When couples divorce, their marital assets need to be divided. However, dividing those assets can prove to be difficult, especially when disputes arise over the value or character of an asset.
To prevent a lengthy and emotionally taxing divorce, it is important that you protect your assets to prevent unnecessary disputes from arising when dividing your marital estate.
In order to know the best ways to protect your assets, it is important that you know the difference between community property and separate property.
California is a “community property state.” Pursuant to California Family Code Section 760, the term “community property” is defined as all property—real, or personal, wherever situated—acquired by a spouse during the marriage while living in California.
This means that both spouses have an equal interest in any assets obtained during the marriage and are both entitled to an equal split of all community property assets during divorce. It does not matter whether one spouse accrued more assets during the marriage than the other; all community property is subject to a 50/50 split between the parties.
Not only do both spouses have an equal interest in their community property, they also are equally responsible for any debt incurred during the marriage. Similar to above, it does not matter whether one spouse incurs more debt than the other during the marriage; both parties remain equally liable for any community debt or obligations at the time of divorce.
In addition to “community property,” property can also be characterized as “quasi-community property.” Pursuant to California Family Code Section 125, quasi-community property is defined as all real or personal property, wherever situated, that is acquired or exchanged by either spouse while living somewhere other than California that would have been considered community property if the spouse who acquired or exchanged the property lived in California at the time of its acquisition or exchange.
Pursuant to California Family Code Section 770, separate property includes the following:
Unlike community property, a spouse’s separate property is not subject to an equal division at divorce. A spouse is entitled to 100% of his or her separate property. However, there are exceptions where a spouse’s separate property can become characterized as community property such as transmutations and commingling.
A transmutation occurs when spouses agree to perform a transaction that will change the character of one spouse’s property. A transmutation can change the character of a spouse’s property in three different ways:
(1) From separate property to community property
(2) From community property to separate property
(3) From one spouse’s separate property to the other spouse’s separate property
If a spouse transmutes his or her separate property to community property, then his or her spouse would have a community interest in that asset.
Commingling can alter the characterization of a separate property asset when a spouse’s separate property is substantially mixed with community property so that the separate property contributions cannot be traced or clearly identified.
Although transmutations require an express written agreement between the parties, commingling can occur as a result of day-to-day transactions, which makes it more difficult to identify any separate property contribution. If you have any separate property assets, it is important to prevent any commingling to ensure that your separate property shall remain characterized as such.
There are several ways you can take steps to protect assets in the event of divorce. However, protecting your assets does not mean concealing your assets from your spouse or hiding assets when responding to discovery requests.
Protecting your assets is about ensuring that your community property and separate property assets are properly designated so that you can proceed to an equitable divorce settlement. Each of these tips will discuss how to best manage and account for your assets so that your divorce process can proceed smoothly and fairly.
If you are considering getting married, a prenuptial agreement is a proactive way to protect your assets and ensure that, in the event of divorce, your separate property remains your separate property.
A prenuptial agreement is a written contract that a couple enters into prior to marriage that sets forth what will happen to each party’s assets in the event the parties divorce. A prenuptial agreement can designate that separately owned assets between the parties remain each party’s respective separate property, in the event of divorce, when otherwise those assets could be considered community property.
For example, a couple can agree that all their income, assets, and debts acquired during marriage remain their separate property where typically, as mentioned above, any income, assets, or debts acquired during the marriage would be considered community property and subject to an equal division between the parties.
A prenuptial agreement can protect a party’s assets by setting forth clear terms that state that his or her assets shall remain his or her separate property in the event of divorce when a party’s assets may be subject to a community property division if the prenuptial agreement were not in place.
A great step toward protecting your assets is to take an accurate inventory of all your assets and determine the ownership status of each piece of property. This allows you to understand which assets you believe are separate property, which assets you believe are community property, and how much each asset could potentially be worth.
An important step in the divorce process is completing a party’s Preliminary Declarations of Disclosure. Part of completing your Preliminary Declarations of Disclosure requires you to complete a form called “The Schedule of Assets and Debts.”
This form requires you to list all of your assets and debts, whether owned by you individually or with your spouse, provide the date the asset/debt was acquired, and list whether the asset/debt is separate or community property. The Schedule of Assets and Debts also requires you to list the values of each asset/debt and provide supporting documentation that reflects those values.
It is extremely important to thoroughly complete your Schedule of Assets and Debts because it allows you to take inventory of each asset and debt you own and gives you a better understanding of the overall values of both your separate property and community property assets and debts. Further, each spouse is required to exchange their Preliminary Declarations of Disclosure, including the Schedule of Assets and Debts, which allows you to see if your spouse had other assets, like a bank or investment account, that you did not know about.
Once you are aware of these additional assets, you can better determine if the community has an interest in any of these assets, which will ultimately allow you to better determine how each and every asset should be divided.
Although the Preliminary Declarations of Disclosure may be tedious and time consuming, it is important as it allows you to have a complete picture of every asset, its possible value, and how it should be divided in accordance with the law.
As previously mentioned, any property obtained during marriage by gift, bequest, descent, or devise is considered a spouse’s separate property. In order to protect the gift or inheritance you received, it is important that you keep a record of the gift or inheritance so that you can support your claim that the gifted or inherited asset is your separate property.
It is easier to ensure that you are entitled to the entire value of your separate property asset if you can provide proof of when you received the gift or inheritance. Some examples that you can provide as proof can include letters, cards, and estate planning documents.
Providing proof that you received a gift or inheritance is a great way to protect your assets because it gives you the ability to put forth evidence that what you received was intended as an inheritance or gift and should be awarded to you as your sole and separate property.
As mentioned above, a separate property asset can become characterized as community property if the separate property asset becomes so mixed with community property that it is impossible to trace or differentiate the separate property portion from the community property portion of the asset. If you are unable to trace the separate property portion of the asset from the community property portion, then you may be forced to divide the entire asset equally.
In order to protect your separate property assets and prevent commingling, you should deposit monetary separate property gifts and/or inheritances into a separate bank account, which remains separate from all other community property. In the event of divorce, you can save significant time trying to trace your separate property contribution in a commingled bank account to prove your separate property claim.
Keeping your separate property funds in an entirely separate bank account is a great way to protect your separate property assets and ensure that you receive your entire separate property assets in divorce proceedings.
If you have you have any unique assets such as a vintage watch collection, a rare coin collection, or valuable non-fungible tokens (“NFTs”), a great way to protect the value of your assets would be to hire an appraiser that has specialized experience to accurately determine the value of each of your assets. A skilled appraiser that understands the specific asset being appraised can ensure that the true value of your asset is determined accurately.
Having your assets appraised is another way that you can protect your assets in divorce because it allows you to know what each asset is worth, based on a professional’s appraisal, which can be beneficial when negotiating how to divide the marital estate.
Like hiring an appraisal expert, hiring a forensic accountant can also prove invaluable when protecting your assets. A forensic accountant can help to examine both spouses’ finances, look for financial discrepancies and determine if there are any hidden assets that need to be accounted for.
Essentially, a forensic accountant can help to ensure that all assets are accounted for and can create a comprehensive profile of the overall net worth of your marital estate. By understanding the overall net worth of the marital estate, you can have a better opportunity to ensure that all community assets are equitably divided between you and your spouse.
Hiring a forensic accountant to create a comprehensive inventory of your assets is another useful way to protect your assets because their thoroughness and hard work can help guarantee that no assets have been omitted when dividing the marital estate.
When going through a divorce, it is important to protect your assets by ensuring that they all are properly identified, characterized, and valued so that each asset can be divided equitably and in accordance with the law. There are many ways you can work to protect your assets to make sure they are adequately designated so that you can work toward an equitable divorce settlement.
Our competent and thorough attorneys at Cage & Miles can help you protect your assets by working with you throughout the divorce process to ensure that all assets are accounted for, properly characterized, and accurately valued. Let the experts simplify and streamline the asset protection process and schedule a free 30-minute consultation today.