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Helping You Understand The Division Of Property And Complex Assets

Asset and debt division are easily the most complicated processes in a divorce. When you have questions that need accurate answers, you will find them at Nelson Kirkman. Having served Orange County in family law since 1998, our divorce attorneys can give you the information that you need.

Do all divorces involving complex assets end up in court?

Absolutely not. Frequently, divorces involving complex assets and other issues are resolved amiably by divorcing parties without the need for a trial or even significant involvement of a judge. Although a trial or court appearances may not be necessary, every divorce involving complex assets benefits greatly from the involvement of an excellent divorce lawyer and a team of experts.

What is the difference between separate property and community property?

According to California law, separate property includes assets that were owned by a party before the marriage, were bought or otherwise acquired after separation, or were received during the marriage as a gift or inheritance, according to the California Family Code. Payments, such as rents and dividends generated by separate property assets, are also considered separate property. Community property includes assets that were acquired from the date of the marriage until separation.

How important are tax considerations during a divorce?

It is of vital importance to have potential tax issues in mind throughout the divorce process and to seek the advice of an expert in the Internal Revenue Code (IRC). Tax issues associated with community property assets may dramatically impact the value of the assets and also affect their desirability to the divorcing party. Additionally, failure to strictly follow the IRC regarding these assets can result in files and penalties. Taxes play a role in most divorces in California.

Do embedded taxes, including capital gains taxes, get deducted from the value of an asset in community property?

Most of the time embedded taxes, such as capital gains taxes, will not be deducted from the value of an asset. Deductions of value due to taxes are limited to cases in which the taxes will immediately become due at the time of divorce or shortly afterward, not when taxes will be an issue in the future if an asset is sold. There are some exceptions to this guidance, such as stock options, which hold no value until they are exercised. Also, community ownership of a business typically results in negotiations over how business taxes could impact the value of the business.

What factors are considered in valuing retirement plans?

Divorce courts in California consider a wide range of factors in valuing retirement plans. This list includes the most common factors, but others also might be considered:

  • Type of retirement plan
  • Contractual terms of the plan
  • Contribution amount during the marriage
  • Increase in value during the marriage
  • Age of the employee
  • Earliest possible retirement date
  • Number of years employed before and during the marriage
  • Survivorship option

The divorce court typically will divide assets in retirement plans into separate or community property based on when the value of the plan was earned. For example, if a party was employed with a 401(k), they contributed to for 10 years before the marriage, a portion of that 401(k)’s value will be separate property, while another portion of the plan will be community property if the party continued to contribute to the plan after getting married. This subject often results in complications in dividing community property assets.

How do family law courts treat stock options?

Stock options that were either granted during the marriage, or become partially vested during the marriage, may be treated by the court as at least partially community property in California. This is based on the idea that earnings during the marriage are community property and stock options or similar assets are typically granted as part of a compensation package. The division of options between separate and community property will vary based on the methodology used by the court.

How do family law courts treat the increase in value of real estate assets?

Increases in the equity of real estate and other real property assets are generally attributed to community property or separate property based on whether the real estate itself is community or separate property. There are several factors analyzed as part of this determination:

  • Date of purchase
  • Source of funds used to acquire and maintain the property
  • Changes made to the property’s title.
  • If a loan has been refinanced
  • Increase in value

Can a separate property home become partially community property?

Yes, a residence owned as separate property by one spouse can become partially community property if certain criteria are met. If community funds are used to make principal payments against a home mortgage for property owned by one spouse, the community may gain interest in the property (IRMO Moore and IRMO Marsden). Importantly, loan payments made on an interest-only loan are not treated the same way. If community funds are used to improve a separate property home, there may be a community interest as well.

Does adding a spouse’s name to the title of a separate property home give them half the equity in the home?

No, adding a spouse’s name to the title of a home does not give them half the equity in the home at the time added. The existing equity in the home at the time the spouse is added is considered to be separate property unless a waiver of Family Code Section 2640 is made at the time of the change. Any increase in equity made after that date would be community property. For example, if a party adds their spouse to the title of a separate property home with equity of $1 million, which then grows during the marriage to $1.5 million, the first $1 million in equity is considered to be separate property.

What if one party uses their own separate funds to make the down payment on a home titled to both spouses?

If one party used their own separate funds to either make a down payment on a jointly titled home or pay down the existing loan on a jointly titled home, they may be reimbursed for this amount in certain circumstances. Specifically, the party must be able to prove the funds used were truly separate property by demonstrating through bank records or other documents where the funds came from.

What if the purchase of a jointly owned home can be traced to the refinance of a home that originally was separately owned?

If a jointly owned home was purchased using funds from the refinance of a home that originally was separately owned by one spouse, that spouse may be eligible for reimbursement for the amount that can be traced to equity that existed on the date the separate property became jointly titled (IRMO Walrath).

For example, if a party owned a separate property home with equity of $4 million, which was then jointly titled with their spouse and refinanced for the purpose of buying another home, that party may be eligible to be reimbursed for the portion of the equity used to purchase the second home after the refinance.

What is tracing used for?

Tracing is used to track separate funds used to purchase assets titled jointly and to split apart bank and brokerage accounts that have been mingled together.

How many types of tracing are there?

There are two primary types of tracing. The first is the direct tracing method, sometimes called mechanical tracing, and the second is the family expense method, sometimes called recapitulation. Tracing can become expensive, and it is very difficult to predict its success with any certainty until it has been completed. Sometimes a court will allow tracing using a different methodology, but it must not violate any family law principles or rely on speculation.

How does direct tracing work?

Direct tracing is the preferred method of tracing separate funds that have been mingled with community funds or assets. In direct tracing, transactions are analyzed on a line-by-line basis to forensically reconstruct the movement of funds between separate and community accounts. Direct tracing can lead to a large number of transactions to analyze, especially if money is moved between several accounts before a purchase is made. For example, if a party is seeking reimbursement for separate property assets that were used to make a $100,000 down payment on a jointly titled property, direct tracing could be used to track the transactions of the $100,000 from a separate party bank account to a community property bank account and ultimately to an escrow account for the purchase. The transactions and account balances would have to hold up to the scrutiny of direct tracing throughout each transaction for the party to be reimbursed.

How does family expense tracing work?

Family expense tracing is used when direct tracing is impossible due to a lack of records and relevant information and this information breakdown is not the fault of the party seeking reimbursement. Family expense tracing attempts to show that an asset purchase must have been made with separate property because community funds did not exist at the time to afford the purchase. Family expense tracing may show, for example, that the asset purchase exceeded the community income at the time of acquisition. When comingled accounts (including both separate and community funds) are used to pay community expenses, the community funds are used first before separate funds, according to a rule called the “community expense presumption.”

When is tracing useful?

Tracing is useful to determine reimbursements from or to community property related to separate property.

Is a divorce trial similar to other types of trials?

A divorce trial is like other types of trials with several notable exceptions. First, unlike many criminal and civil trials, there is no jury for a divorce trial. Secondly, divorce trials can become quite complex because the court follows both the Evidence Code and the Code of Civil Procedure. Divorce trials are frequently lost because attorneys do not have a clear understanding of both the Evidence Code and the Code of Civil Procedure.

Does a divorcing party need to fully inform the other party about their assets and debts?

Yes, spouses owe a fiduciary duty to fully inform each other about all assets and debts, both community and separate, similar in some respect to business partners. The court may rule strongly against divorcing parties that violate this fiduciary duty, including penalties. A divorcing party should be ready to voluntarily make a complete disclosure of all assets and debts in a good faith effort to comply with their fiduciary duty to their spouse until the divorce has been finalized. The rules and requirements can be found in Sections 721(b), 1100(e), and 2100(e) of the California Family Code.

How is a business valued as part of a divorce?

Typically, valuation experts are brought in to value a business owned by the divorcing parties. It is extremely important to build a team of experts to properly represent a client’s interests when a divorce involves a business. A valuation expert is a key part of the team working to reach the best settlement. Divorce courts frequently order valuation experts to meet before a trial begins to iron out the differences in valuation between the two parties.

How is goodwill valued as part of a divorce?

Separate key factors are considered when valuing goodwill. They include the total compensation of the operator-owner, the reasonable compensation for their position, the rate of return on tangible assets like business equipment, and the application of a multiplier/capitalization rate.

Will courts sometimes credit or reimburse community property with a portion of a party’s separate property?

Yes, divorce courts will sometimes reimburse community property from one party’s separate property, or credit community property if certain criteria are met. The commingling of community and separate property often creates gray areas; when that happens, the court typically favors community property. While there may be presumptions made about assets being community property, such presumptions can be countered with evidence of separate property ownership. Ultimately, the court may find that community property should be reimbursed a portion of the increase in value of such assets as investments and businesses.

What are common types of commingling?

Separate and community property are frequently commingled in a variety of circumstances. Common examples include separate property assets used to purchase jointly titled assets such as real estate, the use of separate party funds to make mortgage payments on a community property home, and the use of separate party funds to improve a community asset, such as a home remodel.

Is separate property commingled with community property treated as a gift to the community?

No, separate property commingled with community property is not treated as a gift to community property. If tracing can prove assets or funds originated in separate property, then the party will be reimbursed for that amount. If tracing cannot prove it was separate property, it becomes community property.

Who must prove an asset is separate property?

The burden is on the party that is claiming an asset is separate property and their lawyer to prove that the asset does, in fact, belong to them and not the community. The party must have the records necessary to make tracing possible.

What are the laws and presumptions that tracing must overcome?

Legally, assets purchased or otherwise acquired during the marriage are considered to be community property. It is presumed that when separate property and community property assets or funds are commingled in a particular account to pay community expenses, it is the community funds that are withdrawn to pay those expenses, not the separate property funds.

When should tracing be utilized?

Tracing should begin as early as possible in the process of divorce. Tracing relies on financial records, and if those records must be subpoenaed from financial institutions, it may take months before tracing can even begin. The tracing process itself often takes multiple months to complete.

Speak With A Lawyer About Assets And Property

These are merely a few of the things you are probably wondering about your divorce. When you contact the Newport Beach office of Nelson Kirkman, you can set up a consultation with a knowledgeable lawyer for more information. Call us at 949-430-6952 or send us an email to make your consultation.