Separate Property

by Diana L. Martinez Collaborative Lawyer and Mediator, Law and Mediation Office of Diana L. Martinez

California is one of nine “community property” states as it relates to divorce. This means that assets and debts acquired and incurred during your marriage will be divided equally upon divorce. Exceptions exist for specific items received during marriage that are deemed “separate property” under the law. This includes gifts and inheritance.

This is one of the most misunderstood concepts in divorce law. Spouses often believe their divorce will be easy if they just split all of their property in half, or “50/50.” While strong emotions present a barrier to resolving issues during a divorce, not far behind is the misunderstandings by couples about the concept of what is “fair” when it comes to dividing up assets and liabilities.

From extensive experience as a mediator, consultant, and Collaborative Divorce lawyer, I am a strong advocate for giving spouses a greater voice in the outcome of their divorce. I am also a strong proponent of ensuring divorcing spouses have as much information as possible to make the best decisions moving forward.

Although the courts are required to enforce the laws, spouses in a divorce, with few exceptions (typically related to minor children) are not limited by the law; they can create their own, unique, agreements, based on their goals and values. Laws controlling the division of assets and debts, the amount you receive or pay in support, and the amount of time granted with your children exist to guide you IF you and your spouse are not able to resolve these items together. If you can’t resolve your differences, a judge will make the decisions for you. He or she is required to enforce the law, regardless of your personal goals and values.

You and your spouse may have some understanding of the law. But in negotiating your agreement, you may be better served by accepting less than the law allows in return for a greater benefit elsewhere. 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.

Annette and John Peterson provide a case study worth discussing as an example. The Petersons were able to resolve all disputes in their divorce except one: Annette’s pension benefits of approximately $100,000. This roadblock stalled the Petersons’ divorce for six years, from February 2010 until the California Supreme Court rendered its decision in January 2016.

In retrospect, after nearly six years of legal fees, lost time from work, and stress, Annette and John might have preferred finding a compromise outside of the contested 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 transferable, 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 received 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 to each). But John would keep all of his Social Security benefits.

The trial court ruled in John’s favor, creating an actual 150% windfall for John ($328,000 from 50% of Annette’s LACERA and 100% of his Social Security). 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 correctly 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 the parties were represented by lawyers was approximately $50,000 each. This amount is on the low end for a contested divorce in Orange County, and it does not include the legal fees for an appeal. 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.

Alternative (also known as “consensual”) dispute resolution models often incorporate legal and non-legal professionals to help educate and guide couples through unexpected emotional landmines, often resulting in less, or better managed, conflict, and better informed and well reasoned results.

For example, the Collaborative Divorce model incorporates guidance from 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, and the subsequent modifications to orders after trial. The outcomes tend to be far more satisfying to both spouses, and result in fewer or no additional hearings after judgment to modify those orders.

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.