Community Property Laws in Arizona
Distinguishing between community property and separate property during a divorce or legal separation case is one of the more complex processes associated with family law in Arizona and the law will oftentimes contain many exceptions to the generals rules discussed on this website. It is important that you speak with a qualified and competent Arizona family law attorney about your property, so you can properly establish what is considered to be community property and what is considered to be separate property in an Arizona divorce.
Generally speaking, any property that was owned by a spouse prior to marriage is that spouse’s sole and separate property. Furthermore, any property acquired by a spouse through inheritance or gift is also that spouse’s sole and separate property. Additionally, any property acquired by a spouse during the marriage is typically labeled as community property and would, therefore, be equitably divided in a divorce or legal separation case. If a spouse’s separate property is found to have been commingled with community property, the separate property could potentially be converted into community property, if proper documentation is not provided to the court tracing those sole and separate funds.
Arizona Community Property Laws FAQ Page
Thank you for visiting our Arizona Community Property Frequently Asked Questions page. Our Scottsdale Arizona community property attorneys want to provide you with answers to all of your questions regarding community property and family law.
We strive to provide answers to all of your questions regarding community property and family law. We encourage you to view our Arizona Community Property Laws page, as well as our Family Law Blog to obtain more information about all aspects of community property in Arizona.
What is Community Property in Arizona?
Arizona community property laws include a presumption that all property acquired by either party is owned by the parties as community property, regardless of how title to that property is held. The burden of proving that an item of property is the separate property of a spouse rests upon the spouse making that separate property claim. There is also a presumption that all property owned by either spouse prior to marriage is the separate property of the spouse who acquired that property.
Community property is distinguished from joint property. Joint property is a form of designation of ownership on the title to property, such as land. The laws applying to joint property may result in a different outcome than in community property. For example, a spouse using his or her money to repair or maintain jointly held property may be reimbursable to the spouse using his or her own separate funds. There are exceptions to that rule. The Arizona Supreme Court issued a ruling in the Valladee v. Valladee case addressing the issues pertaining to jointly held properties in an Arizona divorce.
What is Separate Property in Arizona?
Separate property in Arizona is generally classified as any property owned by a spouse before marriage or any property owned by a spouse after a divorce decree has been finalized. Property that is gained by a spouse through inheritance or gift will be that spouse’s sole and separate property, regardless if received before, during, or after a divorce.
The increase or decrease in the value of a spouse’s separate property is also the separate property of the spouse who owns that property. Separate property can be difficult to determine because there are oftentimes complex legal variables involved such as community liens against a spouse’s separate property, transmutation of separate property into community property, commingling of separate property with community property, and the tracing of separate property which were commingled with community funds. It is vital to seek out an experienced, knowledgeable and proficient family law attorney to ensure that community property is fairly divided and separate property is awarded to the spouse who owns that separate property.
What is the Difference Between Community and Separate Property in Arizona?
Arizona community property laws generally provide that property acquired by either spouse during marriage is community property. Those same community property laws also provide that property acquired by either spouse prior to marriage or that was received as a gift or inheritance by a spouse during the marriage remains the separate property of that spouse.
However, a spouse may waive a community ownership interest in a home or other parcel of real property by signing a Disclaimer Deed at the time the property is acquired.
In some cases, the community can obtain a community lien against the other spouse’s sole and separate property. To learn more about how community liens are created against sole and separate property, review our article entitled “Community Liens in Separate Property in Arizona” or watch the video below regarding the Rowe v. Rowe case to learn more about the decision in the Rowe case.
Rowe v Rowe | Community Lien Claims in Arizona
Is all property owned by either spouse community property in Arizona?
No. Generally, all property that was owned by either spouse prior to the marriage, was acquired by either spouse after service of the divorce petition, was acquired by inheritance, or was acquired through a gift is the separate property of the spouse so acquiring the property.
The increase or decrease in value of that separate property is also the separate property of the spouse who acquired the property. Despite these rather simple sounding rules, there are typically very complicated issues concerning community liens against a spouse’s separate property, transmutation of separate property into community property, commingling of separate property with community property, and tracing of separate property which were commingled with community funds.
Also, spouses are free to characterize what would have otherwise been community property into one spouse’s sole and separate property. You should read my indepth article entitled “Disclaimer Deed and Divorce” regarding the affect signing a Disclaimer Deed at the time of the purchase of a home during marriage may have upon community property rights to that home.
This particular issue has many rules and exception and you should consult with a qualified divorce attorney before making any decisions regarding settlement of community property issues if Quit Claim or Disclaimer deeds have been signed by either spouse.
All of these issues should be discussed with an experienced family law attorney before any decisions can be made regarding your rights to property owned by either spouse; regardless how or when ownership of that property occurred.
Do the Rules Regarding Community and Separate Property Apply to Debts in Arizona?
Yes, the rules are the same. For example, any debts owed by either spouse prior to marriage remains that spouse’s sole and separate debt. Generally, debts incurred during the marriage or after service of the divorce petition are the separate debt of the spouse incurring the debt. There are many exceptions to these general rules.
Sometimes complex issues arise when a creditor of one spouse attempts to collect a sole and separate debt of a spouse by taking the separate property of the other spouse or the community property of both spouses. The Arizona Supreme Court addressed the limits of a creditor in taking community assets or the separate property of the non-debt owing spouse to satisfy a premarital debt in the Forsythe v. Paschal case. You may click the link to that case to read more about the Arizona Supreme Court’s stance on these issues. You should also read our in depth article entitled “Can a Spouse Be Held Liable for Credit Card Debt” covering these rules and their many exceptions or watch the video below for our analysis of the SPQR v. Robertson case on this issue.
SPQR v. Robertson | Community Liability for Separate Debt
Are Prenuptial Agreements Valid in Arizona?
Arizona adopted the Uniform Premarital Agreement Act, which makes premarital agreements legal in Arizona. Prior decisions from the Arizona court of Appeals held people are free in Arizona to characterize what would otherwise be community property into the separate property of one of the spouses by entering into valid Post-Nuptial Agreements.
However, written premarital agreements entered into before marriage are treated differently than post-nuptial agreements entered after the parties become married. A Premarital Agreement will be enforced as long as both parties had full prior disclosure of the financial condition of the other party or such disclosure of that information was expressly waived in the written agreement, both parties voluntarily entered into the agreement, and the court does not find the agreement to be unconscionable. A Post-Nuptial Agreement, however, is only enforceable if the court finds it to be fair and equitable; thereby making them significantly more prone to attack.
For more indepth information on the factors a trial court is required to consider when determining whether to enforce a premarital agreement, please read our synopsis of the Arizona Court of Appeals decision in the Pownall v. Pownall case.
Can you Sell Community Property During a Divorce in Arizona?
Some people may be unaware that, as a general rule, you may not sell community property while the divorce is pending. A Preliminary Injunction is issued when the initial divorce papers are filed with the clerk of the court.
That Preliminary Injunction is immediately enforceable against the person filing the divorce papers, but only becomes enforceable on the other party when he or she is served with those divorce papers. That Preliminary Injunction precludes either party from selling community assets.
There are many exceptions to this rule including, but limited to, the sale of community property for the sole purpose of paying attorney fees. Please feel read my article entitled “Can You Sell Your Home During an Arizona Divorce” for much more detail about the sale of assets during a divorce case.
Does the court divide separate property differently than community property?
The court is required to award a spouse 100% of all property the court determines to be that spouse’s sole and separate property. The court is also prohibited from granting a spouse possession, use, or control of the other spouse’s sole and separate property.
Unlike sole and separate property, the court is required to equitably divide all property the court determines to be community property. The court typically equitably divides the community property by equally dividing that property; albeit, the court may grant an unequal division of the community property if the judge believes it is fair to do so. The distinction, therefore, between separate property and community property is extremely important.
How is Community Property Divided in Arizona?
The court actually prefers for spouses to decide for themselves how best to divide their property and debts. Such an agreement is typically memorialized within a written settlement agreement often referred to as a Marital Settlement Agreement. The agreement is, essentially, a written and binding contract between the spouses in which they divide their assets, divide their debts, and resolve other financial issues such as income tax issues, refinancing of debts to remove a spouse’s name from an assigned debt, and indemnification from one spouse to the other for debts assigned to each spouse. Indemnification is an agreement between spouses that grants a spouse the right to enforce the parties’ agreement for the payment of debts if the spouse assigned a debt fails to pay the obligation.
If the parties are unable to agree upon the division of their property, the court will assign to each party any sole and separate property belonging to him or her and will “fairly and equitably” divide the remaining community property. “Fair and equitable” will, in most instances, be approximately equal, unless the court finds an unequal division is appropriate. The Arizona Supreme Court in the seminal Toth v. Toth case upheld a trial court’s ruling of a substantially unequal division of community property, but the case warned that the facts of that case were very unique and likely inapplicable to a large majority of cases.
Many divorce decrees provide for a “catch all” provision that usually states that each party will be awarded all “other” personal property in his or her possession as his or her sole and separate property. The purpose of such language is to catch any property that was not specifically described in the Decree. As you can imagine, it would be very difficult to describe every item of property you own, so this type of provision may be helpful. However, there are some circumstances when a judge will reopen a divorce decree to reallocate assets mistakenly omitted in a final divorce decree.
You may wish to read our summary of the Arizona Court of Appeals ruling in the Ringear v. Rinegar case wherein the court of appeals found it was appropriate to reopen the divorce decree to allocate the community property interest in the wife’s retirement account that was not divided in the decree. The court of appeals specifically rejected wife’s argument that “each party retain all other personal property in their possession” dictated that the retirement account be awarded to her.
For more information on how you enforce a property settlement agreement, please review our article entitled “How to Enforce a Property Settlement Agreement in Arizona”.
Federal and state law prohibit the division of military disability pay. The Arizona statute prohibiting the division of military disability pay was passed into law in 2010. It prohibits both the division of the military disability pay, as well as any court order that requires the service member to “make up” for lost retirement pay due to he or she voluntarily electing to receive disability pay, which is not divisible in an Arizona divorce, instead of normal retirement pay, which is divisible in an Arizona divorce.
The Arizona Supreme Court in the Howell v. Howell case, however, distinguished application of the Arizona statute in cases in which a spouse of a service member was already awarded a portion of a service member’s military retirement before the enactment of the Arizona law in 2010. The Arizona Supreme Court reasoned that, in such situations, the spouse’s right to receive a portion of the military service member’s retirement had already “vested” and, therefore, a trial court may order a service member to “make up” the difference if the service member voluntarily reduces his or her retirement pay by electing disability pay in lieu of retirement pay.
You should be aware that one of the reasons a military service member may elect to reduce the monthly amount he or she receives by electing to receive disability pay in lieu of retirement pay is because unlike retirement pay, disability pay is not subject to income tax.
What Happens When Sole and Separate Property is Used to Purchase a Home During Marriage?
The public policy of the state of Arizona is to preserve and protect the community whenever possible. As a very general rule and as only one example of many situations that could arise, the community gains a community lien whenever community funds are used to improve the sole and separate property of the other spouse, but only to the extent those improvements increased the value of that sole and separate asset.
However, a much different result applies when sole and separate funds are used improve a home during the marriage. If such a case, the sole and separate funds are presumed by law to be a gift to the community absent an agreement between the spouses that the sole and separate funds are to be repaid. The general rules discussed above have many exceptions, which can be very complicated. You should consult with a qualified and experienced Arizona community property attorney about your specific situation.
You should read our article “Changing Sole and Separate Property Into Community Property”, which discusses the Arizona Court of Appeals decision in the Malecky v. Malecky case addressing these issues or watch the video below regarding the Malecky case. You may also wish to read our summary of the Arizona Court of Appeals case of In Re the Marriage of Flowers wherein the court ruled a trial judge may unequally divided separate property that has been turned into community property if it is proven to be equitable to do so.
Similarly, the Arizona Court of Appeals held in the In Re Marriage of Inboden case that a trial court may not order an unequal division of community property for the sole purpose of reimbursing a spouse for using his or her sole and separate property to acquire or improve community property, but the court of appeals did indicate a trial court may consider the respective contributions of their sole and separate property on community property when the judge exercises his or her broad discretion to look at the “big picture” when dividing that community property.
Malecky v. Malecky | Sole and Separate Property Used to Buy Community Property
What is a Community Lien on Sole and Separate Property?
Arizona rulings have recognized the community may gain a community property lien against the sole and separate spouse if either spouse, through labor, effort, or payment of community money, increases the value of a spouse’s sole and separate property or reduces the debt associated with that sole and separate property.
One common examples we see if when the parties choose to live in a home owned by one spouse prior to marriage; thereby making that house the sole and separate property of the spouse who owns it. However, the parties begin investing community money to make improvements to the home and to pay the monthly mortgage. The community, therefore, may have a community lien against the home to the extent such improvements increased the value of the home and/or decreased the mortgage balance owing on the home.
The second most common example of the creation of a community lien is when one spouse owns a business prior to marriage and the value of that business increases during marriage due to the labors of either or both spouses or the investment of money into the business. The community, therefore, may have a lien against the business for income held within the business and the increase in the market value of the business.
There is, however, an argument to counter the community lien claim, which is to argue the community had already been fairly compensated during the marriage to the extent of the amount the court calculates the community lien to be. You may want to read a more indepth article we wrote about the calculation of community liens in separate property and the fair use doctrine used to counter such claims.
The community may also have a community lien against property, such as a home or business, owned by one of the spouses as his or her sole and separate property even if that property decreased in value during the Marriage. You should read our indepth discussion of that Arizona Court of Appeals case in Potthoff v. Potthoff by reading our article about the Potthoff v. Potthoff ruling.
How is a Business Divided in an Arizona Divorce?
How Are Retirement Accounts Divided in An Arizona Divorce?
The Arizona Supreme Court in the Van Loan v. Van Loan case had to answer the question whether an unvested pension constituted community property in Arizona. The conclusion of the court was that retirement assets, including pensions, are treated in the same manner as all other community property in Arizona and are, therefore, divided between the spouses in a divorce. The court will apportion the community property interest in retirement accounts between the spouses and will award each spouse his or her separate property portion of those retirement accounts.
The actual division of the accounts occurs by rolling out an amount into a separate account for the spouse receiving an interest in the retirement account, offsetting that spouse’s interest in the other spouse’s retirement account by awarding him or her more of some other asset, or by preparation of a special Order referred to as a Qualified Domestic Relations Order, which is an Order that directs the plan administrator as to how to divide the community property portion of the retirement account.
Military Retirement Pay may also be divided in an Arizona divorce. However, special circumstances exist in certain cases of military benefits, such as Combat Related Special Compensation payments and other forms of military disability payments that may not be divided in an Arizona divorce. However, the Arizona Supreme Court in the unpublished Merrill v. Merrill case held that a trial court may order a spouse to compensate his or her spouse if the court previously awarded the division of Military Retirement Pay that is subsequently turned into Combat Related Special Compensation pay due the subsequent disability of the military spouse.
How are Stock Options Divided in an Arizona Divorce Case?
As many are aware, an employee may receive Stock Options or Restricted Stock Units from their employer as a form of compensation. A stock option provides the employee to purchase company stock at a stated price, referred to as the “strike price”, at a given point in time.
Typically, the options have a vesting period. For example, an employee may be granted 1000 stock options that vest equally over four years such that each year 250 of the options vest each year until the passage of four years at which time all 1000 options are vested.
If the market price of the stock is higher than the “strike price”, the employee can turn the stock back to the company and be paid the difference between the “strike price” and the actual market value of the stock. Alternatively, the employee can continue to hold the stock to see if future appreciation will provide the employee with a greater profit from the stock.
The main difference between a stock option and a restricted stock unit is that the employee actually owns the company’s stocks that were granted under the terms of the stock option plan. The can sell them or they can hold them as long as they wish. A Restricted Stock Unit, however, is different.
Similar to stock options, a Restricted Stock Unit will have a “strike price” and a vesting schedule. However, unlike a stock options the employee does not actually own the stock when they Restricted Stock Units vest.
Instead, the employee is simply entitled to cash in the difference between the “strike price” and the current market value of that stock. Many Restricted Stock Units also have a date by which the employee must elect to exercise the cashing in of those Restricted Stock Units after which time they are deemed void.
Both Stock Options and Restricted Stock Units are taxable income. As a result, you must take into consideration the income tax effects of these assets when dividing them in an Arizona divorce. Almost all employee benefit plans contain language providing that these stock options cannot be transferred, which means the court has no authority to order the company to rename the Stock Options or Restricted Stock Units in the name of the non-employee spouse.
In such circumstances, it may be wise to have the employee spouse hold the non-employee spouse’s share of those Stock Options and Restricted Stock Units in a constructive trust with detailed language included to protect the non-employee spouse.
One of the more complicated aspects of dealing with Stock Options and Restricted Stock Units is understanding the terms of the Stock Option and Restricted Stock Unit plan to identify the community property interest in those assets that have not fully vested. It is equally important to know whether the assets were granted to the employee as a reward for past performance or, instead, as an incentive to continue employment into the future.
Arizona court’s lacked guidance on how to address Stock Options and Restricted Stock Units until the Arizona Court of Appeals addressed the issue directly in the case of Brebaugh v. Deane. You should review our article entitled “Stock Options in an Arizona Divorce” on the subject for more information regarding the community property interest in Stock Options and Restricted Stock Units.
Can Parties to a Divorce Settle Their Case With a Marital Settlement Agreement?
The Arizona Supreme Court enacted the Arizona Rules of Family Law Procedure. Rule 69 of the Arizona Rules of Family Law Procedure allow parties to submit a settlement agreement to resolve their case.
The judge is not, however, bound to accept your agreements if the judge believes the provisions pertaining to the division of property and debts are unfair or the judge believes the provisions in the parenting plan regarding legal decision making and parenting time are not in the best interests of the children, which rarely occurs.
To form a binding agreement, Rule 69 requires the agreement to be in writing, or the agreement is stated in court and the terms of the agreement are recorded, or the agreement is recorded during a court ordered mediation.
If one of the parties later wishes to challenge the agreement, the agreement will be presumed to be binding and the party attacking the agreement has the burden of challenging the marital settlement agreement.
The court is required to make sure the terms of the marital settlement agreement pertaining to the division of the parties assets and debts is fair and equitable and that the provisions pertaining to child custody and child support are in the best interests of the children.
Although it is rate a judge would reject an agreement between the parties, the Arizona Court of Appeals in the Boncoskey v. Boncoskey case indicated a trial judge must hold an evidentiary hearing if the court has determined the agreement is not fair and equitable or in the best interests of the children before making any changes to the agreement.
You will also need to determine whether you want that written settlement agreement to survive the entry of a Decree of Dissolution of Marriage and, therefore, be enforceable as a contract separate and apart from the Decree of Dissolution of Marriage or, instead, whether you want that agreement to merge into the Decree of Dissolution of Marriage and not survive the entry of that Decree.
Whether you want the agreement to merge into the Decree or not is complicated and based upon the unique factors in your case. You can read more detailed information on “merger” and “incorporation by reference” by reading our synopsis of the Arizona Court of Appeals decision in the LaPrade v. LaPrade case.
The Arizona Court of Appeals heard an interesting case involving a situation wherein only one of the two spouses signed the settlement agreement. The Arizona Court of Appeals concluded that, despite the fact both spouses did not sign the settlement agreement, both parties were still bound by the agreement. You can click on this Muchesko v. Muchesko link for a more in depth analysis of that case.
How Can I Enforce an Order for the Division of Property and Debt in Arizona?
Whether you have reached a Property Settlement Agreement providing for the division of your debts and assets or the court made to make those decision dividing your debts and assets, you may be faced with the problem of enforcing those orders if your former spouse is refusing to cooperate.
You have several options regarding enforcement of an order requiring your former spouse to return property to you after a divorce in Arizona. You may, in certain circumstances, file a Petition for Contempt seeking the contempt powers of the court to persuade your former spouse to comply with the division of property orders.
If the court finds your former spouse has willfully and intentionally violated the court’s orders and had the ability to comply with those orders, the judge may issue a ruling finding your former spouse in contempt of the court, order him or her to pay your attorney fees, and can even order him or her to be incarcerated until such time he or she complies with the orders.
Alternatively, you can file a Writ of Special Execution, which enables you to use the sheriff’s office to physically go into the location where the property is located to provide that property to you.
There are some limitations, however, to what a court can do to enforce a property settlement agreement in Arizona. For example, some judges may order one spouse to pay the other spouse an equalization payment if the physical division of property is not fair or equitable without ordering the spouse who received more property to the other spouse. The order requiring the remittance of an equalization payment may not be enforced by contempt proceedings, based upon the Arizona Supreme Court’s ruling in the Proffitt v. Proffitt case.
The Proffit v Proffit Decision
Another problem occurs when a spouse damages the property before turning it over to the other spouse. In such cases, the Arizona divorce court would be able to hold that party in contempt of court for violating the Preliminary Injunction, which is issued at the beginning of the case and precludes, among other things, either party intentionally causing damage to property during the divorce.
The Arizona Supreme Court in the Weaver v. Weaver case concluded, for example, the Arizona court lacks the statutory authority to order one spouse to pay the other spouse for damage done to property. In such a case, a separate civil lawsuit would need to be filed to obtain a judgment for the damaged property.
Contact Our Scottsdale Arizona Community Property Attorneys
Call us at (480) 305-8300 to schedule a consultation with one of our Scottsdale Arizona Community Property Attorneys regarding Arizona community property laws or any other Arizona family law matter.