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Most states are equitable division states, so in the event of divorce, the court divides marital property on an equitable basis, which is not necessarily the same thing as an equal division. Typically, there is a slight presumption in favor of categorizing property as jointly-owned, but is is not a particularly strong presumption.

However, California is a community property state, so all jointly-titled property acquired during the marriage belongs equally to both spouses. In a few cases, the judge may divide such property unequally, but that usually only happens if there is clear evidence of inequity that spousal support payments alone cannot address. So, the only dispute in this area may be the correct classification of property as marital or non-marital. As one might expect, such a distinction is sometimes much easier said than done, especially if the parties have been married for more than 10 years.

As a rule of thumb, any property acquired before the marriage or by gift is separate property, and the increase from separate property (rents, royalties, etc.) is separate property. However, there are many exceptions, as set forth below.

Premarital Agreements

Many couples chose to resolve these questions in advance with written spousal agreements. These contracts are a lot like insurance policies, in more ways than one. No one anticipates or wants an early death, but people still buy life insurance. Additionally, they frequently adjust their coverage as their income and responsibilities change. Similarly, premarital agreements are effective insurance against the excessive emotional and financial costs sometimes associated with divorce, and these pacts should be updated every few years, at the minimum. Spousal agreements can label certain property as community or separate, even if the judge would not divide it in that matter; for example, Husband and Wife can agree that the marital residence is community property, even if they used a marriage gift from Husband’s family to make the down payment.

Like almost all other states, California adheres to the Uniform Premarital and Marital Agreements Act. Under this law, property agreements can cover almost any property division matter and some non-property matters as well, such as succession and inheritance rights and duties. Premarital agreements cannot cover child custody, child support, or any other subject that violates public policy. To break a marital agreement, the challenging spouse must prove that the agreement was:

Involuntary: Very strong pressure, up to and including a “sign-or-else” ultimatum, usually does not make the agreement involuntary. Instead, the challenging party must establish that the other spouse withheld critical information, making the terms misleading and therefore rendering the agreement involuntary.
Unconscionable: 70-30 is uneven, but depending on the facts, not necessarily unconscionable. Furthermore, the challenging party must show that the agreement was unconscionable when it was made and based on the information available at the time.
Generally, spousal property agreements contain severability clauses, so if the judge invalidates one part, the remainder is still in force.

Personal Property

If there is no premarital agreement to label property, it is sometimes almost impossible to distinguish between community and separate property. Assume Wife owned a rental house prior to the marriage, and she uses proceeds from a home equity loan against the marital residence to fund improvements on that property. In situations like this, property is commingled, a term that normally applies to company owners using business funds for personal reasons. However, property can also be commingled, if it contains both community and separate property elements.

Remember, there is a presumption that all property is community property, even if there is relatively clear evidence of commingling. So, to properly divide such property, the challenging party must present additional evidence. In the above scenario, Husband would need to produce receipts showing that the parties used community funds to hire contractors, pay for materials, and so on. Even then, since receipts only show a temporal connection, Husband may need to do more to clearly establish a causal connection.

Typically, Husband would be entitled to reimbursement for the community expenditure. So, if the couple spent $10,000 updating the rent house, Husband would receive $5,000. In rare cases, commingling results in transmutation, because the influx of separate property effectively changes the property’s characterization. If the house was uninhabitable before the $10,000 investment, Husband might be entitled to a share of the rents as well, because the house may now be community property.

Special rules apply with regard to pension plans, IRAs, 401(k)s, and other retirement accounts. A Qualified Domestic Relations Order divides these accounts upon divorce, and the nonowner spouse is usually entitled to half the increase in value that occurred during the marriage. To divide the account, the nonowner can usually roll over the funds into a new tax-deferred retirement account, do nothing and collect a proportional share when the owner spouse retires, or obtain a lump-sum payout. Different rules apply for military retirement accounts.

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