Arizona Community Property Laws
Community Property Laws in Arizona
Many people have questions about Arizona community property laws and want to know if Arizona is a community property state. The short answer is yes, Arizona marital property laws make Arizona a community property state.
There are only nine states in the country that are community property states including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Alaska. Alaska is considered an “opt-in” community property state because married people in that state can choose to opt into a community property marriage or rely upon common law principles to apply to their assets.
At the core of the community property principles is that each spouse has equal ownership and control over all community property acquired during the parties’ marriage as confirmed by the Arizona Supreme Court in the seminal case of La Tourette v. La Tourette.
Arizona Revised Statute Section 25-318 provides that the court shall fairly and equitably divide all community property and quasi-community property. Assets acquired in a community property state is, by definition, community property. However, property purchased by a married couple who lived in a non-community property state is not, by definition, community property.
That property is, instead, considered by law in Arizona as quasi-community property; meaning the Arizona law requires the Arizona divorce court to treat such quasi-property as if it was acquired a community property state. An interesting bankruptcy decision in the case of In re Janis supported the application of quasi-community property in Arizona by confirming that a condominium located in Hawaii by an Arizona married couple constituted quasi-community property.
Acquiring Community Property in Arizona
Arizona community property law provides that all property acquired during the parties’ marriage, with some exception, is presumed to be community property in Arizona. The spouse attempting to overcome that presumption must prove by clear and convincing evidence that the property is his or her separate property.
Some of the exceptions to the general rule that all property acquired during the marriage is community property is when a spouse receives a gift from the other spouse. Another exception is when the husband or wife receives an inheritance, purchases property with his or her separate property, or receives an award for personal injury damages, in which case those items are the sole and separate property of the spouse receiving that property.
Some of the more complex valuation issues in dividing community property in Arizona about the value of a business and division of stock options. You should read our article on the Arizona Court of Appeals decision in the Brebaugh v. Deane case on how stock options are divided in a divorce in Arizona.
“You should read our article entitled “Disclaimer Deed and Divorce” regarding how a community property interest in a home can be waived; thereby granting the home to the other spouse as their sole and separate property. You may also want to read our article on the Arizona Court of Appeals decision in Malecky v. Malecky on how a wife waived her community property interest on a house purchased during the parties’ marriage.
The Arizona Supreme Court in the case of Schwartz v. Schwartz has held that title under which an asset acquired during the marriage is held (i.e., title to a car being in one spouse’s name only) does not have an impact on the nature of that asset being community property.
There is an important rule that applies to the purchase of a home during a marriage. The Arizona Court of Appeals in the case of Bell-Killbourne v. Bell-Killbourne held that parties are free to change the character of their property from community property to a spouse’s sole and separate property.
In that case, the Appellate Court held that a spouse’s signing of a Disclaimer Deed to purchase a home during the marriage was enforceable such that the spouse who signed the Disclaimer Deed at the time the home was purchased waived any community property interest in that home; thereby making the home the other spouse’s sole and separate property.
Arizona courts also recognize the creation of a community lien against a spouse’s sole and separate property whenever community money or effort was used to increase the value of that sole and separate property. You may wish to read our article on the creation and evaluation of community liens, as well as the counter-argument of “fair compensation” to defeat such community property liens in the sole and separate property.
Dividing Community Property in an Arizona Divorce
It is important to understand how property is divided in an Arizona divorce and the difference between community and separate property. The trial court has broad discretion to effectuate a fair and equitable division of community property. Although the court is required to divide the property equitably, it does not necessarily have to divide the property equally. However, in most cases, the court will equally divide community property.
You are also permitted to enter into a property settlement agreement with your spouse dividing all or some of your community property. That agreement will be adopted by the court as long as it is not an unfair agreement. You can enforce the division of property and debt in an agreement or divorce decree if your spouse does not cooperate.
The court may effectuate an unequal distribution of community property when, for example, the court finds a spouse has committed waste of community assets during the marriage or has concealed or destroyed community property.
The court can effectuate the fair and equitable distribution of property “in kind”; meaning the court will not cut every asset in half but, instead, may award Wife all of her bank accounts, award Husband all of his bank accounts, then award an equalization payment to be paid by one spouse to the other to make the award of those accounts and the balances in those accounts equal.
There are some assets accumulated during the marriage that cannot be divided in a divorce in Arizona. For example, military disability pay may not be divided in a divorce. However, the Arizona Supreme Court in the unpublished Merrill v. Merrill decision ruled that a spouse who elects to change from receiving Military Retirement Pay to Combat-Related Special Compensation Pay may still have to reimburse his or her spouse for the retirement benefit he or she would otherwise have received.
There are times when a divorce decree fails to divide some items of property. This typically occurs because the parties failed to notify the court of the asset. The court, therefore, was not aware of the asset and did not provide for the division of that asset. Sometimes, people intentionally hide assets in a divorce.
Arizona Revised Statute Section 25-318(D) provides that all property not divided in a divorce decree is owned by the former spouses as “tenants in common” which each spouse owns an undivided 50% interest in that asset.
Pensions and Retirement Accounts
Pensions and retirement accounts are unlike other forms of community property because of their tax-deferred status; meaning a taxable event occurs if the court were to empty the retirement accounts to divide the funds within those accounts. You may also want to consider obtaining a valuation of the pension for the purpose of your spouse paying you a lump sum amount as and for your share of his or her pension.
Depending on the type of account, you may be able to divide a retirement account by simply doing a qualified transfer into a new retirement account to divide the account.
Federal tax code anticipated this problem. Federal statutes exist in the Employee Retirement Income Security Act (ERISA) that permit a non-taxable transfer of a spouse’s interest in a pension or retirement account through an approved Qualified Domestic Relations Order for retirement accounts and a Domestic Relations Order for some pensions. Also, federal law within the Uniform Services Former Spouse’s Protection Act allows a divorce court to divide military retirement pay as marital property.
Stock Options, Deferred Compensation, and Other Employee Benefits
Some employers offer stock options, deferred compensation plans, and other employee benefits. These types of assets are almost always governed by a Plan Statement that precludes the transfer of these benefits to the other spouse. The court, however, can create a constructive trust dividing stock options to require your spouse to cash in these benefits under a certain schedule subject to “tax effecting” these assets upon their distribution to the other spouse.
Dividing Community debts in Arizona
The rules that apply to the division of community property also apply to the division of community debts. This means that community debts are to be equitably divided in a divorce. This means community debts, such as credit card debts, are usually equally divided. However, if there is an asset that is awarded to a person in a divorce the debt associated with that asset will almost always be assigned entirely to the spouse who is awarded that asset.
Separate Property in an Arizona Divorce
It is important to distinguish between property that is community property versus a spouse’s sole and separate property. Arizona community property state laws provide a presumption that any property acquired by either party before the date of marriage or after the date the divorce petition is served is the sole and separate property of the person receiving that property.
Spouses can even change the characterization of community property into a spouse’s separate property. This can be done by a written post-nuptial agreement of the spouses as long as the agreement is not made for the purpose of defrauding creditors. Spouses can also change a community property interest in a home to the separate property of one of the spouses by executing a Disclaimer Deed or Quit Claim Deed during the marriage.
The same presumption applies to debts as well. Additionally, gifts and inheritances received by either spouse during the marriage are presumed to be the sole and separate property of the person receiving the gift or inheritance. It is important to understand that the wife or husband who received a gift or inheritance during the marriage has the burden of proving by clear and convincing evidence that such property was a gift or the result of inheritance because there is a general presumption that any property acquired during the marriage is community property.
Community Property Interest in Sole and Separate Property
The community may gain an interest in a spouse’s sole and separate property. For example, if community funds are used to pay the mortgage on a spouse’s sole and separate home during the marriage, the community may have a community lien to the extent those payments reduced the outstanding balance owed on the mortgage from the date of marriage to the date of divorce.
Also, if improvements were made to the home during the marriage with community funds then a community lien could exist to the extent those improvements increased the value of the home. You can also file a lien against the home in the form of a Lis Pendens until such time the community lien claim is resolved. The Lis Pendens will effectively prevent your spouse from selling or refinancing the home until your community lien claim is resolved.
Also, the community may have a lien against a spouse’s sole and separate business if that sole and separate business experiences an increase in value and/or produces more income than prior to the marriage. If that increased value and/or income was not due to the efforts of the spouse during marriage, then both the increased value and increased income remain the sole and separate property of that spouse.
However, if that increase in value is wholly or even partly due to the efforts of the spouse during marriages, then the community would have a community lien on the increase in value and/or income of the business to the extent attributable to the spouse’s efforts during the marriage.
Under both of the above scenarios, there is a defense to whether the community should be compensated for such community liens. Primarily, the community lien can be partly or completely offset if the owner of that separate property can demonstrate the community has already been fairly compensated during the marriage to the extent of the value of that community lien.
To learn more about community liens in separate property, please read our article entitled “Community Liens in Sole and Separate Property in Arizona” discussing the Arizona Court of Appeals decision in the Potthoff v. Potthoff case.
Converting Separate Property into Community Property
Spouses in Arizona are permitted to change the legal characterization of their property either intentionally or unintentionally. For example, a spouse may intentionally gift their separate property to the community when, for example, a spouse owned a home prior to marriage and places his wife’s name on the deed to the home with the intent of gifting that sole and separate home to the community. A gift of separate property can also occur when someone uses their sole and separate money to purchase a home titled in both spouses names.
The Arizona Court of Appeals in the Flowers case, however, held that although a sole and separate home was turned into community property during the marriage, a trial court may have the authority to award 100% of that home to the spouse who originally owned it as sole and separate property if it proved it is equitable to do so.
Another common way separate property is converted into community property is when the separate property is so commingled with community property that it becomes impossible to distinguish between the two. This commonly occurs in bank and investment accounts when paychecks are commingled with funds held in a sole and separate account owned prior to marriage and there is a subsequent continual influx of community monies into the account and outflows of funds for either community or sole and separate expenses.
Commingling issues can become very complicated. For example, if one spouse had an account prior to marriage, used the money to buy a car that was titled only in her sole name during the marriage, and never commingled community funds in the account used to purchase that car, the car would continue to remain her separate.
However, if she had so commingled community funds in that same account such that it was impossible to distinguish the separate from the community funds held within that account, the car would then be considered to be community property.
You should also be aware that the Arizona Supreme Court in the Van Loan v. Van Loan case did not apply the same commingling analysis to retirement accounts such that it does not matter if post marriage deposits are made into what was a previously sole and separate retirement account. The court is required to separate the sole and separate portion from the community portion, award the sole and separate portion to the spouse who earned it and divide the community portion between the parties.
Chris Hildebrand wrote this article about community property to ensure everyone has access to information about community property laws in Arizona. Chris is a divorce and community property attorney at Hildebrand Law, PC. He has over 24 years of Arizona family law experience and has received multiple awards, including US News and World Report “Top Arizona Divorce Attorneys”, Phoenix Magazine “Top Divorce Law Firms”, and Arizona Foothills Magazine “Best of the Valley” award. He believes the policies and procedures he uses to get his clients through a divorce should all be guided by the principles of honesty, integrity, and actually caring about what his clients are going through in a divorce.
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