When a couple gets married, they start acquiring property and assets. In California, all of the furniture in the house, cars in the garage, and cash in the bank gained during the marriage is equally owned by both spouses. When they get divorced, they have to split up those assets. That’s common knowledge. But what isn’t common knowledge is what happens to lawsuit earnings. When it comes to something like monetary damages from a lawsuit stemming from a terrible injury, the asset division rules are a mystery to most couples. This article attempts to demystify this scenario that affects thousands of people each year.
I’m a family lawyer in Orange County, CA, and I know the struggle that couples face when dividing up assets in a divorce. My co-author, Sean Reis, is a personal injury attorney in San Diego. Together, we are going to try to explain the laws dealing with lawsuit damages and how it concerns asset and property division in a divorce.
Marital Asset Division Basics in California
Anything of value that was acquired during marriage, or acquired with marital property, is owned by both of the spouses and would need to be divided between the two if they split up. Each spouse is entitled to receiving property in the divorce, however depending on their state’s law the division may or may not be equal. California is a community property state which means that the asset division will be 50/50.
Community property is considered to be any property or assets that a married couple buys or earns during the marriage. California recognizes separate property as well. Separate property is generally what each individual acquired before the marriage and after separation. This property will remain under that individual’s ownership; he/she isn’t required to “share” ownership of a separate property asset with their spouse. That includes income from any business venture that an individual earned before a marriage.
Of course, the law has exceptions for almost every situation. So, we highly recommend that if you or your spouse received a payout from an insurance company for a personal injury, you should get legal advice as soon as you decide to dissolve your marriage.
California Has Its Own Rule
For your general knowledge of this topic, there are a couple of ways that a court usually determines how personal injury earnings are divided in a divorce. Be aware that California plays by its own rules and these two rules do not apply in California.
- Mechanical approach – This method of ruling is based on state laws of separate and marital property. Typically, the rules are the same as mentioned in the section above. The exception here is that gifts or inheritance received during the marriage by one spouse is considered separate property. So, something like personal injury winnings during a marriage is treated as marital property because it’s not a gift nor is it an inheritance.
- Analytic Approach – This approach questions the purpose of that personal injury award. Were the damages awarded to replace something for the injured spouse or was it replacing something for both spouses? For instance, was the injured person supporting both he and his wife? If so, that award helped support both parties and would likely be divided between both. If the award was given for the individual, injured spouse’s well-being, it would be considered separate property and not be divided in a divorce.
Some states use both the Mechanical and Analytic Approach to dividing personal injury earnings in a divorce. Now, California is the only community property state that plays by a different rule. It’s simple. In California, any personal injury earnings received from a lawsuit that was started during a marriage is to be considered community property. California Family Law Code 780
But, in California, personal injury damages are considered separate property under the following circumstances:
- If the case started before or after a marriage
- If the cause of action arose while the injured spouse was living separate from his/her spouse
There are even more rules regarding separate property that are exceptions to the guiding policies mentioned above:
- If you are separated or living apart from your husband/wife at the time of the injury, property acquired is considered separate
- Then, if the injured spouse uses community property (money) to pay for doctors, therapy, medicine, etc. (while separated) for the injury the other spouse is entitled to a reimbursement for those expenses from the case settlement
- If one spouse injures the other spouse while they are still married, the damages paid to the injured spouse is his/her separate property.
- Later on, if they get divorced, the spouse that did the injuring is not entitled to a portion of those damages paid.
Can You Protect Your Injury Lawsuit Earnings in a Divorce?
Even while you and your spouse are married, there are ways that you can protect your injury earnings in case of a divorce. Although California has a strict community property statute, every couple’s case is different and may have an exception. There are 3 things that can be done to protect a married individual’s personal injury award in California:
- Get a postnuptial or prenuptial agreement – The personal injury earnings can be designated as a personal asset instead of letting it become community property.
- Talk to a personal injury lawyer and divorce lawyer for advice – When the personal injury case begins, make sure you talk to your lawyer about the likelihood of a divorce and what you can do to protect any settlement/award in case of a divorce.
- Keep your money separate – If you anticipate a divorce in the future and want to protect your personal injury compensation from being divided up, open a separate bank account. Do not mix the funds in a community account before talking to a divorce attorney. This will not, by itself, protect your money from re-allocation in a divorce, but it will show that you are not co-mingling assets. Its best to discuss with a family lawyer, tax professional, and a PI lawyer before taking this action.
What About Taxes?
Neither of us are tax lawyers, so you should absolutely consult with a tax professional or tax lawyer if you are interested in the tax ramifications of an injury lawsuit. The IRS has published a guide on its website dedicated to lawsuit earnings. We highly recommend that you read it.
When lawsuit awards or settlements are part of a divorce, things can get fairly messy. With California’s firm community property law, it takes a knowledgeable divorce attorney to help you protect what is rightfully yours when you split from your spouse. If you’re worried about a potential divorce after you’ve started a personal injury lawsuit, don’t do anything until you consult with a family lawyer.
About the Authors
Jason Smith is a family law attorney in Irvine, California. He attended Pepperdine University School of Law in Malibu. He received an undergraduate degree from the University of Utah. He received his license to practice law in 2011 and now represents husbands, wives, and children in family law disputes. His office handles all family law related matters, including divorce and the division of marital assets.
Sean Reis is an injury lawyer in San Diego, California. Mr. Reis attended law school at Rutgers and received an undergraduate degree from University of California, San Diego. He has worked at large defense firms and opened his own practice over a decade ago. His office now represents seriously injured individuals in lawsuits against insurance companies. This includes injuries stemming from anything between car accidents to defective products.