By M. Jude Egan, Ph.D., J.D., Certified Family Law Specialist — Egan Law, Santa Maria, California
Who keeps what in a California divorce? After twenty years of practicing family law, I can tell you that almost every property fight I have ever seen comes down to three rules. If you understand them, you can think through your own case from day one. If you don’t, you will spend money fighting over assets you were always going to split in half, or worse, you will give away property that was yours all along.
Here they are. Everything else in this article is commentary.
Marriage Is a General Partnership
The California Family Code adopts the general partnership framework from the Corporations Code in Family Code §§ 720-721. Essentially, despite the emotions you may have about your divorce, California is really only interested in the money. And its interest in the money is the same interest it would have if a general partnership were dissolving.
A great way to think of a marital dissolution is to think of a general partnership dissolution. When you have a general partner, you are each liable for acts taken by the other during the partnership, relating to the partnership. If your partner takes on debt during the partnership, that debt belongs to you. If your partner makes money or collects assets during the partnership, that money or those assets belong to you as well.
There are some rules, of course, or there wouldn’t be divorce lawyers.
The Three Property Rules
Rule 1: What You Had Before Marriage or Got After Separation Is Separate Property
Everything you had before marriage or got after separation is your separate property, including any income, profits, dividends, growth or increases on it. That is Family Code § 770, and the “including the income and growth” part is the piece most people miss.
If you had a home before marriage, say, from your first marriage, that is separate property. That also means that if you rent out the home from your first marriage, all of that rental income is also your separate property. If your dad died and left you an IRA, all of the income from the IRA is your separate property. If you had a business before marriage, the business is your separate property. If you had stock options from before marriage, all of the value of those stock options is your separate property.
Rule 2: Everything You Got During the Marriage Is Community Property
Everything acquired during the marriage is community property under Family Code § 760. Anything you buy, receive or earn during marriage counts: real estate, vehicles, pension credits, stock options, dividends. It counts even if it is in your name alone. Title does not decide this question; timing does.
This is why I tell every client the same thing at the first meeting: you are getting 50%. Because we are going to divide the community property in half. That is true if you built a business while your wife raised children and did not earn income. It is also true if you got stock options or a pension from work and your husband got his own stock options or pension from work. The default position is to divide community property in half. The default position is also to award each party their separate property. The action is in proving what is community and what is separate.
Rule 3: Except Gifts and Inheritances
The big exception to Rule 2 is gifts and inheritances. If you got an inheritance during marriage, the inheritance is your separate property, and so is any income, profit, dividend, growth or increase on it. A gift made to you alone works the same way. What matters is not when the money arrived, but where it came from.
Mixed-Character Assets: When One Asset Is Both
If every asset were purely separate or purely community, my job would be easier. In real cases, we also have to worry about mixed-character assets, and the most common mixed-character asset is real estate.
Here is the classic example. Wife owns a house before marriage worth $2 million with a $1 million mortgage. Husband moves in and they pay off the mortgage during the marriage. Wife owns $1 million in separate property and the community owns $1 million in community property, because the community paid down the mortgage. The courts have worked out the exact apportionment formula in In re Marriage of Moore (1980) 28 Cal.3d 366 and In re Marriage of Marsden (1982) 130 Cal.App.3d 426, which is why lawyers call this a Moore/Marsden analysis. The precise math gets more involved, but the principle is what matters: paying down a separate property mortgage with community earnings buys the community an interest in the house.
Pensions work the same way. Husband has 15 years into his pension on the date of marriage. He works an additional 15 years contributing to his pension during the marriage. At divorce, Husband has a 15-year separate property interest in his pension and the community has a 15-year interest. Husband gets 22.5 years’ worth of his pension and Wife gets 7.5 years’ worth.
Transmutation: You Cannot Change Character by Accident
The other wrinkle is transmutation, which is the legal word for deliberately changing property from separate to community, or the other way around. Family Code §§ 850-852 govern this, and the law requires an express declaration in writing by the spouse whose interest is adversely affected. In plain English: you have to say so, in writing, on purpose.
The classic example is title. Husband has a home worth $2 million on the date of marriage with a $1 million mortgage. Husband says, as many do, “I love you so much I am going to add your name to title.” Now the house is held as community property. Husband keeps his $1 million of equity from the date of marriage as a reimbursement, and the community shares the increase in value of the home after that point. That deed was a written, signed, deliberate act, and it changed everything about how the house gets divided.
But you cannot transmute property accidentally. Even if you have a family trust and put all your assets into it, unless you specifically transmute the property when you fund the trust, it retains its character as separate property when you retitle it into your trust. Estate planning is not divorce planning, and a trust transfer, standing alone, does not convert your separate property into community property.
You also do not automatically transmute money when you put it into a joint account. In fact, money never changes character. You can take $1 million from your inheritance and put it into a joint account, and the money remains your separate property. BUT, you have to trace it to prove that it is separate property. I often say, “money never changes character; it just gets harder to trace.” A million dollars sitting in a joint account out of which you spend and into which you make deposits for 25 years will be much more difficult to trace than money that bounces off a joint account on its way to a down payment on real estate. How that tracing actually gets done, and the difference between direct and indirect tracing, is a big enough subject that I cover it in a companion article on tracing separate property.
Frequently Asked Questions
Is my inheritance community property in California?
No. An inheritance is your separate property even if you received it during the marriage, and so is any income or growth on it. But if you deposited it into a joint account or used it to buy things during the marriage, the money did not change character; it just got harder to trace. You will need documentation to prove the separate property claim.
Does adding my spouse to title make the house community property?
A deed adding your spouse to title is the kind of written, express act that can change the character of the house going forward, though you generally keep a reimbursement for the separate property equity you brought in. What does not change character is retitling assets into a family trust or depositing money into a joint account. Transmutation under Family Code §§ 850-852 requires an express written declaration. It never happens by accident.
Is income earned during marriage community property even if it’s in my name alone?
Yes. Everything earned or acquired during the marriage is community property under Family Code § 760, whether it is wages, pension credits, stock options or dividends, and regardless of whose name is on the account or the title.
What happens to a business I started before marriage?
The business itself is your separate property under Family Code § 770. But if you worked in that business during the marriage, your labor belongs to the community, so the community may acquire an interest in the growth of the business. Sorting out how much is one of the more complex valuation questions in family law, and it is where forensic accountants earn their fees.
Where to Go From Here
Start with the general proposition that each of you is getting 50% of the community assets and debts, then work through the three property rules as they apply to your facts. Do not waste time and money fighting over assets you are going to split in half; the real work is in identifying, documenting and proving your separate property. If you are facing a divorce involving separate property claims, inheritances, a premarital business or mixed-character assets, call my office to schedule a confidential consultation. And whether or not you ever hire me, read my book, Better Divorce: A Handbook for Getting Through the Most Difficult Time in Your Life, available on Amazon. It will pay for itself many times over.
This article is for informational purposes only and does not constitute legal advice. Every case is unique. Consult a qualified attorney for advice regarding your specific situation. Egan Law · Santa Maria, California · (805) 332-3984 · judeeganlaw.com
