Arizona Community Property Laws
How Does Arizona Community Property Law Work?
Arizona is commonly referred to as a community property state. Arizona courts are, therefore, required to follow community property law principles when dividing community property in a divorce. Those same Arizona laws require the court to identify all of the spouses’ property, classify that property as either property owned by both spouses as community property or, alternatively, property belonging solely to one spouse, value the property determined by the court to be community property, and then to fairly divide that community property.
All assets acquired by either spouse during marriage is legally presumed to be community property. The determination of when a particular item of property was acquired is based upon when transfer of ownership of that property was completed regardless of when actual possession of that property occurs. Typical examples of community property include income earned by a spouse’s effort during marriage regardless of the form of that compensation including, but not limited to, salary, increases in retirement benefits, stock options, and accumulated vacation and sick pay. However, not all property acquired during marriage may be deemed community property, such as under certain circumstances when a spouse signs a Disclaimer Deed at the time a home or parcel of property is acquired.
CLICK HERE to read an article on a spouse waiving a community property interest in property acquired during the marriage.
In the case of a self-employed spouse, the community would receive a community property interest in some or all of the income earned from that spouse’s business, as well as the property purchased with those funds, that would be fairly attributable to the reasonable compensation and possibly excess profits of the business earned as a result of the efforts of a spouse, which amount would be determined by a business appraisal.
The presumption that all property acquired during marriage is community property can be rebutted if one of the spouses presents sufficient evidence to establish that some of the assets are the separate property of that spouse. Separate property consists of property owned by a spouse prior to marriage or received as a gift or inheritance by a spouse during marriage.
Some property that would otherwise be considered separate property may, under some circumstances, be converted into community property when, for example, the separate property is combined with community funds, there are indications that the spouse intended to gift that separate property to the community, or the spouses entered into a prenuptial or post-nuptial agreement modifying separate property into community property. There are other situations in which a spouse may be entitled to a financial lien against the separate property of the other spouse if community funds and/or effort were utilized to manage or maintain that separate property.
Once the initial classification of property is decided by the court, the judge will award each spouse their sole and separate property and then fairly divide the remaining community property. The court must first make a determination of the value of each item of community property to be able to make a determination of how to fairly divide that property. The value of the community property may be determined by an agreement of the parties, the testimony of the parties, or the testimony of a qualified expert, such as an appraiser.
Although many assets do not vary greatly in value while a case is being resolved, there are some circumstances when the value of an asset changes significantly while the case is pending. In such cases, the date assets are valued may have a significant impact upon the court’s division of community assets. Arizona courts are granted broad discretion to pick a valuation date that results in the fairest division of the community assets. Arizona courts may even apply different valuation dates for certain assets in the same divorce case.
Once the value of the community property has been determined, the court must make a determination of how to fairly divide that property. The court has the broad discretion to choose among many alternatives to divide the community property including an in kind distribution of property (wherein the court awards some property to one spouse and the remaining property to the other spouse), a cash out distribution of property (wherein the court orders one spouse to pay some amount of money to compensate the other spouse for a fair value of the property), a sale and division of property (wherein the court orders the property sold and the proceeds divided), a deferred division distribution (wherein the court orders the parties to equally own the property subject to a future sale of that property), and/or a reserved jurisdiction distribution of property (wherein the court enters a divorce decree but reserves jurisdiction over the determination of the subsequent value and/or division of community property.)
The determination of whether an asset is community property and, therefore, subject to a fair division between the spouses or whether the asset is the separate property of one spouse requires a careful case by case analysis. Once that determination is made, the focus turns to establishing the appropriate valuation date and the most advantageous valuation approach to ensure the fairest division of community property.
Visit our AZ Community Property FAQs page for more detailed information on Arizona Community Property laws.
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