Divorce Magazine Podcast: Complex Property Issues in California Divorce
November 13, 2018
How can you ensure that you get your fair share of the assets during divorce? Today’s topic is “Complex Property Issues in California Divorce”; in this podcast, Certified Family Law Specialist David Lederman will offer a basic understanding of how property division works in California – including which property is yours to keep, and which you’ll have to split with your spouse during divorce.
Diana Shepherd, CDFA® and Editorial Director, Divorce Magazine
David M. Lederman, Certified Family Law Specialist
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Read the Transcript of this Podcast Below.
How can you ensure that you get your fair share of the assets during divorce? My name’s Diana Shepard and I’m the editorial director of Divorce Magazine and Family Lawyer Magazine. Today’s topic is “Complex Property Issues in California Divorce,” and my guest is Certified Family Law Specialist David M. Lederman, who serves clients in Contra Costa County. The National Association of Distinguished Councils has named him a nation’s top attorney every year since 2015, on honor awarded to less than 1% of practicing attorneys in the United States. And he is currently a director for the Association of Certified Family Law Specialists.This podcast will offer a basic understanding of how property division works in California – including which property is yours to keep and, which you’ll have to split with your spouse.
Diana Shepherd: David, does marital lifestyle play a role in the division of assets?
David Lederman: No. The concept of marital lifestyle goes into the support analysis, the marital standard of living. What goes into the division of community property assets is something a bit more basic. The concept of community property is that anything earned or acquired during the marriage is going to be community property. And the court’s job – or the parties’, if they’re trying to negotiate – is to decide how to divide the community assets between the spouses. If one spouse has more assets than the other, that may require them to make an equalization payment to the other. The idea is to divide the community assets between the parties unrelated to what the marital lifestyle was, which again is a support concept.
If one spouse inherits significant money or property during the marriage, what can be done to preserve that inheritance in the event of divorce?
Excluded from the idea of community property are assets received by gift or bequest. If I’m married, then anything earned or acquired during the marriage is community property. Gifts and bequests are not earned or acquired, so they are separate property. If the party who received it keeps it separate, that’s easy: it doesn’t change character, it remains separate property.
Let’s say, for example, my grandparents pass away and leave me $100,000, and I take that $100,000 and a stick into a market account or a segregated stock account. If I get divorced 10, 15, 50 years later, that’s still my separate property. If, however, I mix it in with community property assets, then the burden’s going to be on me to prove that the separateness of the asset still exists. The way I’d potentially prove that is by showing that at no point in time did the amount of money in the account drop below what I’d contributed or what my separate property was. Because if it did it, it would be gone.
So if you keep a gift or inheritance separate, it remains separate. But what if there is interest earned on the inheritance that you put into a money market account? Would the interest be marital because the interest was earned during the marriage?
No, it would not, because it’s interest earned on separate property assets. It doesn’t require the effort of either party it’s simply the Corpus generating income. Earnings and accumulations on separate property retains its separate property characterization. If we think of this from a broader standpoint, the idea behind community property is to give equal value to the efforts of both parties – both the stay-at-home parent and the parent who’s out there slaving in the workforce to make a living for the family – and it treats their efforts as community. But if something is not a product of their efforts – earned either before marriage or after the date of separation, or acquired by gift or bequest – it wouldn’t be part of the community property and would be separate as would its earnings.
How are tangible assets such as valuable artwork, antiques, jewelry, collections, and luxury cars valued during divorce?
We use market value. A lot of these assets, such as luxury cars, lose value over time. Let’s say during property division, one person gets the Jaguar. If it was under acquired during the marriage, it’s going to be a community property asset. The other party has a right to half of the value of the Jaguar at the time of trial. You’d get a evaluation of the vehicle at time of trial, understanding that as time goes on, it’s losing value.
Other assets might appreciate – including the artwork, the antiques, the jewelry – and depending on the market, they could be worth a lot more at the time of divorce than they were when they were acquired during the course of the marriage. Those assets are also evaluated at the time of trial, based on a market analysis. If it’s something of a more ordinary nature – electronics or furniture – you’re usually looking at garage sale values: what somebody would pay for it at the flea market or if you had a garage sale at your house. But to the extent it’s of more substance, you can have somebody come in to do a market appraisal.
Are there any tax considerations to be aware of during property division in a high-net-worth divorce?
For high-net-worth divorce, there’s always the concept of tax planning, right? When you’re dealing with the idea of community property, transactions between spouses of assets are nontaxable. One way to avoid taxes – let’s say someone’s trying to avoid paying tax on spousal support or the sale of a house – or trying to shift the dollars between the parties, analytically you look at what would be the best way to do this. Where are going to shelter the loss due to taxes? Part of that could come from shifting a transaction from the high earner to the lower earner post-separation to have in a lower tax bracket. So it depends: it requires a deep analysis of what are the assets, what are the incomes, what are we trying to accomplish in this division?
If a business has been in one spouse’s family for generations, is it exempt from division during a divorce?
Like a lot of great legal answers, the answer is that “it depends on the facts and circumstances of the case.” If the business was in the family for generations, and it hasn’t grown significantly during the spouse’s stewardship, it’s probably going to be deemed separate property. If, however, the labors of the spouse have substantially increased the value of the business – remember, we’re giving value to the spouse’s efforts – the increased value could potentially be a community property asset.
It wouldn’t make the business itself community property, but it would create an accounting issue in trying to determine how much of the increase in value was a result of the labors of the community versus simply the growth of the business on it’s based trajectory.
If a professional with a practice – a doctor, a dentist, or a lawyer, for example – is going through a divorce, what is their spouse likely to get? Isn’t a lot of the value of the company in the doctor, dentist, or lawyer themselves?
Of course it is, but the reality is that the practice is community property. To the extent that the value of the business is me, my efforts, my labors during the marriage, that is community property. The question then is what does that equate to in dollars? Let’s take the example of a medical practice or an law practice; you can’t give the practice to the non-doctor or non-lawyer spouse. What we can do is value the business and divide the value of the business.
Let’s say for example that I’m an attorney (which surprisingly enough, I am!), and I make $300,000 a year. Another attorney who’s similarly situated to me the same number of years of experience and competency is making $200,000 a year. That differential would be the increased value that the community is getting because it’s my business, and there are lots of different ways to go out and value it. But a shorthand way would be to take that differential and multiply by three or two or four – depending on what the math model is – to determine what is the community property interest in the practice. Then give the asset to the professional who can work it – the attorney, the doctor – and give the other spouse half of the value of the community property interest in the business,
What property is considered during valuation?
All property. If we’re looking at a business, and we’re trying to value the business, the business is composed of the tangible assets, goodwill, and what’s in the bank accounts. All that can all go into the analytical value of the business.
If one spouse received annual bonuses from their employer during the marriage and is expected to continue to receive them post-divorce, will those bonuses be factored into property division?
No: only the bonuses that were earned during the marriage. Let’s say the parties got divorced on 1/1/2019, and the bonus for 2018 was earned over the course of 2018, but it wasn’t paid until March of 2019 – that bonus would be community property. Again, the basic concept is “earned or acquired during the marriage,” and therefore, subject to division. Let’s say, however, we’re talking about the following subsequent years; and that bonuses earned in 2019 were paid in 2020. Those bonuses would be the separate property of the spouse who earned, although the bonus could be used to pay child support or as a basic pay spousal support as well. And that typically comes from using a formula to determine what that spouse’s interest would be based on additional income over and above their base salary.
How does executive compensation, including stock options, RSUs, RSAs, Phantom equity grants, etc., how does that affect a divorce settlement?
They need to be accounted for. We need to know to what extent the stock options are they vested; if they’re vested, they’re community property and subject to division. Same thing for the RSUs, the RSAs. Phantom income is a concept we talk about in family law; it’s income that comes through somebody’s tax returns, but it’s not really income available for support. It’s like the Phantom limits: you feel it, but it’s not really there and not available to use. But to the extent that executive compensation is an asset earned during marriage, it is subject to division. Basically, everything of value that’s earned during marriage – real estate, stock options, extending, identifying, valued, businesses, cars, vehicles or cars, jewelry and whatnot – is subject to division and must be valued and dealt with during the division process.
In a high-net-worth divorce, would you include capital loss carryforwards as part of the settlement negotiations?
I definitely would. They could be of substantial value and certainly could be subject to negotiation. If there’s a shelter of a couple hundred thousand dollars that can be applied to future years, that would be a useful asset. The funds should be part of the settlement negotiations.
Where there are multiple properties – some owned by one spouse before the marriage, some are income properties, and some family residences and vacation homes – how will these be divided on divorce?
Let’s deal with these piece by piece. If one was owned by a spouse before marriage, it is presumptively community property. If it’s rented out during the course of the marriage and pays for itself, it’s a separate property asset. If the recurring income is on its own paying down the mortgage, and the community’s not put money into it, that would make it mostly separate property.
If, however, the community is putting money into the house to maintain it, the community would have an interest in that asset – and that interest needs to be quantified and divided. Again, if the asset is self-sustained and is not taking community effort or money, it’s going to be separate property. But once community effort and money interweaves into the separate property asset, then it starts acquiring community property aspects.
It doesn’t become community property unless title is transferred into joint name, but it becomes a community investment, and the community will get its investment back to the extent that it’s quantifiable.
Vacation homes earned prior to marriage are separate property – unless the community is paying the mortgage, or taxes, or for renovation and maintenance. If the community is putting money into it, again, community property interest is accumulated. If the vacation home is purchased during the marriage, of course, the basic rules of community property apply, and it is inherently a community property asset.
Let’s say I buy a vacation home while I’m married, and I put it in my name. Well, that doesn’t make it separate property. A case came out a couple of years ago, Marriage of Valley, confirming that it doesn’t matter whose name is on title: if it was acquired during the marriage, it’s presumptively community property.
Is a spouse entitled to a share of their spouse’s pension or retirement accounts?
Yes. Just like any other asset, to the extent it’s acquired during the marriage, it is presumptively community property and subject to division.
Diana Shepherd: My guest today has been Contra Costa County divorce attorney David Lederman, who has handled divorce cases from relatively simple to extremely complicated. The team of experienced family law attorneys at the law offices of David M. Lederman are ready to fight hard to protect your assets and achieve fair property settlements. If necessary, they will litigate aggressively to protect your rights and achieve your goals. If you have any questions or concerns about property division in your California divorce, visit www.ledermanlaw.net.