PROPERTY SETTLEMENTS IN LOS ANGELES

What is Community Property?

California is a community property state in which spouses are entitled, with some exceptions, to
an equal division of community property and debts in a divorce (called dissolution in California).

Community property is all property, in or out of state, that either spouse acquired during the
marriage through the efforts of either spouse or with community property funds. This means
that, even if only one spouse worked during the marriage and the other stayed at home raising
children, both spouses are entitled to one half of the community property. "During marriage"
refers to the time period from the date of marriage to the date when the parties legally
separate. The date of separation is often contested because it determines the extent of the
community property estate. The courts have said that separation occurs where one spouse
subjectively intends to end the marriage and does something to evidence that intent. It could be
moving out of the family home, telling your spouse the marriage is over, arranging for a new
place to live, etc.


What is Separate Property?

The parties are entitled to keep their separate property which is not divided in a dissolution.
Separate property is any property that is acquired before the marriage, including any rents or
profits received from those items; property received after the date of separation with separate
earnings, inheritances that were received before or during marriage; and gifts solely to one
spouse.


Do debts and credit cards also have to be divided?

Debts are also classified as either community or separate property debts. With few exceptions,
debts incurred during the marriage are community property debts that will be divided equally in
the dissolution. It does not matter whose name is on the debt.

For example, credit card debts incurred during the marriage are community property debts
regardless which spouse's name is on the credit card. Student loans are one of the main
exceptions to this rule. In certain circumstances, the community may be entitled to a
reimbursement if the couple pays off one spouse's student loans during the marriage. Debts
that you incurred before marriage or after separation are separate property debts.


What happens to the Family Home?

The family home in California is often the marriage's most valuable asset. The division of the
family home can be complicated if there are minor children and one spouse wants to stay in the
home. The community property interest in the home is further complicated where the property is
in the name of one spouse and was acquired prior to the marriage but the mortgage payments
have been paid from community earnings. Parties should also be aware that if one spouse
remains in the property after separation they may be incurring indebtedness to the other party
if the fair rental value of the property exceeds the mortgage, taxes and insurance payments on
the home. These are called Watts claims. The reverse may also be true. If the spouse living in
the house is paying the mortgage which exceeds the fair rental value, they may be entitled to
what's called Epstein credits.


Am I entitled to a share in my spouse's pension?

Another valuable asset in a marriage is a pension or retirement plan. The non-employee
spouse is entitled to a portion of the plan that was earned during marriage. To ensure that any
pension settlement is enforceable it is advisable that any settlements regarding pensions are
contained in a "Qualified Domestic Relations Order" (QDRO) signed by the Court.


How do I figure out the extent of my husband or wife's property?

Each party is required by California law to file a preliminary and final "declaration of disclosure"
with the Court that they have served an Income and Expense Declaration and Schedule of
Assets and Debts on their spouses. The final declaration can be waived by the written
agreement of the parties. The disclosures will list each spouses community property assets and
debts and separate property. Most disputes involve the extent and valuation of community
property assets. If a spouse tries to hide assets, your attorney can employ various discovery
tools forcing a spouse or a third party to turn over financial records. For example, they can
subpoena the records of third parties such as banks and CPA's.  In complicated cases it may
be necessary to employ the services of a forensic accountant. It is a good idea to minimize this
risk by taking some simple steps as part of any pre-divorce planning. You should make copies
of important financial documents such as tax returns, W2's, bank and brokerage statements
and keep them in a safe place.

The law requires the parties to make full disclosure of all their assets and liabilities and also any
business investments and opportunities. The case of Marriage of Rossi, illustrates what can
happen when one party tries to conceal assets. In 1996 Denise Rossi won $1.3 million in the
California State Lottery. She chose to conceal the winnings from her husband and filed for a
divorce 11 days after learning of her winnings. She had been married for 25 years. 2 years
after the case was over and a Judgment had been entered, her ex-husband discovered that his
ex-wife had won the lottery.  He filed a Motion and the judge gave all of the $1.3 million dollar
lottery winnings to the husband, since the wife had intentionally not disclosed her winnings in
the divorce proceedings. News reports indicate that Denise ended up filing for bankruptcy.


Don’t forget some often overlooked assets!

Some assets that are easily overlooked but may turn out to be valuable include:
•        Tax refunds
•        Frequent flyer miles
•        Season tickets
•        Prepaid insurance
•        Vacation pay
•        Club memberships


Are their tax consequences of a property settlement?

It's important that you consider the tax consequences of any property settlements during a
dissolution. Generally, IRC section 1041 provides that transfers to a former spouse incident to
a divorce are not taxable. However, if either spouse agrees to sell an asset as part of a
settlement there may be a tax consequence. For example, if parties agree to sell the family
home and divide the net proceeds they may have to pay capital gains tax on any gain. The Tax
Reform Act 1997 gives each spouse a $250,000 exemption from gain realized on the sale or
exchange of the principal residence. Similarly, the tax consequences of distributions from
pension plans now or in the future should also be considered.


© 2007 Warren R. Shiell. All rights reserved. Los Angeles Divorce and Family Law Attorney. The information contained in
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