Nobody really knows what the divorce rate is in California, because the state doesn’t count divorces. However, most states do. Based upon the available data, it appears that the divorce rate for first marriages is approximately 50%. The divorce rate for second marriages is higher, perhaps 60%.
That means that sooner or later most people will enter a marriage with separate property. The first time around it may not amount to much, unless you’ve stayed single long enough to acquire significant assets. The second time around (or the third, fourth, and so on), the chances are much higher that you will bring more to the party than your toothbrush.
If you’ve finally found your perfect partner and statistics bore you, preserving your separate property throughout your marriage may not be high on your do list. After all, separate property can’t be changed to community property without a clear written agreement between spouses. Calling the house “ours” for ten years doesn’t cut it. The deed’s in your name alone, just like the deeds to your investment properties and the corporate stock in your business. What could go wrong? Plenty.
Let’s take the house first. Remember that all property acquired during marriage is presumed to be community property, and that includes earnings. If you pay the mortgage from the same checking account where your paycheck goes, you are using community funds. Every monthly payment reduces the principal balance and increases equity. However, it’s not your equity that’s increasing. The increase belongs to the community, so half of the increase belongs to your spouse. The legislature did not do this to you. The judges did. It’s called equitable apportionment.
If you stay married for a while and have kids, you’re going to need a bigger house, and chances are you and your spouse will buy it together as community property. So you sell your old separate property house and use the proceeds for the down payment on the new house. This time the legislature has done you a favor. When you get divorced you get reimbursed for your separate property that went into the new house - but only if you can prove how much it was. If you have the records to calculate the equitable apportionment correctly, you’re half way there.
But let’s say you rented back your old house while you looked for the new one, and in the meantime you put the sales proceeds into that same checking account where your paychecks go. You have just commingled your separate property with community property. If you cannot trace the separate property portion of the sales proceeds from the time they came out of the sale escrow to the time they went into the purchase escrow, you’re out of luck.
Equitable apportionment also applies to your investment properties and to your business. If you commingle the separate property rent with community property before paying the mortgages, or if you use community property to make improvements, the community takes a bite out of what would otherwise be your separate property. As to the business, the time and effort of you and your spouse are community property. If either or both of you increase the value of the business, the increase is community property!Happily enough, if you are smart enough and fortunate enough to get a well-drafted premarital agreement, you can protect your separate property from equitable apportionment. However, a premarital agreement cannot eliminate tracing problems with rights of reimbursement.
San Diego Family Law Attorney Stanley D. Prowse is a California Certified Family Law Specialist. We welcome your legal inquiries.