Equalization payments in California refer to the process of ensuring fairness in the financial matters of a divorce.
California is a community property state, meaning you and your spouse jointly own any property acquired during your marriage.
A prenup dictates how to split those assets and debts in the event of divorce or death ahead of time. If you don’t have a prenup, then your property is split 50/50 by the court during divorce proceedings.
Splitting things evenly isn’t always that easy. Luckily, a system exists to even – or equalize – the playing field.
Let’s dive into when the equalization payment comes into play and how it works in a California divorce.
Dividing Assets During Divorce
When a couple divorces, they must divide their property and debts. This typically happens during the settlement phase of the divorce.
There are two types of property in family law – community property and separate property. In community property states like California, community property (or marital property) includes any assets or debts incurred during the marriage and is jointly owned.
Separate property is anything solely owned by you (e.g., a car you purchased before the marriage or a family inheritance).
You must evenly divide your community property during a divorce settlement according to California’s 50/50 rule. If the divorce is amicable, the couple may be able to sort out asset division on their own or through mediation. If things are more contentious, then the court steps in to divide marital assets.
Either way, an equalization payment may come into play to ensure the final division is even and fair.
How The Equalization Payment Works
An equalization payment becomes necessary when one spouse receives more community property than the other.
Think about it this way: if you and your spouse purchased a home together and then decide to get a divorce, one of you may want to keep that home.
Let’s say the house is worth $600K, and the remaining community property is worth $400K, for a total of $1,000,000 of community property. If you decide to keep the house where you’re getting $600K of an asset, and your spouse is getting $400K of assets, you’ll owe your ex-spouse an equalization payment of $100K. The payment ensures you both receive a total of $500K of your $1,000,000 community property, creating an equal divide.
That’s the purpose of the equalization payment: to offset the uneven distribution of assets so both parties are left satisfied (relatively speaking) with the property division.
What If You Can’t Make The Payment?
What if you don’t have a spare $100K to fulfill the equalization payment in the above example?
There are a couple of options:
- Do a cash-out refinance against the home to complete the payment.
- Sell the house and make the equalization payment from the profit.
- Sell the house, then divide the proceeds evenly.
- Agree on a payment plan over a period of time.
- Waive the equalization payment.
Why Waive The Equalization Payment?
As strange as leaving money on the table may sound, sometimes it’s just easier.
Whether one spouse simply wishes to be done with things, feels generous, or recognizes the legal fees incurred with dragging on a divorce are sometimes more than the assets they’re fighting over, it’s possible to negotiate an uneven deal.
Skip The Drama, Get A Prenup
The best way to retain control of your assets in your marriage is by creating a prenuptial agreement. When you establish a prenup, you and your partner dictate precisely who owns which assets, saving time and money if you divorce.
Plus, a prenuptial agreement is a valuable tool for discussing finances and big-picture goals. These talks are critical for the health of your marriage and open the door for trust, respect, and open communication.
Book a consultation call with me to comprehensively plan your premarital finances and get set up for a successful marriage.