Understanding Property Characterization in Divorce: What You Need to Know
When going through a divorce, one of the critical issues you’ll face is the characterization of your property. Determining whether your assets and debts are considered separate or community property can have a significant impact on the outcome of your divorce settlement. Here’s a comprehensive guide to help you understand how courts evaluate and classify different types of property.
What is Property Characterization?
Property characterization is the process by which a court determines whether an asset or debt is community property (owned equally by both spouses) or separate property (owned solely by one spouse). This distinction is crucial because community property is subject to division between both parties during a divorce, while separate property remains with its original owner.
How Courts Determine Property Character
Courts use several methods to determine the character of property, including:
- Inception of Title: This principle considers when and how the property was acquired. If it was obtained before marriage, it’s typically considered separate property.
- Tracing: If the property has changed form or been mixed with community property, tracing is used to determine its original character.
Types of Separate Property
- Pre-Marital Property: Assets owned before marriage are considered separate property.
- Gifts and Inheritances: Property acquired during marriage through a gift or inheritance is also separate property.
- Property Designated in a Marital Agreement: Spouses can agree, through prenuptial or postnuptial agreements, how certain properties will be treated, allowing them to designate assets as separate or community property.
- Survivorship Agreements: These agreements allow a spouse to designate that their separate property interest will automatically pass to their spouse upon their death.
How Different Assets Are Treated
- Income: Income earned during the marriage is generally considered community property. However, if income is earned after separation, it is considered separate property.
- Real Property: Real estate acquired before marriage or through a gift/inheritance remains separate property. If you sell separate property and use the proceeds to buy another property, the new property retains the original character.
- Business Interests: The date the business was established determines whether it is separate or community property.
- Debts: Debts are presumed to be community property unless proven otherwise. If a spouse incurs debt using separate property, it may be classified as separate debt.
- Gambling Winnings: Winnings earned during the marriage are community property.
- Tim Cole Compensation: Compensation for wrongful incarceration is considered separate property.
- Interest and Dividends: Interest earned on separate property is considered community property. Stock dividends follow the same rules, with cash dividends treated as community property and stock dividends retaining the original character of the stock.
- Livestock and Horses: Animals owned before marriage are separate property, but their offspring are considered community property.
- Pets: Pets are treated according to when and how they were acquired, following the general rules of property characterization.
- School Degrees and Loans: Degrees and loans are separate property unless otherwise agreed upon.
- Stocks and Investments: Stocks acquired before marriage or through separate funds remain separate. If they grow in value or split, they retain their original character.
- Liquidated Stocks: Funds from the liquidation of separate property stocks remain separate.
- Mergers and Trusts: Stocks received from mergers retain their original character. The corpus of a trust retains its character, while the income from the trust depends on various factors.
Protecting Your Separate Property
To protect your separate property, consider the following:
- Keep Detailed Records: Maintain clear records of your property and how it was acquired.
- Use Separate Accounts: Avoid commingling separate property with community property by keeping separate accounts.
- Consider a Marital Agreement: A prenuptial or postnuptial agreement can help clearly define the characterization of your property.
Understanding the characterization of your assets and debts is essential in navigating the complexities of a divorce. If you have specific questions or need legal advice, reach out to an experienced family law attorney.
