California is a community property state. A basic definition of community property (CP) is whatever comes about as a result of either party’s efforts during the marriage. Typically, this comes in the form of regular earned income from employment (or self-employment), but it is whatever one gets from employment, e.g., retirement benefits, bonus monies, commissions, stock, and stock options. CP is, likewise, whatever is acquired with CP; if CP income is used to buy a car, for example, that car is CP. CP debt is whatever is incurred during marriage, and before separation, even if just in one spouse’s name (there are rare exceptions to this).
CP is created during the period from date of marriage to the date of separation (DOS). For this reason, it is important to establish the DOS, and it is something about which the parties often disagree. As regards the DOS, we are looking for the final breakdown of the marital relationship, at least from one party’s perspective. There can be many factors in this determination, and the DOS may, or may not, coincide with the physical move-out of one party.
Separate property (SP) is whatever either party had, as of the date of marriage. SP is also whatever either party receives by way of gift or inheritance, even if that happens during marriage. Generally speaking, SP remains SP unless one pro-actively changes it into the CP of both parties, or the SP of the other spouse – what we call a “transmutation.” To accomplish this, we need to see a clear, written statement of that transmutation intention by the SP holder. SP is also what either party earns, post-DOS; the “flip side” of this is that new debt a party incurs after the DOS is that party’s responsibility.
The starting point is to look at what exists as of the DOS, and carry everything forward to the time of division. We give credit to natural accumulations on either CP or SP. A simple example of this is a savings account; we look at the DOS balance, but add the interest that accumulates, up to the time of division. As regards a CP home, if one spouse is buying the other out, the valuation used is that as of the time the buy-out occurs – not as of the DOS.
In almost every case, we need to account for the CP vs. SP components of certain assets – what we call “hybrid” assets. The most common example is a retirement-type account. If such an account existed before marriage, it is SP, but, to the extent further contributions were made during marriage, the account is partially CP. Then, we may also need to account for contributions after the DOS, since those contributions are SP. This is usually the subject of an actuarial analysis, hopefully on a joint neutral basis. A SP business, continued during marriage, needs to be evaluated for a possible CP interest.
The goal in a divorce case is to achieve an overall equal division of CP, and to confirm each party’s SP to the respective parties. We need not divide each individual asset; typically, one party makes an equalizing payment to the other corresponding to half the difference between their respective totals. Usually, we divide assets in two categories: retirement-type accounts, and everything else. This is because retirement accounts are tax affected (unless a Roth IRA), and we want each party to be on an equal footing, when the funds are withdrawn, downstream, and tax must be paid. Properly-done, property division in the context of divorce does not incur present tax liability (see Internal Revenue Code Section 1041).
As with any other issue, the parties are free to agree to vary from the normal operation of law, and so agree to an unequal division of CP, perhaps in exchange for the how another issue is resolved.