In California, when a judge is dividing community property, he or she must divide the net community assets and debts equally between the spouses unless one of a few exceptions applies. In most other states a judge can make an “equitable distribution” and is not required to divide equally. In California law some exceptions to the equal division requirement are:
- The spouses agree to a non-equal division.
- One spouse has deliberately misappropriated community assets and/or debts, ignoring the interests of the other spouse.
- The value of the community property is less than $5,000 and one spouse cannot be located.
- Personal injury damages, although usually technically community property, are normally given to the spouse who suffered the injury.
- The community debts exceed the community assets.
Dividing Community Property – Approaches
A court has broad discretion in its approach to dividing a couple’s community property. You have complete discretion when working out your own division. Here are the main approaches to dividing a given community asset or debt:
- “In Kind” (half of the item to each spouse). This avoids valuation problems.
- “Asset Distribution” (giving some items to one spouse and the rest to the other spouse). This avoids the need to split individual property items.
- “Sale and Division of Proceeds” (often done with high value items such as houses). This avoids valuation challenges and the need to give the item to either spouse.
- “Non-equal shares” (say 20% of a savings account to one spouse and 80% to the other). This may be done to balance out or equalize the overall property division.
The “asset distribution” approach is often a good starting place. Couples usually base the division of their property as much as possible on who wants each item and on who is logical owner for each item. It’s often difficult though to make this result in an overall equal division.
Challenges and Concerns
Some ways to resolve a possible unequal division are:
- Generate enough cash to enable equalization by selling relatively high value item(s).
- Agree to create a legally-binding promissory note in which one spouse will make specified payments to the other spouse over a specified time period.
- Use the “non-equal shares” approach above for particular items.
- Agree on a non-equal division. Perhaps it’s close enough for a couple to consider it to be workable.
- Agree on a non-equal division but offset this somehow in the spousal support that is agreed upon.
When a divorcing couple has difficulties dividing their community property on their own, working with a divorce mediator can very often help you come to a solution. A division-of-property trial before a judge is often lengthy and complicated and is very expensive when attorneys are involved.
Sometimes with community debts (say credit cards) there is a concern that one or both spouses might not follow through and pay off the debts they are assigned. It’s often wise to try to pay off as many of the community debts as possible using community assets as part of the divorce settlement. This retires the debts so that no one needs to be concerned about them.
When working out your own settlement, it’s wise to learn about all possibly relevant tax ramifications of property division proposals. Often they are substantial and unexpected. A Certified Divorce Financial Analyst (CDFA) or tax specialist may be worth consulting. When a judge is dividing community property, he or she may not make adjustments for future tax consequences of the property division unless these consequences have already occurred or will occur as a result of the ordered division.