Many Napa County residents are fortunate to have large inheritances, and if they decide to pursue a divorce, asset division in their cases can become quite complex. Under California’s community property laws, the division of community property assets should be equal to both parties, and as we explain below, equal division of assets specific to marriages involving inherited wealth requires the keen eye of an experienced asset division lawyer.
Equal Division of Community Property in Napa County Divorces
All property acquired by either spouse during marriage that is not separate property is community property. Quasi-community property is property acquired by either spouse during marriage while domiciled outside of California that would be considered community property if purchased while domiciled in California.
An example of quasi-community property: Let’s say after marriage, you and your wife buy your residence in California . A few years later, you also purchase a vacation home in Hawaii (a non-community property state). Years later when you file for divorce (dissolution of marriage), the California residence is to be treated as community property, but the vacation home is to be treated as quasi-community property – as California jurisdiction does not extend to Hawaii property concerns.
Community property and quasi-community property must be divided equally upon dissolution, except as the parties agree or as otherwise determined by the court (e.g. is there a valid prenuptial, postnuptial, or marital settlement agreement?). The court may determine that unequal division is necessary in cases of deliberate misappropriation, personal injury, or domestic violence. In general, all property acquired by either spouse during marriage will be considered community property and will be divided equally in a divorce.
Separate Property Subject to Tracing
Napa County divorce cases typically have many complicated issues attributed to the commingling of separate property because many vineyard owners received inheritances – either through the transfers of their family vineyards or proceeds from family wealth that were inherited and used to purchase the vineyard.
Separate property includes all property owned before marriage and all property acquired during marriage that is
- acquired by gift or inheritance,
- produced by separate property, or
- acquired after the date of separation.
Separate property is not divided upon dissolution, it remains the undivided property of the party who owns it.
It is important to note that separate property funds can become community property if they are commingled with community property funds and cannot be traced to their separate property source. This commonly occurs when one spouse deposits separate funds in a bank account in which community funds are deposited.
In such an event, the separate property must be “traced” to a separate source. There are two methods by which to trace commingled funds. The first is direct tracing and the second involves consideration of family expenses and a presumption that family expenses are paid from community funds.
Direct tracing requires that
- (1) the amount of separate funds on deposit be ascertainable;
- (2) the separate funds continue to be on deposit when a withdrawal is made for the purpose of purchasing the specific property in dispute; and
- (3) the drawer’s intention be to withdraw the separate funds.
Essentially, the funds must be ascertainable at all times and directly reflect any purchases made that the purchaser contends are separate property.
Family Expense Method
If using the family expense method, it must be shown that all community funds were exhausted by family expenses and thus the remaining funds are necessarily separate property.
For both methods, it is necessary to show that the requirements were met at each specific time that property was acquired or payments were made. In other words, it will not be sufficient to merely show that the difference between the total of separate deposits and the total of separate withdrawals over the relevant period was sufficient to cover the acquisitions or payments at issue. In cases where funds are commingled and separate property funds cannot be traced, the funds will be deemed entirely community property.
Title Presumptions of Real Property
Real property acquired by the parties during marriage in joint form including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property. This presumption may be rebutted by a clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property.
In certain cases, where a party acquired property before marriage but the property was converted to joint form at some point during the marriage, the spouse who initially acquired the property may be entitled to reimbursement. See discussion on reimbursement infra.
It is important to note that tracing cannot overcome a presumption arising from the form of title. Tracing is limited to situations in which there is no written indication of ownership interests between the spouses with respect to property acquired.
Assignment of Debts
Community debts, meaning debts incurred between the date of marriage and the date of separation that are not separate debts incurred for other than the benefit of the community, are divided equally upon dissolution. Debts incurred by either spouse before marriage must be confirmed to the spouse who incurred it, without offset. Debts incurred by either spouse after separation but before entry of judgement for the purpose of providing for the “common necessities of life” may be confirmed to either spouse according to their respective needs and abilities to pay when the debt was incurred.
Special rules exist for student loans, however, student loans are generally confirmed to the party who received the education.
There are instances in which a spouse may be entitled to reimbursement.
Separate Property Contributions to Acquisition of Community Property
A party is entitled to reimbursement for contributions to the acquisition of community property to the extent he or she can trace the contributions to a separate property source. For example, say you inherited a sum of money during marriage and used the inherited funds to make a down payment on a house. You may be entitled to reimbursement for that down payment if you can show through tracing that your inheritance was used to make said down payment. This may be true, even if the contributor intended the contribution to be a gift to the community. Generally, this right is surrendered only through a written waiver by the contributor.
Reimbursable contributions generally include down payments, payments for improvements, and payments that reduce the principal of a loan used to finance a purchase or improvements. Reimbursable contributions do not include payments for loan interest, property maintenance, insurance, taxes, or separate property payments on community credit card debts during marriage.
Separate Property used for Community Purposes
A party who uses separate property for community purposes during marriage and before separation is deemed to have made a gift to the community and, accordingly, is not entitled to reimbursement. There are exceptions to this rule, namely Separate Property Contributions to Acquisition of Community Property as discussed supra.
A party who uses separate property for community purposes after separation but before dissolution is generally entitled to reimbursement. This type of reimbursement is known as an “Epstein credit.” The separate funds used for community purposes must be traceable to a separate source.
Additionally, reimbursement is not proper in instances where the paying spouse has sole use of the community asset. For example, there will be no reimbursement for separate property payments on a house for which the paying party has sole occupancy.
Community Property used for Separate Purposes
A court may order reimbursement to the community when a party unilaterally uses community property to pay his or her separate obligations. This is true both pre- and post-separation, subject to certain limitations such as payment of necessary living expenses.
Community Property Contributions to Education or Training
The community is entitled to reimbursement for contributions to the education or training of a party that substantially enhances the other party’s earning capacity. Community payments on loans for education or training are reimbursable even if the debts were incurred before marriage.
However, if the community has substantially benefited from the education or training, then there may be no reimbursement. The court will presume that the community has substantially benefited from the education or training when the contribution occurred more than ten years prior to the action. Meaning, if you supported your spouse through graduate school and then enjoyed the benefits of their increased earning capacity for over ten years, the court will presume that no reimbursement to the community is necessary.
Also note that contributions to education or training can be offset by education or training received by the opposing party.
Separate Property Contributions to Acquisition of another spouse’s Separate Property
Effective January 1, 2005, a party must be reimbursed for separate property contributions to the acquisition of property of the other spouse’s separate property estate made during the marriage.
Generally, a court need not consider tax consequences that may arise after the property division. However, when the tax consequences are immediate and specific, the court must consider them in dividing the property. For example, the court need not consider speculative future tax liability arising on the hypothetical sale of an asset but must consider taxable events that occur as a result of enforcement of the court’s property division order. In cases where tax consequences are immediate and specific, the court has the discretion to assign the tax liability as it sees fit.
Transfers between spouses and former spouses incident to dissolution are treated as gifts and thus are not taxable events resulting in recognition of gain or loss.
Founding partner Brent Kaspar is also an active CPA, which combined with his significant litigation experience uniquely positions him to navigate the complexities of inherited wealth asset division. Kaspar & Lugay has offices in Napa, CA, and Brent Kaspar and his team of financially astute family law attorneys can competently represent you better than anybody else. Call our Napa law office now to see how we can help.