Frequently Asked Questions

Business owners and entrepreneurs may encounter several significant issues leading up to and following divorce that can put your business at risk. For example, the business owner spouse needs to ensure the company is operational despite the litigation. Without proper support, the demands of litigation can put a great deal of pressure on a business and could harm your business’ reputation. What’s more, a divorce can place a tremendous amount of stress on a business owner that could impact his or her ability to make sound business decisions.

Additionally, divorce cases involving businesses often require the assistance of multiple financial and industry experts. Business owners can expect the company will need to be appraised, so internal financial records will be combed through by the opposing party and their experts. Having business records scrutinized can be stressful for the owner-party as well as the rest of the company. Once litigation begins, the business owner may be concerned with protecting sensitive or proprietary information from public disclosure in the superior court records or from improper use.

Following divorce, the operating spouse may need to buy out the other spouse’s interest or dissolve the business altogether; financial experts and corporate attorneys may need to step in to get everything squared away. In the end, there is the concern that a spouse could end up as a minority shareholder in the business and wreak havoc if there has been a complete breakdown in the parties’ relationship. Having adequate support and looking to the future is crucial for a business owner or entrepreneur facing divorce.

To protect their business, the operator spouse needs to hire a great team, have all business records in order, and prepare to cooperate and compromise. The operator spouse will need a good forensic accountant with business valuation experience in the family law context. The operator spouse must be prepared to provide their expert with whatever documentation he or she needs to properly analyze issues related to value, compensation, income available for support, or other pertinent issues. Well-done analysis requires great amounts of information and documents. The operating spouse needs to understand that the non-operating spouse has the right to review all the books and many internal documents. An owner can anticipate any personal expenses that were run through the business will be scrutinized. If the operating spouse is organized and ready to cooperate, divorce litigation need not be too disruptive for the business. Staying organized and cooperating with experts is the simplest way to streamline litigation and keep expenses to a minimum. Every business is unique, so having counsel who can work with you to determine a sound strategy and can quarterback your team is crucial.

If you own a business, there are a few things you should do immediately.  First, read the Summons (Family Law) carefully, especially the Standard Family Law Restraining Orders on page 2. Parties to a family law case are prohibited from taking certain actions regarding property, independent of whether the property is separate or community property. Your business dealings may be affected. Violating these restraining orders could subject you to severe penalties or increase the cost of litigation. Second, engage family law counsel as you have a short period of time to draft and file a Response. Also, the sooner you get a sound strategy in place with counsel, the easier the divorce will be on you and your business. Third, contact your accountant or bookkeeper and get your books in order. Your business records will be scrutinized, and you should be prepared to provide copies to your spouse and opposing counsel. If you are not informed about your business’ accounting practices, you should immediately connect with your bookkeeper or CPA.

Rarely, but it does happen. Nevertheless, that type of behavior is risky for the operator spouse because it can increase litigation costs, could harm the operator spouse’s position with the court, and could result in sanctions against the operator spouse. Fortunately, this type of behavior is usually exposed by diligent forensic accountants brought in to appraise the business’ value. It is imperative to hire a forensic accountant who has experience with dissolutions and business valuation; they know how to recognize the games people play and ensure a fair result. If you are the operator spouse, do not take any extraordinary actions with your business before speaking to your family law attorney.

Generally, yes. Valuation of assets is required for community property assets with the exception of those that will be sold and proceeds divided equally, divided in kind (e.g., 100 shares of stock – 50 to each spouse), or assets that will be jointly owned by the parties in equal shares following the divorce. While some parties have settled their divorces outside of court without business valuations, it is not recommended. In most cases, a business valuation is vital to settling the case even if the divorce is amicable. Your divorce attorney cannot advise you as to whether you are getting a “good deal” at settlement if the value of the business isn’t known.

If one or both parties own a business, that business will impact some of the most important aspects of the case: spousal support, child support, and property division. To set support if either party owns a business, your attorney needs to know how much income is available for spousal and/or child support. To do so, a forensic accountant will need to prepare a controllable cash flow report.

Furthermore, Pursuant to the California Family Code, if the parties cannot agree upon a settlement, the family court must divide the parties’ estate equally. To award the business to one party, the business must be assigned a value so that the other party can be compensated for his or her ownership interest.

Separate property businesses should be appraised as well. Even if one party started a company before marriage, the community may have acquired an interest in the business or its assets during the marriage. In that case, business profits accumulated during marriage may need to be apportioned between a party’s separate estate and the community, so a business valuation will be necessary. Also, keep in mind that although hiring a forensic accountant to do a business valuation costs money, the accountant’s analysis could be crucial to protecting your interests at divorce and saving you money in the long run.

A business owned by one spouse (the “operator-spouse”) must first be characterized as separate property, community property, or a combination of the two. In California, a business formed prior to the date of marriage is presumed separate property, whereas a business formed during marriage is presumed community property even if separate property was used to fund the business. While income from a separate property asset is separate, income derived from the labor and efforts of either spouse during marriage will belong to the community. Therefore, the divorce the court must determine whether to apportion business profits accumulated during marriage; some profits accumulated during the marriage may belong to the community even if the business is separate property.

If apportionment is appropriate, the court will apply one of two primary apportionment methods, or a combination thereof. The method applied depends on the primary reason behind the business’ profitability during marriage. On the one hand, was the business profitable due to market forces, such as supply and demand? On the other hand, was the business a success because of the operator-spouse’s extraordinary personal efforts during the marriage? Answers to these questions will determine if any profits are primarily separate or primarily community property. Once that determination is made, the court will decide how much of the profits should be assigned to the community. A separate property business will be awarded to the operator-spouse at divorce, but a great deal of analysis is required to determine how much the operator-spouse must pay the community to settle the issue.

It depends on the type of business and what type of benefits the non-family spouse acquired during employment. In some cases, the non-family spouse may have acquired stock that cannot be sold on the public market. The non-family spouse must be bought out and compensated for his or her stock, or he or she may remain a minority shareholder, which is usually not desirable. As such, the stock must be assigned a value. It is also possible that even though the business will be characterized as separate property, the efforts of both the non-family spouse and the family spouse could result in the community having a claim to business profits accumulated during the marriage. Cases with closely-held companies can be complex, so there is a high likelihood that the parties will need to bring in forensic accountants, and possibly industry experts, to appraise the business and assist in settlement.

A professional or undergraduate degree is not property subject to division at divorce in California. Similarly, a professional license (e.g., to practice law or medicine) is not divisible. Nevertheless, a party who receives an education during marriage may not get that degree free and clear. The community may be entitled to reimbursement for contributions made towards one party’s education or training that has substantially enhanced that party’s earning capacity. Also, it is important to note that while a professional degree or license is not subject to division at divorce, the goodwill of a professional practice can be appraised and may be apportioned to the community.

Depending on the circumstances, professional goodwill may be divisible at divorce. Professional goodwill has been defined as the expectation of future patronage or the likelihood that a business will continue to attract customers. Some family law courts have held that the goodwill of a business is divisible marital property if it is transferrable.

Two examples show the difference between transferrable goodwill and nontransferable goodwill. First, in some industries a company’s or individual’s book of business is valuable, transferrable, and quantifiable; it can be bought and sold. For instance, goodwill held in a medical or legal practice could be divisible at divorce. Second, an individual cannot transfer or sell his extraordinary skill set or elite professional reputation. For instance, one California court has held that while a leading motion picture director may have an impressive earning capacity and reputation, as a sole proprietor he does not have goodwill that is divisible at divorce. Nevertheless, every case is unique and should be discussed with a qualified family law attorney.

For many executives, annual salary is a small piece of their income and their compensation plans can be complex. Many executives are granted incentive stock options (ISOs), restricted stock units (RSUs), or phantom equity grants (RSAs). These equity incentives generally vest on a schedule, so it is possible that a grant could be received before marriage, but a portion of the incentives vest for work done during the marriage. In such a case, the equity incentives will need to be apportioned between the employee spouse and the community. The court has wide discretion to characterize and apportion equity incentives and may rely upon several different formulas found in California case law. The grants will be analyzed to determine if the incentives should be characterized as incentives for future performance, deferred compensation, or both. Once characterized, the court will apply a time-rule to determine what percentage of the equity incentives will be allocated to the separate and community estates. Additionally, equity incentives are divisible as property at divorce and may be treated as compensation available for child and/or spousal support in the future. In some cases, the non-employee spouse may attempt to improperly “double dip” from an employee’s equity incentives by trying to take a portion of the incentives as divisible property, then take another portion of the incentives as child or spousal support. Amidst divorce, executives need to be wary of these tactics.

Executives may also receive performance bonuses, commission, or various retirement benefits. Just about anything an executive receives from his or her employer for work completed during the marriage can be treated as divisible marital property. As such, all compensation benefits need to be valued at divorce and apportioned between the employee’s separate property and the community property estates.

Balances in a defined contribution plan, such as a 401(k) plan, could be community property to be divided at divorce. The percentage of the funds that will be apportioned to the community or to the employee-spouse’s separate estate depends on when the contributions to the plan were made. Any contributions made between the date of marriage and the date of separation, and any gains or losses therefrom, will be considered community property. Any contributions made prior to the date of marriage or after the date of separation, as well as any gains or losses therefrom, will be considered separate property. When the balance is a mix of separate and community property, it is wise to bring in an actuary to perform an assessment of the community’s share of the plan assets. Any funds to be transferred to the non-employee spouse must be done with a Qualified Domestic Relations Order (QDRO).

A defined benefit plan is one in which an employee will be entitled at retirement to a set monthly benefit during the remainder of his or her life, with the amount of the benefit usually calculated based on a formula multiplying years of service by the employee’s salary over a certain time frame. Balances in a defined benefit plan, such as a CalPERS pension plan, could be divisible at divorce depending on when contributions were made. Contributions and any gains or losses therefrom will be apportioned to the employee-spouse’s separate estate or to the community. Any contributions made between the date of marriage and the date of separation, and any gains or losses therefrom, will be considered community property. Any contributions made prior to the date of marriage or after the date of separation, as well as any gains or losses therefrom, will be considered separate property. When the balance is a mix of separate and community property, it is wise to bring in an actuary to perform an assessment of the community’s share of the plan assets. Any funds to be transferred to the non-employee spouse must be done with a Qualified Domestic Relations Order (QDRO).

If privacy is a concern, speak to an attorney at your earliest opportunity. With counsel, consider your various settlement options, including alternative dispute resolutions such as mediation or collaborative divorce. Reaching agreements on all issues through mediation is the best way to ensure private information remains private during the dissolution process. Mediation and negotiation are confidential and privileged pursuant to the California Evidence Code. If the parties cannot reach an agreement on certain issues, those issues should be bifurcated from the rest of the case and tried before a private judge. Parties can agree to hire a private judge by written stipulation. With a private judge, hearings are held in private conference rooms, not the public courthouse. While certain documents must be filed with the court to start and finish the dissolution process, most divorces don’t require the parties to appear at court. If the parties reach a complete written settlement agreement, it is possible to restrict how much of your agreement is available in the public record. However, if any issue must be litigated and decided by a judge, the corresponding documents must be filed with the court and the public can access them. Therefore, the absolute best way to keep a low profile is to settle as many issues as possible without court intervention.

Unlikely. Nearly every state in the United States has strict residency requirements for filing family law actions. In California, for example, a party may file for divorce in a county in which either party has been a resident for the three months immediately prior to filing, only if the qualifying party was also a California resident for the six months immediately prior to filing. So, if a Nevada resident wanted to file for divorce in Orange County, he could only do so if (1) his spouse was a resident of Orange County for the three months immediately preceding filing, and (2) the spouse was a resident of California for the six months immediately preceding filing.

If privacy is a serious concern, there are ways to reduce exposure in California courts. For instance, parties can stipulate to hire a private judge—usually a retired judicial officer with family law experience—to preside over their matter and have hearings in a private office instead of at the public courthouse. Furthermore, parties can also keep documents out of the public record by mediating their divorce and working to settle outside of court with the support of a mediator and necessary experts. Mediation documents are not filed with the court and are privileged, meaning they cannot be disclosed or used as evidence in later proceedings. Finally, parties may agree to submit a confidential marital settlement agreement along with their Judgment. If handled properly, parties can keep most of their financial settlement private. Working with attorneys as early as possible in the divorce process will give parties their best change to preserve their privacy in a high-profile case.

If you discover an error or realize the other party has failed to follow court orders, notify your counsel immediately. Some problems can be quickly addressed by submitting amended pleadings to the court or speaking with opposing counsel. At the end of the case, some parties merely forget to submit certain documents or don’t understand the procedure for getting a QDRO finalized; counsel can help address that. In other scenarios, errors or omissions can have serious consequences if not addressed immediately and may not have a simple fix, even if the error was not your fault.

It is possible to avoid some issues with insurance policies and other pay-on-death accounts by alerting the institution that manages the plan or account about the ongoing family law litigation, early in the case. Once the Summons (Family Law) is served, California law prohibits parties from cashing, borrowing against, cancelling, transferring, disposing of, or changing the beneficiaries of any insurance or other coverage held for the parties or minor children involved in the case. The standard family law restraining orders found in the Summons are meant to keep the status quo unless and until parties consent to a change or the court orders one. If one party learns the other spouse violated the standard restraining orders, he or she should act immediately to rectify the situation by alerting opposing counsel, notifying the managing institution, and if necessary, filing a Request for Order with the family court.

In complex cases, we often turn to forensic accountants for assistance. Forensic accountants can assist with many issues including but not limited to, separate property tracing, apportionment of stock options and restricted stock units, income available for child support, business valuation, calculating community property interest in a marital residence, and marital standard of living. Furthermore, forensic accountants can audit personal and business financial records, then compare them. Sometimes a spouse’s personal spending habits can draw attention to discrepancies in the business records. During these audits, accountants can further investigate omitted or under-disclosed assets. Accountants with experience in family law cases know the games people play to hide assets or reduce income on paper. If a party has serious concerns that assets are hidden, we have many formal discovery tools available to uncover hidden information and may even rely on private investigators for leads. Uncovering hidden assets can get expensive, so it is best to discuss the pros-and-cons of further investigation with your attorney and forensic accountant.

Some couples have prenuptial agreements, and some do not. The truth is that California community property law performs as a sort of prenuptial agreement for the parties who understand the rules and can avoid certain pitfalls. Any property received by a party by gift, inheritance, or otherwise acquired prior to marriage is that party’s separate property. Funds that are paid from a family trust, for example, will be the recipient spouse’s separate property. However, the recipient spouse will lose the separate property protection given to him by law if he commingles his separate property with community property source. For instance, if husband is paid $10,000 per month from a family trust, that is his separate property; it will best be protected if he places those funds in a separate account in his name alone and never deposits any joint funds into that account. Alternatively, if husband deposits his monthly $10,000 payment into a joint checking account he shares with wife and uses for daily expenses, he has commingled those separate funds. At divorce, he has the burden to trace the funds back to his separate property trust income, which can be an expensive and tedious undertaking. If unsuccessful, he risks losing half of the funds bequeathed to him during the span of the marriage.

So, in order to protect family wealth, prenuptial agreements are recommended to set the ground rules and protect the spouse receiving family funds prior to or during marriage. If a prenuptial agreement is well-prepared with complete financial disclosures from both parties, both parties are represented by independent counsel, and the agreement is reviewed and executed well in advance of the wedding, the agreement is likely to hold up in court. (Even so, challenges should be expected and the laws are always changing.) During the drafting process, however, it is important that the parties understand what can and cannot be enforced in a prenuptial agreement. No provisions can go against public policy. For instance, provisions limiting child support or encouraging divorce will not be enforceable.

A couple’s marital standard of living does not necessarily play a significant role when it comes to property division. However, marital standard of living plays a significant role in determining long-term spousal support. (Notably, this might not be the case if the parties executed a prenuptial agreement and properly waived spousal support.)  In awarding long-term spousal support, the family court is required to base its decision as to the amount and duration on the standard of living established during the parties’ marriage. The marital standard of living is one of many factors considered by the court when setting spousal support, but it carries considerable weight. The court can set spousal support in an amount equal to, greater than, or less than the amount the supported spouse will need to maintain the standard of living enjoyed during the marriage. Support based on marital standard of living will be based on the parties’ pre-separation lifestyle. Therefore, a supported party should not expect more spousal support if the supporting party’s income dramatically increases after the date of separation.

Possibly, depending on whether the spousal support order is modifiable or not. If a party totally waives spousal support by agreement, there is a high likelihood the agreement included a non-modifiability provision. Such a provision strips the court of its jurisdiction to order or modify spousal support for the would-be supported party indefinitely, regardless of circumstances. This means that even if the would-be supported party loses a job or becomes disabled, the court cannot order or increase spousal support. On the one hand, spousal support waivers like this can create a hardship for would-be supported parties. On the other hand, including a non-modifiability provision in a settlement agreement can be great for a would-be supporting party. If spousal support is not modifiable, the paying party can plan financially for the future and rest assured that they will not go back to court on that issue. Either way, the impact can be significant, so it is imperative that parties consider modifiability of spousal support in their settlement agreements.

If a spousal support order is modifiable, the supported party may be able to go back to the court and request additional support. Nevertheless, the court might not be persuaded by the supported party’s plea for more funds. California courts require supported parties to make reasonable efforts to become self-supporting following divorce. If the party requesting additional support failed to make efforts or squandered assets received at divorce, the court will have less sympathy and be less likely to modify the order. Yet, depending on the length of the marriage, the assets received at divorce, and the requesting party’s earning capacity, the court may be willing to order additional support. Every case if fact specific, so consult with an attorney about your case and likelihood of success (or risk of exposure).

Absolutely. There are tax considerations to be aware of in every case. As such, we always recommend our clients consult with a tax attorney or CPA with family law experience while divorce is pending. Fortunately, property transfers between parties subject to a marital agreement at divorce are not taxable events. For example, one party can transfer ownership of real property to the other spouse without triggering a property tax reassessment.

In complex cases, parties may have liquidity issues that stand in the way of settlement. If a couple’s net worth is primarily based in one type of asset, such as stock or real estate, they may be forced to sell a portion of the asset to equalize the community estate. Depending on the item sold, the parties may need to deal with capital gains taxes or other tax concerns. It is best to make settlement decisions with the aid of tax professionals so parties can make informed settlement decisions and minimize their taxes.

Dividing real estate at divorce can be quite simple or incredibly complex. The properties will individually need to be characterized as separate or community property. From there, any possible reimbursement claims must be addressed. Although one spouse may have brought a separate property residence into the marriage, if the community made payments toward the mortgage or used community funds for improvements to the property, the community may be entitled to a reimbursement for its contributions. In some instances, the community may acquire an ownership interest in the property and will be entitled to equity. In the case of the party who brought in a separate property residence to the marriage, he or she will be awarded that property at divorce, but will be required to reimburse the community with cash or other property. If the separate property owner does not have cash to pay the community with, he or she may need to sell the property and use the proceeds to satisfy the debt to the community.

If a property was acquired during marriage and both parties are on title, that property is presumptively community property. Nevertheless, if one spouse paid separate property toward the down payment, that spouse would be entitled to a dollar-for-dollar reimbursement. At divorce, parties often decide to sell the property, pay off any reimbursement claims, then split the remaining proceeds. Parties often reach deferred sale agreements if they wish to maintain a given property until an upcoming event, such as their youngest child’s high school graduation. Alternatively, one party will purchase the other party’s ownership interest and refinance the property on their own.

Property cases become more complex when properties are refinanced during the marriage or used as income properties. Parties and counsel often have to rely upon real estate appraisers and forensic accountants to untangle their realty assets, even if only one or two properties involved. For families with a large real estate portfolio it may take several experts, appraisers, and real estate attorneys to straighten out the case and help parties settle.

Ultimately, parties can divide their properties by agreement in whichever manner they see fit. Nevertheless, if the parties are unable to agree, division of their real estate holdings will be litigated and the outcome will come down to the court. In that case, once the community property interest is determined, it must be divided equally between the parties.