriage are community property. Loans are also divided.
- Businesses – Corporations, partnerships, and sole proprietorships started during the marriage are community property even if they are only in one spouse’s name. They will be divided between the spouses.
- Personal Property – Furniture, jewelry, art, and other personal items acquired during marriage are community assets. The court will often order these items divided fairly.
Treatment of Debt in Divorce
In addition to dividing assets, the court must also divide debts taken on during the marriage. All community debts are equally divided in divorce, even if the debt is only in one spouse’s name.
Some common types of debt treated as community debt and split during divorce include:
- Credit card balances
- Personal loans
- Medical bills
- Tax debts
However, the court has discretion to assign certain debts specifically to one spouse.
For example, if one spouse wasted community assets or mismanaged finances during the marriage, the court may order that spouse to take on more debt as part of the division.
Student loans are generally treated as the separate debt of the spouse who incurred the loan, even if community funds were used to repay the loans during marriage.
Exceptions to Equal Division
While the default in California is an equal division of marital property, the family court does have discretion to order an unequal division in certain cases, including:
- Where one spouse misappropriated community property or breached fiduciary duties
- Where one spouse deliberately mismanaged community property to hide or deplete it
- To offset one spouse’s excessive gifting of community property
Unequal division is not common but may occur in cases involving financial malfeasance or reckless waste of community assets by one spouse.
The court may award the other spouse more than 50% of assets to make up for losses.
Modifying Community Property Division
After a final judgment dividing community property has been entered, it is very difficult to undo or modify the order. It requires proof of specific circumstances, such as:
- Failure to disclose assets or debts during divorce
Minor errors or omissions usually cannot reopen property division after a divorce is finalized.
The only option may be to file a lawsuit claiming fraud or intentional deceit by the ex-spouse regarding financial disclosures made during the divorce.
This highlights the importance of full financial disclosure and frequently updating property documents during a divorce. Failing to account for all assets and debts often cannot be corrected after the case closes.
Hiding or Wasting Community Assets
California law prohibits spouses from hiding, depleting, or wasting community property before a divorce is finalized.
This is known as financial malfeasance or breach of fiduciary duty. Courts will sanction spouses who engage in this type of fraud or deception.
Some examples of prohibited activity regarding community property include:
Transferring money to secret accounts spouse is unaware of
Spending large sums on extramarital affairs
Gambling away community savings or assets
Allowing community property real estate to go into foreclosure
Destroying community personal assets
Courts can award 100% of an asset to the other spouse if financial malfeasance is proven. Criminal charges may also be pursued for the most egregious cases.
Using Community Funds to Purchase Separate Property
Confusion sometimes arises when community funds are used to pay for separate property during the marriage.
For example, community income might be used to pay the mortgage on a home one spouse owned prior to marriage.
California law states that the community retains an interest in the amount spent on separate property. This reimbursable interest is repaid to the community estate at the time of divorce.
So if $50,000 of community funds are spent on one spouse’s separate property home, the community retains a $50,000 interest in the home.
This must be repaid before the home can become the separating spouse’s separated property.
Community Property Agreement
Spouses can enter into a community property agreement that re-characterizes assets as community property instead of separate property.
All income, assets, and debts acquired over the course of the marriage will be deemed communital property that is divided equally in divorce.
This type of agreement should be signed before or during the marriage, not in contemplation of divorce. Courts scrutinize post-separation agreements regarding property.
A premarital or marital contract generally waives each spouse’s right to equitable division at divorce.
Impact of Prenuptial Agreements
A prenuptial agreement allows engaged couples to define separate and property differently than under California law.
The agreement can designate all income and assets as separate property and waive community property rights.
Prenuptial agreements must meet certain requirements to be enforceable:
In writing, signed by both parties
Entered into voluntarily without duress or coercion
Complies with financial disclosure rules so both parties know the assets involved
Prenups that are unfairly one-sided or inaccurate may be challenged in court. However valid premarital agreements can override community property law when spouses divorce.
The Divorce Process and Community Property
Dividing community property is a key part of the divorce process. Here are some steps:
File petition – Identify the date of separation to determine separate vs. community property division
Discovery – Mandatory financial disclosures, and document exchanges to trace the origins of assets and debts
Appraisals – Real estate, businesses, and property are appraised to determine values
Litigation – If disputes on character or valuation of assets, hearings may be needed
Settlement negotiations – Most cases settle, using mediation if needed to resolve community property dividing
Judgments – The court enters orders on the division of assets, and debts, and may order spousal/child support
Ongoing disclosure during the process is vital. Nondisclosure of assets or hidden squandering of community property can result in harsh penalties.
Community Property Interests
Each spouse has current, existing interest in 50% of community assets and debts. Not contingent on divorce.
Interest applies regardless of how the property is titled. Community property remains such even if put in one spouse’s name.
The right to an equal division of community property at divorce is vested immediately upon acquisition during the marriage.
Can only transmute community property into separated property by written agreement other action unilaterally changes interests.
Creditors can seize community property to satisfy debts incurred by either spouse during marriage.
Understanding each spouse’s present community property interests is key. This impacts management rights, creditor claims, and divisible assets at divorce.
Seeking Legal Advice
Dividing property and debts equitably at divorce can be complex, especially with substantial assets involved.
Consulting an experienced California divorce attorney is highly recommended to protect your rights and ensure all community assets and debts are disclosed.
An attorney can advise what property will be deemed separate vs. community and how assets and debts should be divided under state law.
For high-net-worth divorces, forensic accountants are often retained to value assets and track community vs. separate property.
With proper representation and full financial transparency, communal property division can be resolved fairly so both spouses retain their rightful share of assets acquired during the marriage as they start new chapters in life.
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