In a California Divorce, “Community Property” Doesn’t Always Mean 50/50
By Diana L. Martinez, Family Lawyer and Mediator, Law and Mediation Office of Diana L. Martinez – Collaborative Divorce Solutions of Orange County
Ask a family member or friend who lives in California what happens to assets and debts in a divorce, and they’ll probably tell you that everything is split equally. Ask a lawyer practicing family law in California the same question, and they’ll probably tell you “community property”, that is, anything acquired during marriage that isn’t “separate property”, gets split equally between the spouses. Under California law, “separate property” is any asset or debt you acquired before you married, after your “date of separation” or at any time by gift or inheritance.
This equal split of community assets and debts is one of the most misunderstood concepts in a divorce in California. I am frequently asked why divorces are so expensive when “the law says everything is split 50/50”. While strong emotions often create the greatest obstacles to resolving a divorce out-of-court, a close second is each spouse’s concept of what is “fair” when dividing assets, debts, and future income.
As a mediator and a Collaborative lawyer, I am a strong advocate for giving spouses a greater voice in the outcome of their divorce – you know your children, your goals for your financial future, and your spiritual aspirations better than any judge; you should be in charge of making decisions that help you achieve those goals, even if these concerns are not “legally relevant”. I am also a strong proponent of ensuring divorcing spouses have as much information as possible to make the best decisions moving forward. Understanding of the law is just as important as understanding each spouse’s goals when it comes to a durable out-of-court resolution.
Spouses in a divorce can create their own unique agreements, as long as they are not illegal or against public policy. Laws controlling the outcome of your divorce will apply IF you and your spouse are not able to resolve all items together. While you and your spouse may have a strong understanding of the law, in negotiating your agreement, you may be better served by accepting less than the law provides in return for a greater benefit. The benefit could be a better co-parenting relationship, or the opportunity to reduce or eliminate spousal support. It may even be the creation of balance where the laws aren’t able to provide it.
Take for example, Annette and John Peterson: The Petersons were able to resolve all disputes in their divorce except for Annette’s pension benefits, valued at approximately $100,000. This one item prolonged the Petersons’ divorce for six years, from February 2010 until the California Supreme Court rendered its decision in January 2016.
Looking back on it, after nearly six years of legal fees, lost time from work, and the stress created by the protracted divorce, Annette and John might have preferred finding a compromise outside of the court process. State laws governing pensions and federal laws governing Social Security created the sense of imbalance that Mr. and Mrs. Peterson fought so hard to correct, as each, individually, deemed most “fair”.
In California, pension benefits are community property when earned during marriage. Pension benefits are a form of deferred compensation for services rendered. Non-financial contributions to pension benefits, or “service credits”, are also considered “a form of deferred compensation for services rendered” and, therefore, community property.
But Social Security benefits are separate property under federal law. Federal law preempts state law. Social Security is not transferrable, nor can it be assigned by the wage earner. There are, however, derivative rights upon divorce if:
- you and your spouse are entitled to receive Social Security;
- your marriage lasted 10 years or longer;
- the ex-spouse did not remarry;
- the ex-spouse is age 62 or older; and
- the benefit the ex-spouse is entitled to receive based on his/her own work is less than the benefit he or she would receive based on his/her former spouse’s work.
If each requirement is met, an ex-spouse could elect to receive either all of his/her own Social Security, or one-half of his/her former spouse’s Social Security, but not both.
As an employee of the County of Los Angeles, Annette, did not contribute to Social Security. Instead, the County contributed to a defined pension plan for Annette through the Los Angeles County Employees Retirement Association (LACERA). As an attorney in private practice, John contributed to Social Security through mandatory payroll deductions.
Annette’s LACERA benefits totaled between $200,000 and $216,000. Based on Social Security calculations, John’s Social Security benefits totaled $228,000. Annette attempted to argue that the laws governing LACERA pensions and the laws governing Social Security created unequal benefits. Annette and John would split her LACERA benefits in their divorce (approximately $100,000). But John would keep all of his Social Security benefits (approximately $328,000).
The trial court ruled in John’s favor, creating an actual 150 percent windfall for John. Annette asked the California Supreme Court to correct this unfair situation, suggesting the court give John less than half of her LACERA pension benefits.
The Supreme Court let the trial court’s ruling stand, citing the requirement under California law that community assets be divided equally in a divorce. Since Social Security is not a “community asset,” the court divided the community assets and could not deviate from that equal division, even when it creates an unequal division overall.
But the Supreme Court pointed out that it was completely within Annette and John’s power to create their own, more equal solution, even though the court under the law could not.
So let’s go back to Annette and John’s original circumstances. What was the value to John if he had agreed to give Annette all of her LACERA benefits, instead of insist on following the state law giving him a far greater share? What would have been the value to Annette to propose an alternate payout to John to resolve this issue?
As of 2010 in California, the average cost of a divorce where each party has his/her own lawyer was approximately $50,000 each, through trial. This amount is on the low end for a contested divorce in southern California, and it does not include appeals. Over the period of six years, based on 2010 estimates, Annette and John would have spent more than $100,000 each. Resolving your divorce early and collaboratively can save on legal fees, lost work time, and other intangible and emotional costs.
Managing emotional trauma and stress for yourself and your family offers priceless benefits, far beyond feeling a sense of entitlement or unfairness. Attorneys frequently fail to focus on these practical impacts because they are hired as legal advisors and guides, not as therapists. Attorneys are not equipped to help people through their fears; they are not trained mental health professionals.
One of the advantages of the Collaborative Divorce model is the integration of a mental health professional as a “divorce coach” to help manage the emotions of divorcing spouses, often saving the spouses tens, if not hundreds of thousands of dollars, as well as years of stress embroiled in a contested divorce. The outcomes tend to be far more satisfying to both spouses.
Making decisions based on accurate legal and financial information, as well as balancing the practical impact on your family and finances often results in far greater and lasting benefit for you and your family. Sometimes, there is too high a price for the short-term gain of getting everything you can under the law.