California Community Property FAQs
Find out how community property is determined, and how it's handled in a California divorce.
What is community property?
California law defines community property as any asset acquired or income earned by a married person while living with a spouse. Separate property is defined as anything acquired by a spouse before the marriage, during the marriage by gift, devise, or bequest, and after the parties separate. The law requires that the community estate be divided equally if there is no written agreement requiring a particular division of property. This means that from the total fair market value of the community assets, the joint obligations of the parties are subtracted, yielding the net community estate. Unless agreed otherwise, each spouse must receive half of the net community estate.
How is California community property divided?
The law does not require an "in kind" division of the community property, which would mean you would have to divide each physical object. All that the law requires is that the net value of the assets received by each spouse must be equal. Thus, it is not uncommon for one spouse to be awarded the family residence, with the other spouse receiving the family business and investment real estate, as long as each spouse gets assets that are equivalent in value. Since the total net value of the assets being received by each spouse is equal, such a division is proper.
Ordinarily, it is not difficult to determine whether a particular asset is community or separate property. However, certain types of assets can pose unique problems in this regard, including a business that one spouse owned before marriage and both spouses worked on during the marriage, or property that belonged to one spouse before marriage but was shared during the relationship.
What about my spouse's pension or employment benefits?
When a married person accumulates an interest in a pension, retirement, profit sharing, or other employee benefit plan during the marriage, the part that was accumulated during the marriage it is community property and subject to division in the dissolution. (If the owner of the benefits contributed to the plan before marriage or after separation, those amounts aren't included in the division.) The spouse who owns the retirement plan can pay the other spouse for the non-owner spouse's share of the community interest, or the court can reserve jurisdiction to have each spouse receive a proportionate share of the benefits when they are paid. (See below.)
How are pension plans divided?
Generally, Pension Plans are divided in one of two ways: a "reservation of jurisdiction," or a "cash-out."
Reservation of Jurisdiction. This is the most common way in which pension plans are handled. Under reservation of jurisdiction, the court orders that when the employed spouse retires the other spouse will receive a percentage of each pension check. This percentage is calculated by dividing the years when the spouses lived together as husband and wife by the total number of years that the employed spouse has been participating in the Pension Plan. The result of that division is the community property percentage of the Pension Plan.
For example, if the husband had 20 years of contributions into a Pension Plan, with 10 of those years coinciding with the years he lived with his wife, the community property share of his Pension Plan would be 50% (10 divided by 20). Thus, the wife would be entitled to 25% of the husband's pension checks (half of 50%).
Under a reservation of jurisdiction, the non-employee spouse can elect to receive his or her share of the employee spouse's pension benefits at the earliest time that the employed spouse could retire. This means that if the employed spouse chooses not to retire at the earliest opportunity, that spouse will have to pay the other spouse what the non-employee spouse would have received if the employed spouse had retired.
For example, if the husband is eligible for "early retirement" at age 55, but he chooses not to retire at that time, his ex-wife can demand that he pay her the amount of money that she would have received if he actually retired at that time. However, if the wife makes such an election, she does not receive any cost of living increases after that date.
The Federal Retirement Equity Act of 1984 created what is known as the "Qualified Domestic Relations Order," or "Q.D.R.O." (pronounced "quadro"). Where the Court makes orders concerning a spouse's retirement plan and the order is prepared in the correct form, the Federal law requires the employer to comply with the terms of the order. The preparation of a Q.D.R.O. can be time consuming and complicated, and, consequently, expensive. However, it is a necessary step in the dissolution process. Several companies have been formed for the sole purpose of preparing Q.D.R.O.s. For a reasonable fee, these companies prepare the O.D.R.O.'s and submit them to the pension plan administrators.
To learn more about QDRO's, see, QDROs in California: Dividing Retirement Benefits.
Cash-out. The other method of dealing with a pension involves obtaining "actuarial evaluation." An actuary is an expert who deals with statistical and financial evaluations of insurance policies, annuities, and pensions. By reviewing the plan description as well as the accumulations on the account of the employed spouse, the actuary can determine the "present value" of the community share of the pension plan. With a cash-out, the employed spouse receives the pension plan in its entirety, and the other spouse recieves other community property assets of equivalent value.
What about a closely-held business or professional practice?
Like any other asset, a business or professional practice must be considered in the valuation and division of community property. To the extent that a business or practice has been developed during the marriage, there is a community property interest that must be dealt with in the dissolution. The most difficult and time-consuming aspect of determining the value of a business or professional practice is in evaluation of "goodwill." This is the intangible value that most businesses have, which is based on the expectation of future business, based on established name or reputation. If the business or practice is operated by one of the spouses, it has a goodwill value even if it could not be sold on the open market.
Often, a business person or professional will say, "How can there be any goodwill . . . if I stop working, the office does not make any money?" The law's answer is that the goodwill of a business or professional practice is valued as a "going concern." That is, the law assumes that the business will continue operating and will not lose any customers that would otherwise have been lost if it were sold to another owner.Certified public accountant and business appraisers are hired to determine the value of a business or professional practice. The accountant or appraiser who is hired reviews the books and records of the business or practice and prepares a written report.
What about the family residence?
Where minor children are involved, it is common for the primary custodial parent to be allowed to live in the residence with the children for a specified period of time after the divorce is finalized. During that period of time, the spouse who lives in the home is usually required to make all mortgage, property tax, and homeowner insurance payments when due, although the other spouse may be required to make those payments if there's a significant disparity in the spouses' income and resources. The house must be sold when there are no children living at the property, the youngest child attains the age of majority, or as otherwise agreed by the parties or specified by the court.
See, "Who Gets the House in a California Divorce?" for in-depth information.
What about educational degrees and professional licenses?
In California, where a spouse has earned a college degree or a professional license during the marriage, the community estate is entitled to be reimbursed for the costs of acquiring the degree or license. These costs are normally limited to such things as tuition, fees, and books. Unlike in other states, the law in California does not give the other spouse any right to a percentage of the enhanced earning ability of the spouse who acquired the degree or license.