News and Updates

BASICS OF DIVORCE IN CALIFORNIA

The idea of getting divorced is never an easy. Along with the emotional decisions being made also comes the uncertainty about the legal aspects of divorce in California. All to often a person considering divorce speaks with a friend who gives advice based on their recent divorce, and this can be a very dangerous way to get information about your rights under the law. 

Community Property

California is a community property state. That means everything earned or acquired during marriage is considered community property (more on this later). Under California law both parties are entitled to half of the marital assets, which is the community property. As such there are two ways to divide everything. First is the item theory. That basically says we are going to divide everything in half. However, it is rather difficult to cut a car in half , or to only live in half of a house. So the other theory, equitable division, is used. In California, more often than not equitable division is the preferred method to divide the community property. 

What happens with an equitable division is all the community property is assigned a value, and the total value of the community is divided. For example, if the couple has two cars, purchased during marriage the value of those two cars is decided on, and agreed to. After that, if both parties agree that each will continue to use the car they typically drive on a daily basis, the value assigned to that car is given to that person. So in this example if the first car is a brand new Tesla Model X with a value of $75,000, and the wife typically drives that car, and the parties agree she will retain that car, that value is added to her share of the community property division. If the other car is a older model Ford Explorer with a value of $10,000 and the husband typically drives that car then that value is added to his share of the community property. As you can well imagine there is now a difference of $65,000 in value between the husband and wife. It is worth noting, in California, same sex marriages are subject to the same laws. So if you are in a same sex marriage and think these law do not apply, they absolutely do. 

As we now have a difference of $65,000 in value of community assets, there must be an equalization. The first thing we will have to do is look to see if there is a debt against that particular item. If the Tesla described above has a loan for $30,000, and the Ford has no loan, the equalization is now decreased by $30,000 and the loan (debt) must be assigned to someone. Typically with automobiles the person taking a particular vehicle with a loan will assume that loan. As such the wife in this case would take the loan on her own, and the equalization to the husband is now $35,000. 

One area that is always a concern is that of retirement. There are so many different types of retirement accounts that each needs to be looked at very closely to determine if a division will trigger a penalty, or if there needs to be a specialized removal of a spouse from a pension account. In these cases the goal is almost always to determine the most cost-effective way to approach the problem to retain as much of the retirement accounts as possible. 

Community Debts

As with the community assets the community debts are going to be split equally as well. Depending on the nature of the debt, generally speaking, debts will be split evenly. However, as we saw in the example above, if there is a debt owed on property of some sort, and one person is taking that property the debt will be assigned to them. So in the case of a home with a mortgage, if one spouse is hoping to stay in the home, they will have to assume the mortgage on the home. This is often difficult to do when the spouse hoping to stay in the home cannot qualify for a mortgage on the property. This often leads to the difficult decision to sell the home. In addition, if there is equity in the home, and equalization needs to be made, the equity is often so high that neither party is capable of making a large equalization like that. The home is often the most valuable asset, and as such requires the most thought when deciding how to equitably divide the community. 

If there are community credit cards, those accounts are usually closed or transferred to just one spouse. Often times we see these credit card debts paid in full and the joint accounts closed. If one spouse has a credit card in just their name, say for business, then that card may be separate property. It really depends on the nature of that account.

Community property and community debt are usually two of the biggest areas of concern and confusion. It is really important for anyone seeking to get divorced to fully disclose the entirety of their assets and debts so the most accurate assessment can be made. Without this knowledge and disclosure a client can expect more delays and more attorney fees to fully understand and develop the most accurate distribution of the assets and debts.

Rental Properties, Title, and the best way to approach your rentals.

Southern California is living through unprecedented times. The Palisades and Eaton Fires destroyed large swaths of neighborhoods. As the cleanup begins, and thoughts turn toward rebuilding. Some may be thinking about rebuilding their rental property that burned, or if you currently own a rental property there are likely hundreds of applications for your property. There are different ways to hold title to a property. Below we will outline a few of the ways to take title, and explain what each means. 

Some people might have a home they inherited and decided to make it a rental property. Other’s have decided to supplement their income by owning a duplex in a winter resort town. Some are landlords who own multiple buildings. Each type of landlord has their own issues, and that means looking at each way to hold title and talking it through with the attorney and maybe the accountant on the best way to hold title to investment properties. Let’s look at the different ways to hold title through the following scenarios-

A Married Couple

As a married couple who own a rental home holding title in the name of their trust is typically going to be the most common. The couple will see their attorney and draft an estate plan, title to the home will be first recorded as community property, then into the trust. This will help the couple to possibly avoid capital gains tax, and property held in a trust bypasses probate court. 

Typically a title company will default to either tenants in common or in the case of a married couple joint tenants. Recent changes in California law allow a married couple to hold title as community property, and when title held as community property is transferred into a trust, a stepped-up value is given and that new stepped-up value is the basis for calculating potential capital gains taxes that may be owed. Probate can be very costly and time consuming, but capital gains tax can really hit an estate hard. 

Partners in an LLC or S-Corp

Some of the staff at Wilkerson & Wilkerson Law love to ski and snowboard. Time spent in winter resort towns means lots of time spent in rental condos. Often times these condos are owned by a few friends who rent the condo out in order to subsidize their vacation home. As such they will hold title to the home either as tenants in common, or in an LLC. When this is done there are a few ways to reduce liability and reduce potential capital gains. 

First the partners form an LLC to hold title to the property. The shares of the LLC are held by their individual trusts. So partner A has a trust with his spouse, and partner B a trust with his spouse. They are both partners in the LLC. Their respective shares are held in their trusts. The home is in the LLC and the shares of the LLC are assets of their trusts. 

S-Corp

Some of the homes lost in the recent Palisades and Eaton fires were apartments that were part of larger complexes. Some of the homes were part of a duplex or triplex. It is no doubt that there are property owners who had multiple rental units that were lost in these fires. This type of landlord will typical hold title to their properties with a S-Corp. As with the LLC above, their private trust will likely have the shares of the S-Corp as an asset of the trust. The private trust is set up just like any other individuals trust, and the shares held in the S-Corp are included as an asset in that trust. 

It is worth noting that if the S-Corp is worth more than $28m then a different type of trust has to be created and a different type of estate plan. That amount referenced above refers to the current amount of the Estate Tax. That is the amount a couple can pass to their heirs before the Estate Tax kicks in. If your net estate is worth more than $28m currently we need to have a different conversation. 

Depending on the type of rental property, and the type of situation in which a person owns a rental property there may be a number of things required to assist the owner in getting their rental up and running. If it is a couple we may need to draft a new estate plan if they don’t already have one. If we are dealing with a partners on a property we may need to draft estate plans for them, an operating agreement, and setting up an LLC. If the owner is looking for a S-Corp we have to incorporate, set up bylaws, operating agreements, standardized leases, and potentially a specialized estate plan and/or a family LLC. 

For more on taking title to rental properties please feel free to contact Travis at the Wilkerson & Wilkerson Law offices at (949) 624-0828. If you need assistance in sourcing a new rental property or listing one you already own please contact Jeff Simons with Keller Williams Realty at (714) 746-8103 or at Jeff@jeffreysimons.com.