Arizona Community Property Laws

Learn About Arizona Community Property Laws From Our Licensed Arizona Attorney Chris Hildebrand of Hildebrand Law, PC.

Community Property Laws in Arizona

Arizona Community Property Laws.

Arizona Community Property Laws.

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. Married people in Alaska can choose to opt into a community property marriage or rely upon “common law” principles to apply to their assets.

At the core of community property principles are that each spouse has equal ownership and control over all community property acquired during the parties’ marriage. The Arizona Supreme Court confirmed this principle 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. An Arizona divorce court treats 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. The court in the Janis case confirmed a condominium located in Hawaii by an Arizona married couple constituted quasi-community property.

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Acquiring Community Property in Arizona

Acquiring Community Property in Arizona.

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. However, the following ways of receiving property during the marriage is the separate property of the spouse receiving the property:

A gift given from one spouse to the other spouse turns the property into the separate property of the spouse receiving the property;

  • Property a spouse receives from an inheritance is that spouse’s separate property;
  • Property a spouse purchases with his or her separate property;
  • An award of personal injury damages are the sole and separate property of the injured spouse;

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 a court divides stock options in a divorce in Arizona.

You should read our article entitled “Disclaimer Deed and Divorce” regarding how a spouse can waive a community property interest in a home. A Disclaimer Deed may grant the house 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. The Wife in the Malecky case waived her community property interest on a house purchased during the parties’ marriage.

The Arizona Supreme Court in the case of Schwartz v. Schwartz held that title to an asset acquired during the marriage does not impact the community property nature of that asset.

The difference between the Malecky case and the Schwartz case resulted from a spouse’s waiver of a community property interest in the Malecky case. The spouse in the Schwartz case only held title to an asset without also having a waiver of a community property interest.

There is an important rule that applies to the purchase of a home during the marriage.

The Arizona Court of Appeals in Bell-Killbourne v. Bell-Killbourne held spouses 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 a spouse who signs a Disclaimer Deed on a home during the marriage waives any community property interest in that home. The house then becomes 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. A community lien exists when community money or effort is 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

Dividing Community Property in an Arizona Divorce.

Dividing Community Property in an Arizona Divorce.

It is essential 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 share the estate equally. However, in most cases, the court will equally divide community property.

You may 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 order an unequal distribution of community property. A court may do this if a spouse wastes community assets. A court may also do this if a spouse conceals or destroys community property.

 

The court can divide the property “in-kind.” An in-kind division of assets means the court does cut every asset in half. Instead, the court may award each party their bank accounts. The court could then order one spouse to pay the other spouse an equalization payment. That equalization payment ensures each spouse received half of the total value of both bank accounts.

An Arizona judge is prohibited from dividing some assets in a divorce. For example, a court cannot divide a spouse’s military disability pay in an Arizona divorce.  However, the Arizona Supreme Court in the unpublished Merrill v. Merrill decision ruled a spouse electing to change from Military Retirement Pay to Combat-Related Special Compensation Pay may have to compensate his or her spouse for the decreased retirement benefit.

There are times when a divorce decree fails to divide some items of property. Failure to divide an asset in a divorce 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 the former spouses own all property not divided in a divorce decree as “tenants in common”. Ownership as “tenants in common” means 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. These accounts are different because they are tax-deferred accounts. A tax-deferred account means income taxes are not paid until money is withdrawn from the account.

You may also want to consider obtaining a valuation of a pension in a divorce. You would value the pension to obtain a lump-sum payment for half the value of the pension in the divorce.

Depending on the type of account, you may be able to divide a retirement account by merely doing a qualified transfer into a new retirement account to split the retirement account.

Federal tax code anticipated this problem. The Employee Retirement Income Security Act (ERISA) is a federal law. That federal law allows 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. A Plan Statement almost always governs these types of assets. The Plan Statement practically always precludes the transfer of these benefits to the other spouse. The court, however, can create a constructive trust to divide stock options. In a constructive trust, a spouse can be ordered to redeem the other spouse’s share of those options in the future. The redemption of the nonemployee’s share of the stock options, however, bust be “tax effected.” This “tax effecting” may be done because the employee spouse will be pay income taxes on the exercise of the stock option.

Dividing Community debts in Arizona

The rules that apply to the division of community property also apply to the division of community debts. Community debts are also equitably divided in a divorce. Community debts, such as credit card debts, are usually equally divided. However, a spouse awarded an asset burdened by debt will almost always be solely responsible for that debt.

Separate Property in an Arizona Divorce

It is essential to distinguish between the property that is community property versus a spouse’s sole and separate property. Any property acquired before the date of marriage is that spouse’s sole and separate property. Also, any property acquired after service of the Petition for Dissolution of Marriage 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. You can turn community property into a spouse’s separate property by a written post-nuptial agreement between the spouses as long as the agreement is not made to defraud 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 essential to understand that the spouse receiving the gift or inheritance has the burden of proving by clear and convincing evidence that such property was a gift or the result of inheritance. That burden of proof exists because there is a presumption that any property acquired during the marriage is community property.

Community Property Interest in Sole and Separate Property

Community Property Interest in Sole and Separate 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. The value of that community lien may be the extent those payments reduced the outstanding balance owed on the mortgage from the date of marriage to the time of divorce.

Also, improvements made to the home during the marriage with community funds may creat a community lien if those improvements increased the value of the house. You can also file a lien against the home in the form of a Lis Pendens if you have a legitimate claim to a community lien. The Lis Pendens will effectively prevent your spouse from selling or refinancing the home until the court resolves the community lien claim.

Also, the community may have a lien against a spouse’s sole and separate business if that business increases in value and/or produces more income than before the marriage. If that increased value or pay was not due to the efforts of the spouse during the 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. The value of that community lien would be the increase in value or income of the business to the extent attributable to the spouse’s efforts during the marriage.

However, there is a defense to compensating the community for community liens. A court can conclude the community was fairly compensated for that community lien during the marriage.

 

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

Converting Separate Property into Community Property.

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. A gift of separate property can occur when a spouse adds the other spouse’s name ‘s name to the deed of a home owned by the other spouse before marriage. A gift of separate property can also occur when someone uses their sole and separate money to purchase a house titled in both spouses names.

The Arizona Court of Appeals in the Flowers case found a spouse had gifted his sole and separate home to the community. Despite that finding, the court upheld an award of 100% of that home to the spouse who originally owned it as sole and separate property. The court found it was fair and equitable to do so.

Another common way a spouse converts separate property into community property is when a spouse commingles separate property with community property. Separate property that is so commingled to the extent it is impossible to distinguish becomes community property. Commingling separate property commonly occurs in bank and investment accounts when a spouse commingles paychecks earned during the marriage with funds held in a sole and separate account.

Commingling issues are very complicated.

For example, a spouse buys a car from an account he owned prior to marriage. He does not put any paychecks he earned during marriage into the account. He then buys a car with funds in that separate account. The account and the car are that spouse’s separate property.

In another example, that same spouse buys the same car with funds from the same account. However, he has been depositing his paychecks earned during marriage into that account. His commingling in that account likely turned it into a community property account. The car purchased from that account is now likely community property.

The Arizona Supreme Court in the Van Loan v. Van Loan case did not apply the same commingling analysis to retirement accounts. As a result, a spouse has not commingled a retirement account by making additional retirement contributions after marriage.

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.

Other Articles About Community Property in Arizona

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Chris Hildebrand

Chris Hildebrand

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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