The first thing that is necessary is…
A Complete Disclosure of Marital Assets.
What is a marital asset?
A marital asset is any real or personal property.
Real property can be real estate like a house or condo. Personal property can be things like cars and furniture.
This property can either exist or be contingent.
A contingent asset is an opportunity that presents itself after separation but is the result of efforts and investments during the marriage.
Make a list of everything you and your spouse own. Including any income or opportunities that might arise from your property
And since California has a very broad definition of marital assets, it is better to list the asset than to leave it off your Financial Disclosure (FL-140). The penalty for not listing an asset can be high.
But, before we look at penalties you should know that in California property can be either community property or separate property.
Let’s look at some more definitions.
Community Property
…includes nearly everything that was purchased or received while you were married.
It potentially includes everything either spouse earned while married including pension plans, 401(k)s, IRAs and other retirement plans.
Debt incurred during the marriage is community property, even if only one person’s name is on the credit card. Both spouses are responsible for the debt.
A simple test.
If a spouse bought something during the marriage with money they earned while married then it is probably community property.
Quasi-Community Property
… is generally property that either spouse bought in another state with while they were married.
For instance, if a married couple lived and worked in Nevada and one of the spouses bought a boat with their wages. And then they moved to California and filed for divorce then the boat is community property.
Separate Property
… is anything that you owned before marriage.
And inheritances and gifts to one spouse received during marriage are also separate property. Rent or income earned from separate property is generally separate property.
And if something is bought with separate property money it generally remains separate property. This determination can get really complicated.
So the most important thing to remember is that even if you know for certain that something is separate property, you should still disclose.
The consequences for nondisclosure can be severe.
On the financial disclosure forms there’s a box to indicate if property is separate or community. It is better to negotiate now than to lose it later.
After we review the Lottery Case I think you will agree.
And what if different property types are mixed during marriage?
Then they become…
Commingled Assets
..which are separate property mixed with community property.
For instance, one spouse owns a house before marriage, she sells it to make a down payment on the martial home. And the mortgage payments are made with wages earned during marriage. The house is a commingled asset.
A same thing can happen happen with a pension.
A spouse contributes to a pension before marriage. And he continues to contribute during the marriage. The non-employee spouse will be entitled to a half interest of the marital portion. This is also known as the coverture fraction.
Or if you inherit money and deposit it in a joint account.
The key.
Complete disclosure, as the law requires, and then negotiate knowing that few people see assets from a purely numerical point of view.
For instance, a pension may symbolize security in old age to one person and a reward for thirty years at an unloved job to another.
Different viewpoint create different values and the opportunity to trade.
The Reason Behind Financial Disclosure
Before a martial settlement agreement can be negotiated or Family Court can make a ruling there must be full disclosure. Otherwise the result will be flawed and the divorce will be unfair.
To make a fair divorce possible California has a policy of full disclosure and cooperative discovery. FC §2100.
Certainly a noble sentiment.
And you would be justified in thinking that it is only that, a sentiment. Because, don’t divorcing spouses tend to lie to each other?
Yes. Sometimes.
And they get away it, for a little.
To keep dishonesty in check.
Family Court has the authority to transfer 100% of an undisclosed asset that was transferred or impaired in a deliberate breach of fiduciary duty to the harmed spouse. FC §1101(h)
That is a big statement, let’s unpack it.
Fiduciary Duty, what is it?
The fiduciary duty between a husband and wife that is “a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other.” FC §721
This means that each spouse must act in the best interest of the other spouse.
And that they must inform each other as to the existence, characterization, and value of all community assets and debts. FC §1100(e)
At first glance one might assume that if they don’t ask about a specific asset then you don’t have to say anything. But if they ask you need to be honest.
That is a dangerous assumption.
Let’s look at the “Lottery Case”.
THE LOTTERY CASE
Each week, Denise and her co-workers chipped in $5 a piece and bought lottery tickets. The week she didn’t contribute they won $6,680,000.00. The co-workers gave Denise her share of $1,336,000.00 as a gift.
Denise went to the Lottery Commission and said she was contemplating divorce and didn’t want to split this with her soon to be ex-husband.
They told her to file for divorce before she received a check. So, Denise filed for divorce, and changed her address so the Lottery paperwork would go to her mother’s house.
During the divorce Denise did not list the jackpot on any of Financial Disclosures (FL-140). She could have listed the jackpot as separate property, since she claimed that it was a gift.
She didn’t do that.
Instead she chose not to keep it a secret and not disclose. Probably seemed like a good idea at the time.
Years went by and her ex-husband filed for bankruptcy. In the process he discovered that Denise had won a million dollar jackpot.
Naturally they went to court.
And the court found that Denise acted fraudulently and breached her fiduciary duty to disclose assets during the divorce proceedings. She did not list the jackpot on the Preliminary or Final Financial Disclosures (FL-140).
If an asset is not disclosed and the court finds that the spouse acted fraudulently 100% of the asset can be awarded to the aggrieved spouse F §1101(h).
The court did not even consider whether the jackpot was separate property. After all, Denise’s coworkers said it was gift and therefore her sole and separate property.
Instead the court found fraud and awarded 100% of the jackpot to her ex-husband.
An Alternative Way to Go
Make a full disclosure of assets. Honestly characterize them as community or separate property.
And then use mediation to negotiate your martial settlement agreement.
And it is a good idea to keep a copy of the Financial Disclosure (FL-140) that your spouse sent you.
The information provided in this post is for general information purposes only and should not be construed as legal advice. You should not act or rely upon this information without seeking formal professional counsel. The information provided in this post is not intended to create an attorney-client relationship.