Date of Separation in CA – Part 2
Frequently, divorcing spouses in California think that the valuation date of the house, retirement accounts, the closely held business, and other investment accounts is valued as of date of separation.
This is incorrect.
The date of separation ends the presumptively community asset period. Under California law, everything that happens from the date of marriage, lawsuits against you, assets acquired, debts incurred is considered community property until the date of separation.
While the date of separation is important in the determination of many income-related, debt-related and expenditure-related items in divorce, it is not necessarily the only date that is relevant in valuing ALL community property in divorce. Under California Family Code 2552, courts are required to assess the value of community property and assets as close to the date of trial as practicable. This ensures that the court restricts property division based on the date each party would be entitled to the property.
The date of separation is important in valuing and characterizing restricted stock units and stock options. It is important for identifying if new equity compensation awards were granted before or after date of separation. It is also relevant in determining whether the income earned, sign-on bonuses, etc. are community (before date of separation) or separate (after date of separation) property.
However, the date of separation could become less than definitive if the couple has pooled and shared their income and expenses since the date of separation. There are many nuances regarding what is community income and expenses when the couple has continued to carry on their finances in the same manner as they did while married after the date of separation and during the pendency of divorce.
In California, the date of valuing retirement accounts, home, and brokerage accounts, and other assets is the valuation at the “time of trial.” Not every case goes to trial, in fact, approximately 97% of dissolution cases do not go to trial. The default rule is to assume that everything is divided currently, always in the now, with some exceptions.
For these and many assets, the valuation date usually is determined as close as possible to the settlement date or the actual division of the asset whether the parties were separated recently or several years ago. Fluctuations up or down may affect the actual amounts divided and are subject to the market forces especially with stock portfolios and real estate.
If assets that are community in nature and ended at the time the parties separated, they will typically be valued closer to or at the date of separation. This would include, for example, personal checking accounts. There may be no growth in the asset and need to be divided recognizing each share of the community asset right at separation for this type of asset.
In settlement outside of court, both parties must agree on the date of valuation to use and the parties may agree on different dates of valuation depending upon the asset to be divided.
How is the date of separation defined? There are two parts to this. The first is when either party holds in their minds the knowledge, the certainty, the desire that the marriage is over. The second is the objectivity test where the words, actions and behaviors expressed convey the message that the marriage is over.
If a party filed a petition for divorce and served the other party, it is a definitive action that signals the date of separation. But, usually, it’s the hard conversation that has happened somewhere earlier, and this may be weeks, months or even years earlier than a party decides to file the necessary court papers. If one party absolutely wants to put a stake in the ground on the actual date of separation but does not want to file yet “for the sake of the children” or other reasons, this discussion needs to be in writing so that it could be produced in court if there is an objection as to the actual date by the other party.
Business Valuation Date
Another exception to the division of currently and now, is a business.
If there is a family business, professional practice, or closely held business when is it appropriate to start a valuation of a business? If a business was founded or acquired after the parties were married and before they separated, it is most likely to be considered a community property business subject to equal division upon divorce. As a result Family Code 2550 provides that community business interests are still considered community property after separation and before trial despite the valuation date if a business valuation has been conducted.
There is a provision for one party to request an alternate date than the date closest to the “trial date” or settlement date. The court may award this based on good cause which are typically bad behaviors on the part of one party such as obstructive conduct, dissipation of community property after separation, waste of community property, breach of fiduciary duty, etc.
There may be other reasons such as individual post-separation acts that increased the community estate’s value or uncertainty resulting from the post-separation commingling of community and separate funds. If the party who runs a business now puts in more time, energy and effort into the business and the business increases in value post separation, this additional effort could be considered separate property value. Then the business would be valued at the date of separation, but it would take a motion to the court to be permit the use of the date of separation to value the business.
Note: This article is for informational purposes only and is not intended to provide either tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters
