California law defines community property as any asset acquired or income earned by a married person while living with his or her spouse. Separate property is defined as anything acquired by a spouse before the marriage, or during the marriage by gift, devise or bequest. The law requires that the community estate be divided equally if there is no written agreement to the contrary. 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 ½ of the net community estate.
It should be understood that the law does not require an "in kind" division of the community property. 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. 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.
To the extent that a married person accumulates an interest in a pension, retirement, profit sharing or other employee benefit plan during the marriage, it is community and subject to division in the Dissolution of Marriage. The law gives the judge the power to award a spouse his or her pension plan, based on its "present value," or to "reserve jurisdiction" to award each spouse a proportionate share of the benefits when they are paid.
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 retire 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 Pl an.
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 (½ of 50%).
Under a reservation of jurisdiction, the spouse can elect to receive his or her share of the employed spouse's pension benefits at the earliest time that the employed spouse could retire. This means that even if the employed spouse chooses not to retire, he or she still has to pay to the other spouse what that 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 get if he actually retired. 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. Mr. Rabenn usually will recommend that one of these companies be hired to prepare Q.D.R.O.'s.
Cash-out:
The other method of dealing with Pension Plans involves obtaining "actuarial evaluation" of a Pension Plan. An actuary is an expert who deals with statistical and financial evaluations of insurance policies, annuities and Pension Plans. 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 Pension Plan.
For example, if the husband's Pension Plan provides that he will receive $1,000 per month upon his retirement at age 65, and the husband is presently 45 years old, the actuary estimates how much money would have to be deposited in an interest-bearing account now to yield interest income in 20 years of $1,000 per month. This process includes an estimation of the long-range interest rates that would be in effect over that period of time. Actuarial evaluations of Pension Plans commonly cost $100, which is an expense that has to be paid by our clients.
With a cash-out, the employed spouse receives his or her Pension Plan, with other community property assets being awarded to his or her spouse to result in an over all equal division of community property.
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 in 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, bas ed on established name or reputation. If the business or practice is operated by one of the spouses, it still 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.
Where minor children are involved, it is common for the custodial parent to be allowed to live in the residence with the children for a specified period of time after the Dissolution of Marriage 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. The house must be sold when: there are no children living at the property, the youngest child attains the age of majority, or any date as otherwise agreed by the parties or specified by the court.
In California, where a spouse has earned a college degree or a professional license, 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.