Property distribution is one of the biggest concerns in California divorce proceedings. When a couple has amassed substantial property, dividing it can be even trickier. High-asset couples have properties including real estate, businesses, investment portfolios, stock options, pensions, and premarital property, among others. 

California is among the states that apply the principle of community property law in divorce cases. While this principle may seem simple on paper, applying it in a high-asset divorce can require extensive financial expertise. For those undergoing a high-asset divorce in Sacramento, knowledge of California's community property law is vital.

Understanding California Community Property

Typically, property obtained and money earned by either spouse before separation is considered community property. Both parties have an equal share of any community property, regardless of who earned the money or whose name the property is in.

In most cases, courts divide community property equally between the parties upon divorce. On the other hand, separate property stays with its owner regardless of divorce. 

Separate property includes what one spouse owned before the marriage, property bought after separation, and inheritance and gifts received individually during the marriage. Property bought with separate property funds remains separate property during distribution. 

However, the challenge is that not all assets fit into one category. Since a marriage can last a long time, community and separate property can get mixed up. This means an asset may have both community and separate property interests. 

Tracing Separate and Community Property 

Finding the origin of funds used to purchase or improve assets becomes especially important in a high-net-worth divorce.

For example, a spouse may own an investment account before the marriage took place. The account could be worth $500,000 at the time of the marriage but could have received contributions of marital funds over the next 20 years. You must determine the percentage of separate and community property interests. 

Real estate can also create difficulties. A spouse may have bought a house before being married but made mortgage payments on it using community income after getting married. This means the property contains both separate and community interests.

California courts recognize that property can be partially community and partially separate after the commingling of funds. 

In complicated situations like this, lawyers hire forensic accountants to trace transactions, analyze bank statements, and identify the origins of funds. Tracing can significantly affect how hundreds of thousands or even millions of dollars are divided. 

Valuing Businesses and Professional Practices

Business ownership is another area where conflicts can arise in high-net-worth divorces. 

Businesses formed during the marriage can still be considered community property, even if only one party actively manages the business. Pre-marital businesses can be a mix of separate and community property, depending on whether the business's value increased during the marriage.

The business may need to be valued before it can be divided into separate portions of community and separate property.

Business valuation is controversial, as different assumptions can yield different valuations.

Splitting up the business doesn't necessarily require selling it, as one spouse may keep the business while the other receives alternative property to equalize their share.

Real Estate and Investment Portfolios

High-net-worth individuals or couples might own multiple homes, investments, rental property, commercial property, or even property based outside California. 

Evaluating how to divide these assets goes beyond assessing their market value. Mortgages, taxes, capital gains risk, maintenance costs, and income-generating capacity can all affect an asset's economic value. 

For instance, receiving a $2 million investment account is not the same as receiving a $2 million real property. This is because the two assets may differ in taxation, liquidity, risk, and growth potential.

Stocks, Retirement Accounts, and Executive Compensation

Asset distribution becomes more complicated if a spouse, or both spouses, is an executive, physician, attorney, entrepreneur, or other highly compensated professional.

Restricted stock units, stock options, bonuses, deferred compensation, pensions, and retirement accounts can include community property interest. Some benefits may not become payable for years after the divorce. 

Retirement benefits are especially easy to overlook. The California Courts specifically warn that retirement plans may be the most valuable assets in a divorce case and that special technicalities apply to their distribution.

The community share of the benefit may depend on when it was earned, not when it was paid out.

Full Financial Disclosure is Essential

Each party needs accurate information to divide property effectively. 

In California, during divorce proceedings, couples must provide financial disclosures about each party's income, expenses, assets, and liabilities. According to the California Courts, intentionally failing to disclose financial information can result in penalties, costs, or even nullification of some agreements or orders. 

Disclosures are especially important for high-net-worth individuals because they may have multiple financial accounts, corporations, trusts, and investments that hold assets and liabilities.

If you still have concerns, the discovery process can help you obtain additional information.

The Date of Separation Can Have Major Financial Consequences

Another issue that can carry weight is determining the date of separation.

Typically, earnings and liabilities after separation are treated differently from those incurred before separation in marriage. As the California Courts note, the date of separation will significantly affect how property and liabilities are classified. 

When one spouse is highly paid, even a few months of disagreement can mean large sums of money in salaries, bonuses, investments, or other property.

Reaching a Fair Resolution in a High-Net-Worth Divorce

Even though California's community property system aims to divide community property equally, reaching an equitable solution may not always be easy, especially when a lot of money is involved. 

Spouses may agree on how to split their property rather than leaving a judge to decide on each piece. In California, couples can create their own property distribution agreement and bring it to court for approval. 

Settlements may allow room for compromise. One party may keep the family business, while the other keeps the investments or property.

Talk to a Sacramento, CA, Family Law Attorney Today

Wagner Family Law represents Sacramento residents pursuing a divorce. Call our office today to schedule an appointment, and we can begin reviewing your finances right away.