Securing your financial future after a divorce is a major undertaking that can require a lot of time, effort and money.
In order to reach an equitable division of assets, you need to determine how much they’re worth. And that means you need to understand how assets are valued in a California divorce.
What’s the valuation date? What impact does the date of separation have? And how are various assets – from homes to pensions to businesses – valued in a California divorce?
I recently sat down with family law attorney Travis Krepelka to take a much closer look at several of these key issues. Let’s dive in.
How Much Are My Assets Worth in a California Divorce
When are assets valued in a California divorce? What is the valuation date?
Travis Krepelka: It’s a little bit complicated but there are some rules that govern that determination. The short answer is we’ve got a statute in the family code that says you need to value everything as near as possible to the time of trial.
Most cases don’t go to a trial, so what that really means is you’re supposed to value everything currently. The going presumption is that we’ll value everything whenever we’re dividing it, in the moment.
But that’s not always appropriate, so we value and divide assets that are subject to growth or a reduction in value due to market forces. It might be a stock portfolio. Commonly, it’s real estate. We’re going to value those always as currently as possible, as close in time to the actual division of the asset, whether the parties separated three years ago or whatever.
Assets that are community in nature that ended at the time the parties separated, those we value closer to or at the date of separation. For example, everybody’s got their deposit accounts, their personal checking account that they were depositing their paycheck after separation; this is now their separate property. So, we really just need to recognize that the shared community asset ended right at separation for that type of asset and divide at that date.
The default rule is to assume that everything is getting divided currently, always in the now, with some exceptions like deposit accounts.
Another pretty common exception is a business; you have to file a motion and get permission to value it at date of separation. But a lot of the time many people in that business will depend on how hard they want to work, and how much time, energy, and effort they are pouring into it.
That time, energy and effort after separation is my separate property, and so if, as sometimes happens upon separation, people have nothing better to do but than to pour themselves wholeheartedly into the distraction of work, then their business can increase in value post separation.
That should be their value. That’s an example of another thing that we do value sometimes at the date of separation.
Conversely, a lot of people going through a divorce lose focus on their business. They’ve got a lot of other things on their mind, a lot of things to try to deal with and business might decline in value because of the failure to put in enough time and energy. For the person in business where that happens, they kind of get stuck with that.
What is the impact of the date of separation?
The date of separation ends the presumptively community asset period. Under California law, everything that happens in a marriage for good or bad, lawsuits against you, assets that you acquire, debts that you incur, everything is presumptively community property from the date of marriage until the date of separation.
Then, from the date of separation onward, it reverts to presumptively the separate property of whoever’s earning the money or incurring the debt.
How is the date of separation defined?
Not easily sometimes. There is not a black and white rule; there is however a two-part test that has been developed over time by case law.
Part one is easily satisfied, which is when either party subjectively hold in their minds the knowledge, the certainty, the desire that the marriage be over. That part of the test is easy.
Someone just takes the oath to tell the truth and says, “Yep, that’s how I felt.”
Part two of the test is, objectively, were there words or actions that any reasonable person would unequivocally understand, to get the message that this marriage is over. So, filing a petition for divorce and serving somebody with it is definitely a sure thing. Usually it’s the hard conversation that has happened somewhere earlier. Usually the date of separation is that moment where one or the other spouse, or maybe it was somewhat mutual, had that talk where they say, “you know what, this is over, we’re going to get a divorce.”
Sometimes that’s months, and in some situations even years, before people get around to filing.
A lot of times people will have a conversation with their spouse where it’s over, but then they’ll kind of go on to the outside world, whether it’s for their kids or for public appearance sake, but mostly for their kids, continue to live the same way until they’re able to get clarity.
How are things like that generally interpreted? What are some of the things for people to be wary of if they’re trying to make sure that they define a date of separation and take action consistent to be able to not extend the date of separation beyond that further?
That’s a great question. The case law that has developed our understanding of what principles the courts are going to look at for date of separation are often ones that have confronted some of these facts like you’re talking about.
What you’re talking about happens all the time. People “stay together for the kids.” They don’t tell their friends, they don’t tell their in-laws, and they just keep living like they were to all outside appearances, but they’ve told each other.
What’s going to come up on that is, is there a dispute? One spouse may say it and they both know what the truth is. They had that talk and that they were separated. Then that’s the date of separation, or it should be.
But if somebody changes their mind, and that change of mind is going to be because of some financial gain that there is to be had by being separated later, then the person who’s changed their mind, if they’re willing to lie or be forgetful about those conversations, you’re stuck with a “he said, she said,” situation.
If that’s all it was, if it was just private conversations and no one else was told, that might be tough for the person who’s claiming the earlier date. Even though they may have an accurate recollection of those conversations, it may be tough for that person to win if that were a litigated issue, even if they’re a hundred percent correct.
Then how do you put yourself in a better situation when this happens?
I advise my clients as follows. If you’re the one who is certain that you want this thing to be over forever, because a lot of the time it’s one party who wants the marriage to end and the other kind of wishes it weren’t, but if you’re the party who wants the date of separation to have happened and to be sure that it happened on this date that you’re saying, my best recommendation is you need to file the petition and put that date on it and serve the petition.
But I get it if you want to get through a school year or do whatever it is, there at least needs to be an email between the parties that we can produce later that’s contemporaneous, that says, “Hey, it was a hard conversation, but thank you for having it with me.
“I’m confirming that we talked about how we are separated now and we talked about how we’re going to wait for the school year to end before we tell the kids, but we’re separated.”
It needs to be something in writing that I could produce in court that is something more than his testimony versus her testimony.
So, you are trying to make sure that there are definitive, objective ways of evidence that can demonstrate part two of that two-part test?
Yes. Emails and texts are the world that we live in, even between spouses, and so it may seem weird because the conversation we’re envisioning is a tough one that people are obviously doing face to face, but it’s kind of that day or few days after, that summary, of what was talked about that needs to be sent.
People don’t always present me with those nice sets of facts, and so that’s when we end up getting separation date disputes; that’s the kind of evidence that would help prove a specific date.
Let’s explore how some of the different types of assets are valued in a California divorce. How is the value of a house determined in divorce?
In terms of timing, it’s determined in the now. We start off with spouses doing disclosures. You list your house, and everyone grabs a Zillow value, just to put something down. Most of us know that Zillow can be off by 10%, 15%, and sometimes more.
There are many, many ways we can resolve what happens with the house, but the three most simple ones are the choices that a judge has if the parties can’t settle. Those choices are that a husband can buyout wife, wife can buyout husband, or it can be sold to a third party on the open market.
If it’s sold, that process is going to value the house.
If somebody’s going to buy somebody out, then usually the parties will agree on a joint neutral appraiser. It’s rare in my experience for people to fight appraised values.
Every county has five to ten very well known, very well respected and trusted family law appraisers. Typically, you hire one of those people at shared expense and usually people agree to go with their value. But I have had cases where we’ve had the fight of the appraisers, and the appraisers will have to come into court and testify. It does happen, but not that often.
In the market where we live in, Silicon Valley, where a lot of times houses are being sold for well above ask, especially in the recent months and recent years, do you ever see where people are actually putting a house on the market and maintaining a right of first refusal to buy the other person out at whatever the best offer is?
Is there ever anything that tries to kind of blend the “we don’t truly know what a house is worth unless it’s sold” with actually trying to get as close as possible up to that legitimate, bonafide sale price?
Is there ever anything like that that happens in your experience?
That doesn’t happen too often. I’ve talked about that with a few clients, and I can’t say off the top of my head that I can recall ever actually testing the waters all the way to the point of listing.
To help with appraisals, we’ve brought in a local, well respected realtor who works in that demographic and that community and knows what things really go for, and we can get a comparative market analysis from the realtor. We can get a letter with some commentary that we might list this at 1.4 million, but it’s probably going to sell for 1.6 million, like you’re talking about.
But in terms of third parties out there as competitors to help auction up the price and then back out as sellers and internally exchange it within the divorce, I haven’t really seen that. I would have to check with realtors to know if that’s even legal or ethical, right? Is it even appropriate for a seller to list a house with no intention of selling it? I don’t know.
How are retirement accounts valued in divorce?
Similar to everything else we’ve been talking about. Most retirement accounts, such as 401k plans, and IRAs of different kinds, they need to be valued at whatever time they’re divided. That’s because they have grown with market forces or decreased with market forces from separation onward.
You frequently have a slightly complicating factor to deal with many times as well. Let’s say I’ve got a 401k and I’ve got $100,000 that I’ve put into it throughout the marriage. It’s all community money that I’ve put in. Then I separate, and I keep funding it with what is now my separate property income, so now we come to time of division and I’ve put in $100,000 community cash money over the marital period and I’ve put in $15,000 of separate property cash money post-separation then both of those chunks have grown with market forces.
That needs to be taken into account. It’s not that hard to do, and this is another situation where most people do use a joint expert to do this analysis and to prepare the necessary stipulated orders to divide the retirement accounts.
How are pensions valued in divorce?
Pensions are a little bit tougher. You find a little bit less guidance in the case law and you find more of a closed universe at some level. I don’t know if that makes sense there. You can encounter so many different rules and regulations depending on who this pension is through, who’s providing this pension.
But at the end of the day, if you zoom way out, the 30,000-foot view remains the same, which is the out spouse, the person who did not work for it and doesn’t have their name on this pension is entitled to half of the community portion of benefits available.
A lot of the time there’s a time rule applied. If there were 15 years of working for a company that gave rise to this pension, or working for the government, if there were 15 years of that, and for 10 of those years the parties were married, then you have two-thirds of that benefit that is a community marital asset, leaving half of that for the out spouse.
How are bank accounts and investment accounts valued in a California divorce?
They are valued depending on whether or not they grow with market forces. Is it the type of account that grows because I own stock and that stock goes up in value, or is it the type of account that grows because I deposit my paycheck into it?
After the date of separation, when the community presumption ends and everything is now presumptively separate property, if I’m putting my paycheck into an account, that’s mine. That type of account typically we’re going to value at the date of separation, when the community period ended.
If it’s something that just rises and falls with market forces, and I’m not putting separate property money into it post-separation, then we’re going to value that at whatever time we divide it.
When determining the apportionment of the growth on the community portion versus the separate property portion, is that done similarly for an investment account with typical stocks and bonds perhaps in a 401k that also has typically stocks and bonds? Or is that done any differently?
It would be done similarly to a 401k. It’s a tough thing to advise clients what they should or shouldn’t do as they start a divorce process, because any time you introduce complications you increase your fees.
If I have to work harder and look at something more nuanced, the divorce will cost more money. If we have to bring in a CPA, a family law, or forensic CPA to do the analyses for us, it’s going to cost more money.
It would be beneficial if people would just freeze and stop comingling their money, keep it separate from the community, and just hold off while we figure things out.
But you want people to continue to live their lives, and if that’s a natural course of the way they run their financial life, to deposit money continually into an account and then invest it within that account, then they’re going to keep doing it. And they should, but then we’ll have to apportion it, exactly like you said.
We’ll have to look at every statement, every transaction, every investment that’s held, every stock, every bond, and figure out what grew and what didn’t and apply that to the separate or to the community assets.
Are you finding that when retirement accounts are apportioned, it’s done based on looking at what the community and separate property balances are at each point in time and applying that ratio to the growth in the account that occurred during that period?
Well said. You said that much more concisely than I did, yes.
Are you finding that that’s also the same approach that you’re taking with investment accounts in terms of looking at kind of the overall composition of the account, versus actually saying these particular individual investments were the investments which were owned at date of separation?
So, whatever those investments grew to remain community property, versus looking at it generally on a blanket approach? Are you taking a similar approach with investments or retirement, or actually getting down to the security by security basis, or does that vary?
The answer is I’m going to do what makes the most sense for my client and for the case.
Very few cases go to trial, but to avoid going to trial, like most people do, you have got to be willing to cut corners and round off and make compromises, and so a lot of people are willing to just look at the numerical value of the total holdings in an account and divide that.
But it is true that that’s not accurate. That doesn’t accurately reflect diving down into the actual securities that are held, which of those are community, which are separate, which are aggressive growth, which are moderate, which are conservative, and what are the capital gains exposures on the long term or short term hold of each of those things.
If you want to do it right, you have to go security by security and answer all of those questions. That is the legally correct way to do it, but also the less common way to do it.
The more common is just to assume that $50,000.00 in Schwab account is the same as $50,000.00 in my Merrill Lynch account and not even look at what’s actually held there.
As an example, if someone came in to you and said, “Look, I have this retirement account that I started in 1980. I have all the statements and I own Apple stock that I’ve held through today,” then you’d probably be inclined to where it would make sense to take that detailed approach as opposed to the rounded corners where you’re just apportioning things based on the community and separate property balances?
Absolutely! I think if someone has separate property that they could prove up, that to me is when it is worth that detailed dive to prove and preserve that for them.
If we’re dividing community property, if you really want to do it right, you’ve got to do it in kind, because the consequences long-term of holding this stock might be different than this stock over here.
But I do find that people are willing to round like that when it comes to community. However, if we’re talking about protecting someone’s separate property, whether they got it before marriage, inherited it during the marriage, or it was put in there post-separation, if we have the documents and can prove it, that’s an exercise that’s typically worthwhile.
You talked a little bit earlier about how the date of valuation for a business in a California divorce.
How are businesses being valued? Who’s doing them, and what are some of the major things that they’re looking at in doing the valuations? What are the methodologies that they’re using?
I don’t know that I’ll be able to talk like a forensic CPA about the methodologies, nor do I think too many family law practitioners would do so. But I do have a few answers. The first is they’re valued by forensic CPA’s who specialize in business valuations for family law litigation support.
If you read one of their 30-page reports with 200 pages of attached schedules, you’ll come across things like the excess earnings method, or the capitalization of earnings method, and some other methods that they usually rule out that I don’t even remember the buzz words for.
I think what’s important are a few of these principles. This is what I as a family law specialist bring to bear, that people need to understand.
First and foremost, and this is really hard for people, is a divorce value for a business is usually higher than a fair market value of the business. Let’s say I represent the spouse who is in business, and he’s got a dental practice.
We hire an expert, they hire an expert, everyone values the business, and comes up with a number and says the business is worth $600,000. The client says, “Are you kidding me? I couldn’t sell this thing for a fifth of that. All this is worth is 100 grand of dental equipment I’ve got, and then the rest of it is just me. There’s no way I could sell this on the market.”
He could bring in a business appraiser and broker who would say exactly that, which is you could only sell this thing for $100,000.
That’s not what’s being done in a divorce context. What’s being done in a divorce context is the business owner is buying out a partner, and so they’re removing a partner and buying the opportunity to continue to work in that business alone for the next however many years and continue to reap the benefits of that business. That’s the best way I’ve had it explained to me by CPAs trying to put my own frustrations and my clients’ frustrations into some kind of a context.
You’re not selling this on the open market, you’re buying out a silent partner that you didn’t really know that you had.
So, in that example, the dentist says, “Look, it’s just not worth that, I’d rather shut the business down. I’m 63, I was planning on retiring in two years, I know I’m not going to be able to sell this for that price,” and so what’s being baked into that valuation doesn’t make sense or, “I’m not able to kind of earn that back in any reasonable period of time,”…how does that play out?
Are they able to just walk away and say they’re going to shut the business down? How does that generally play out?
Let’s use that hypothetical. The 63-year old dentist in our hypothetical here probably ends up having to pay $300,000 for half the value of his business, and is probably having to pay spousal support on the income that he was making and should have been making for at least a couple more years until he’s of retirement age.
It’s a big time double whammy, and really a rough situation that people do legitimately find themselves in, some of them with no bad intentions, but unfortunately the case law that has developed is littered with punitive decisions against people who made their decisions for the wrong reasons.
You’ve got the high-end Silicon Valley executive making $600,000 a year who at midlife crisis coming out of divorce, quits that and works to become a surf instructor. That’s the case law we have, and the principles that are going to stick it to that person are the same principles that are going to be applied, unfortunately, to our 63-year old dentist in our hypothetical.
It’s a bad news situation.
How do you determine the value of personal property for a divorce?
Personal property is the courts’ least favorite thing. Technically, there’s only two kinds of property. There’s personal property and real property. So personal property actually includes money and accounts and all that.
But I understand your question. We’ve talked about retirements. We’ve talked about investment accounts. We’ve talked about bank accounts. We’ve talked about businesses.
So personal property is my stuff; it’s my Blue Ray collection, my vinyl collection, my wine collection, my furniture and my car and all of that.
The short answer is it’s not. The court system does not provide a venue to people to hear disputes over stuff. Now there are exceptions to that, and it’s all about whether it makes sense financially.
There are some things that if people are going to fight about it, they’re worth talking about what their value is, such as their art collections, gun collections, and stuff that sometimes are worth so much money that it makes sense to have them appraised by a personal property appraiser and go to court with that.
But if it’s your average person who has just an accumulated household full of crap that they’ve gotten over the course of their marriage, really are left to their own devices.
They need to figure it out. Attorneys can try to help where we can, but if they can’t figure it out, they’re sent off to a binding arbitration panel, and not allowed to bring lawyers. It’s like an even smaller version of small claims court where you don’t even get a judge but you get an arbitrator, a volunteer attorney, and you’re just stuck with their decision.
I will say that probably 5% of my clients express to me at the outset that they are concerned there might be some dispute about the personal property, meaning 95% of people just tell me don’t worry about it, we’ve got it figured it out.
And of those 5% that tell me there is probably going to be some dispute, it almost never comes up, even in those cases where they thought it would.
How are taxes taken into consideration when determining the value of assets for divorce purposes?
In what sense specifically?
Let’s use a hypothetical and say that there’s a house that’s worth a million dollars that was bought ages ago for $100,000, so there’s a large built-in gain.
And then the flip side of that, assuming there is no mortgage means there’s a million dollars of equity in that house. And then there’s another asset that’s a million dollars of cash. So, the house has been appraised using the approaches that you talked about earlier, and we say husband’s going to keep the house at a million, and the wife’s going to keep the cash at a million, creating what appears to be a fair trade.
But clearly there are different tax implications or characteristics of those assets. How are those tax implications taken into consideration, if at all?
They are taken into consideration by the attorneys and experts that are working with us in a settlement. The problem is that this specific example you’ve given is one where our judiciary, in my opinion, has just gotten it dead wrong, which in the case law is clear that if you go to a judge, the answer is no, we’re not going to take into account speculative things.
And so the common argument that I make all the time, and it works in negotiation because the other side of the table understands that I’m right, but I also have to understand that they have more leverage than I would like them to is to resist the adjustment I want to make because they know that they have the backing of case law.
So, I may be negotiating a house buyout, and I say sure this million dollars is not the same as that million cash dollars, because at some point I’m going to sell it and I’m going to have this capital gains tax hit.
I’m also going to have commissions and closing costs and some deferred maintenance I had to do as a part of that sale, so I’m going to be out 8% just for those things and then another 15% for my capital gains. So really, it’s only this net value.
Case law resoundingly says so what? That’s totally speculative. That may never happen. You may own that house. You may die in that house. And that may all happen through your estate plan or something.
The answer is to negotiate it and usually the other side who’s being bought out will agree to some kind of an adjustment to take these things into account, but just recognize that they have legal backing to stonewall you at some point and say we’re done reducing, even though these things are very real.
It almost sounds like a bit of a game of chicken where there’s a diversion between financial reality and the legal reality.
To the extent that you can’t reach an agreement and the house does end up getting sold, then that legal reality of taxes not being taken into consideration actually veers and merges into what the financial reality is, which is that those taxes and selling expenses are real, and now would come to fruition.
Yes, that is the case.