US Law: Legalities Surrounding Division of Assets Post Divorce
What’s mine is yours! During subsistence of the marriage, this phrase is often (willingly) quoted by either spouse to the other. However, the dynamics change once the marriage ends and the married couple goes through a divorce. The aspects and details of the division of assets, custody of children, payment of alimony have to be assessed and dealt. While in certain situations, these issues are amicably sorted and settled, in some, these uncertainties become the cause of grave mental and financial distress for the parties involved.
This Article covers the scope and legalities involved in the division of assets and ancillary issues under a divorce in community property states in the United States of America.
To briefly elucidate, the United States gets divided into common law and community property states. Majority of the states in the US are common law property states where the property acquired by one spouse during the marriage is solely owned by that person unless the title deed of the property states the name of both the spouses. In that case, it shall belong to both the spouses. However, common law property states deal with acquisition and division of the properties for married couples in a much different manner. In community property states, properties- both real and personal bought during the marriage are considered community property or marital property and is owned in equal ownership. Importantly, community property is not only limited to ownership of assets but also any debts accrued by a married couple during the marriage. The states of California, Arizona, Texas, Idaho, Nevada, New Mexico, Louisiana, Washington, and Wisconsin are community property states.
For this article, we shall discuss the state laws of California to understand the classification under marital and separate property and legalities involved post-separation and divorce in such community property states in the US.
Section 760 of the Californian Family Code[i](the Family Code) sets out that all property whether real or personal, wherever situated, acquired by a married man during the marriage while having his domicile in the state of California falls within the purview of community property. Importantly, any property which is not categorized as separate property is community property.
The Family Code provides that a separate property of a married person includes among other things all property owned by the person before his marriage, all property acquired by the person after his marriage by way of gift, bequest, devise, or descent. The Family Code further provides that even if the community property gets transferred in trust, it remains community property during the marriage and any community property that is withdrawn from a trust by revocation or otherwise remains community property unless there is a valid transmutation of the property at the time of distribution or withdrawal.
Importantly, the Californian laws provide for transmutations or amendments or alterations to a marital property into separate property.
Under the Family Code transmutations of the property refers to a written agreement between married persons to transfer, with or without consideration, community property to separate property of either spouse. Importantly, the Family Code provides that for the division of property on dissolution of marriage or legal separation between the parties, property acquired by the parties during the marriage as community property or any reason whatsoever is presumed to be community property. This presumption may be rebutted only if:
- A clear statement in the title deed or other documentary evidence of title through which the property gets acquired that the same is different and does not form part of any community property.
- Proof that the married persons have made a written agreement that the property is separate property.[ii]
Pertinently, should a married couple decide to separate or divorce, either spouse may file a proceeding before the court for dissolution of marriage or separation. In such matter, the courts may either pass a judgment of divorce or decide on separation of parties. Alternatively, at a later time, the court may expressly reserve jurisdiction to make property division. In doing so, it may result in dividing the community estate (marital property) of the parties equally unless otherwise agreed in writing or orally by parties in the court.[iii]
Let us now consider a case study to understand the dynamics of the community property state laws better. Consider the situation of Mr. X bought a property in California, US during his marriage to his wife in the year 2010. In the same year, Mr. X settled a trust with the said property and the wife as a beneficiary to it. After that, Mr. X revoked the trust, and the ownership was transferred back to his sole name in the year 2015. After a few months, the client and the wife get divorced outside the US with the divorce decree not specifying anything about the Californian property. Now, Mr. X desires to sell off the property which gives rise to some queries dealing with the aspect of this sale. Through the below FAQs, we discuss and provide clarifications to the dynamics of the proposed transaction.
Mr. X had amended the title of the property from the trust to his sole title, will such change not affect the right of the ex-wife on the marital/community property.
For the ex-wife’s claim on the property, it is essential to ascertain whether the Property falls under the purview of community property or separate property. A bare reading of the Californian Family Code categorically sets out conditions under which property gets defined as a separate property. Transferring the title in the name of Mr. X, will not render the property as a separate property.
Accordingly, in light of Californian Family Code, a property that is withdrawn from trust and transferred in the individual name of any person, will be constituted as community property unless the property gets legally transferred in writing as separate property by that individual. However, without a written agreement to that effect, the Property shall be termed as community property.
Are there any options by which Mr. X can sell the property himself without any claims on the property by his ex-wife?
To effect a smooth sale of the Property without any hindrances, Mr. X can approach his wife to obtain a Quit Claim Deed (the QCD) or an inter-spousal agreement.
A quitclaim deed is a deed under which one spouse waives off his/her rights in the Property in favor of the other spouse and transfers the sole interest in the name of that spouse.
Similarly, an inter-spousal agreement may be used between married parties to transfer a marital property to separate property of one spouse or alternately add the other spouse to the title of the property or assign a title to a property on according to a divorce settlement thereby recording the arrangement between the married couples.
What steps can be taken to obtain title insurance in theUS in sole favor of Mr. X?
US insurance companies, in line with their internal compliances, before certifying the title in favor of Mr. X, needs to be confident that the ex-wife will not make any claim on the Property. Therefore, the insurance companies seek a written agreement or QCD for this purpose. Also, another mode of executing a sale is to obtain a deed of warranty by the owner of the property in favor of the purchaser. Typically, under such deed, the seller promises that the seller has not transferred the property to anyone else, and the same is free from encumbrances or any third-party claims. A deed warranty provides a high degree of protection (insurance and indemnity) to the purchaser of a property and therefore may be accepted by the insurance companies and purchaser to affect the sale. However, it is important to highlight that on the execution of the deed of warranty, Mr. X is open to risk on account of any proceedings that may be filed by the ex-wife towards her rights and interest in the Property, claiming to be her marital property. At that stage, depending on the outcome of the litigation, Mr. X may be liable to, and reimburse the purchaser against any losses incurred by the purchaser on account of the claim filed by the ex-wife.
In the event, Mr. X can sell the property, can he transfer sale proceeds to another country without any hindrances?
The proceeds from the sale of the concerned property are taxable for long-term capital gains in the US in the event the person holds the same for over a year. The percentage of taxable income as per long-term tax depends on the tax bracket under which an assessed would fall.
Additionally, Mr. X would have to comply with the reporting and tax regulations in the US to remit the proceed of the sale of the Property, and the degree of compliance shall be subject to the 'status' of Mr. X (whether Mr. X would qualify as a US person).
Enforcement of Foreign Orders on the division of assets
Enforcement of Foreign orders on divorce and following rights between the parties are subject to the doctrine of comity. Further, to ascertain whether a foreign court has jurisdiction over subject matter, a divorce order is not treated as one court order. The divorce order is unique as it contains separate court orders for support, custody, children, and property, each having different jurisdictional requirements. This division of the divorce judgment into separate orders with different jurisdiction related conditions is called the doctrine of divisible divorce. For enforcement of a foreign judgment for the division of immovable property in California, either party may bring a suit for partition in the Civil Department of the Superior Court California. Accordingly, for courts to consider an order or enforce a judgment for divorce, it must have the required jurisdiction over the part of the decree that must be imposed.[iv]
The process towards separation or divorce if often very taxing for a married couple and it is prudent for the parties to amicably determine their rights and obligations towards the division of assets and liabilities, child custody and support and other ancillary aspects accompanying the separation or divorce for a smooth divorce and settlement. The parties may opt to either arrive at a solution through an inter-settlement/inter-spousal agreement or may seek a court order towards settling. In any event, in case of any confusion or doubts regarding the entitlements and obligations, the parties may seek the assistance of financial mediator and lawyers to safeguard their interest and offer some peace of mind.
Till Death do us apart? Really?
[i]Enacted in the year 1992. Operative January 1, 1994
[ii]Section 2581 of the Family Code
[iii]Section 2550 of the Family Code
[iv]Peter M. Walzer, Esq.- Divorce.com