Attorneys at Law
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Hyden Zakheim, LLP
Providing effective representation locally, since 1991.
Community Property & Asset & Debt Division
Community Property: To discuss asset and debt division, we should first clarify the concept of community property. The first and main point is that “community property” does not relate to how an asset or debt is “titled” but rather the character of such asset or debt. In other words, an asset may be titled in only the name of one spouse (such as a retirement plan or a bank account with only one owner) yet still be a community property asset for family law purposes. Simply put, all property (or debts) accumulated by a husband and wife during their marriage become community property even if originally acquired in the name of only one spouse. The basic idea is that a husband and wife each gain a one-half interest in anything they earn or acquire during the marriage. The main determining factor in the classification of a particular asset as community property is the time of acquisition: community property is generally defined as everything the couple owns that is acquired during the marriage with the exception of separate property owned by either of them individually. Separate property is that property which each spouse brings into the marriage, in addition to anything that either spouse acquires by inheritance or gift during the marriage, or via a “transmutation agreement.” A transmutation agreement is a written contract between spouses wherein one spouse transfers his or her one-half interest to the other spouse.
Division of Assets and Debts: Now that you are familiar with community property laws, logic follows that each spouse, upon divorce, is entitled to their one-half of the community property and responsible for one-half of the community debts. Oh, if only it were so simple! In some cases it is that simple: you have $1,000 in the bank, so each of you gets $500. But what about cars, houses, retirement plans? There are many factors that cannot simply be divided in half. Although we cannot cover every scenario, below we touch upon some of the more typical:
Automobiles: The first step to dividing automobiles is a determination of their value. Let’s assume a hypothetical car; a 2013 sports-car is driven by Wife. The sports-car is in generally decent condition, has all the standard bells and whistles and about 85,000 miles. We first determine that the fair market value of the sports-car is $16,500. However, there is a still an outstanding debt of $7,500. Therefore, the current value of the car is actually only $16,500-$7,500 or $9,000. Since we cannot divide the car in half, Wife would owe Husband half of $9000 or $4,500 to keep the car. This may be done by what is called an “equalizing payment” or via a credit against some other debt that he would owe her.
Real Property: To determine the value of the home, we use the same logic as the vehicles: fair market value minus any debts leaves the value or “equity” in the home. At times one spouse wishes to keep the home and as such would owe the other spouse the buyout, or equalizing payment as described above. At other times, the spouses cannot afford to purchase the other’s interest and choose to sell the home and split any gains received. But what if the home is “underwater” (where the debt exceeds the fair market value)? In such cases other options can be explored such as short sales. However, even “underwater” homes are often desired by one of the spouses. If a spouse wishes to keep a negative equity home there are several creative options that can be negotiated by your attorney.
Retirement Assets: Many of our clients comment they will lose a great deal of money in tax penalties if they divide their retirement plans, such as 401k, 403b, IRAs, pensions, defined benefit plans and the alike. This is not true. The tax code allows for the division of such plans as part of a divorce action through one of two mechanisms: Qualified Domestic Relations Order (QDRO –used for qualified plans) and Domestic Relations Order (DRO – for non-qualified plans). These tools allow for a division of a retirement plan between two spouses without tax implications, so long as the divided portions are expeditiously deposited in another retirement plan. Further, upon calculations done via QDROs (and DROs) the actuary professionals working with the attorney will determine what portion, if any, is separate property and what portion is community property to be divided. Let’s use a very simplistic example: Wife has a retirement plan with a current value of $75,000. She had started the job prior to marriage, and on the date of marriage had $10,000 in this 401k. On the date of separation, the plan balance was $72,000. The remaining $3,000 were funds she deposited in her 401k after separation but before divorce was final. (This simplistic example does not account for fluctuations in the market.) Therefore, the community portion of the 401k is $75,000 - $10,000 (pre-marital funds) and - $3,000 (post marital or separation funds) = $62,000. So long as Husband is willing to open a retirement plan (such as an IRA) he may receive his share of the community portion ($31,000) via a Qualified Domestic Relations Order.
Salary and Earnings: As attorneys we often hear things like: “I paid for it with my salary.” Or “It came out of my paycheck.” Yes, it is true that the paycheck is made out by the employer to the employee. However, because community property laws presume that anything acquired by the couple during marriage is community, the earnings of Husband and Wife are community property and as such any purchases made using either spouse’s earnings or any such savings of earnings are subject to division. So half of what he earns is hers and half of what she earns is his! This is true even in situations where one spouse does not work. It follows that anything you purchase or pay for during marriage with either party’s salary becomes the community property of both spouses. (For more on earnings see section on Spousal Support)
Credit Cards: As a rule of thumb, any debts incurred by the parties during marriage are the community debts of the parties. Comments like “She spent all this money on her hair, nails and clothes, so it’s her debt” or “He bought a new car so it’s his expense” do not really work. In general, the exception to this are those debts that are contrary to the understanding of marriage. For example: a gift to a mistress or a boyfriend would be contrary to the understanding of marriage.
In addition to the above few common assets and debts, there are many more that require the experience and knowledge of competent attorneys for division. In this day and age, an attorney who is not only knowledgeable about the law, but also a creative thinker can help make the division of property easier and financially beneficial to both parties.