Division of Community Property
In California community property is divided equally
between the divorcing spouses, therefore the division itself presents no
difficulties – the assets are first listed and valued, then they are allocated
to the parties according to their agreement or sold, and an equalizing payment
is calculated if one party retains more community assets than the other.
The devil, as always, is in the details.
First, one or both parties may have separate property which needs to be excluded from the division of community property. Separate property includes pre-marital assets and assets acquired as gifts or inheritance by one spouse during marriage. The party who claims to have separate property needs to prove its separate character (See Separate Property Tracing).
Second, not all of the assets values are readily available. Real estate requires appraisals and business interests require valuation – both are prepared by professionals. Business valuations may take significant amount of work and time.
Third, some of the assets require special procedures to determine community share in them (stock and options acquired as employment compensation, retirement accounts and sometimes real estate ). Some assets may require special legal procedures to divide them (retirement accounts are divided by QDRO(Qualified Domestic Relations Order).
Property division starts with a schedule of all available assets and their values. A forensic accountant will first review Declarations of Disclosure of the parties and specifically their Schedules of Assets and Debts and then request documents to support ownership of the assets and their values.
It is important to remember that only checking, savings and credit card accounts are valued as of the date of parties’ separation, other assets are valued either as of the date nearest to a settlement/trial, or as of some other agreed upon (or court established) date.
The need for a difference in valuation dates is explained by the way various assets are used after the date of separation. Checking, savings and credit card accounts continue to be used by the parties to pay for their separate living expenses. Separate property earnings and support payments are deposited to and paid from these accounts. Community property balances that existed in these accounts at the date of separation are quickly replaced by separate property money. Depending on the way these accounts are used, it may be necessary to prepare post separation accounting in order to allocate community property balances between the parties.
An agreed upon (or court established) date most often applies to business values. In general, a business is valued as of the date nearest to a settlement/trial. As a practical matter, this date may be the nearest ending date of a year or a quarter, depending on how the business is operated and how often its financial statements are prepared.
An alternative valuation date, usually chosen around the date of separation, is commonly used for a personal service business the value of which almost entirely depends on the services provided by one of the parties. The use of such date is intended to exclude from the value of the business whatever increase/decrease in it that is related to post-separation efforts of the managing spouse.
Property division schedule can be viewed as a final summary of all accounting work done in a divorce case.
Copyright: Irina Anissimova, CPA, CFF, 2015