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In Arizona, an increase in the value of separate property during a marriage can be either separate or community property depending upon whether the spouses were segregating separate from community property in Arizona.
Arizona court generally treats separate property increases as community property to the extent it is attributable to a spouse’s efforts. Any increase due to the inherent value of the property itself remains separate property.
In Nace v. Nace 448 P.2d 76 (1968), the Arizona Supreme Court addressed this issue.
A husband appealed the Court of Appeals’ ruling that the increase of his separate holdings during the marriage were community property.
Keeping Separate Property in a Separate Property Account To Preserve the Separate Nature of That Property.
Mr. Nace and Mrs. Nace married in 1956.
The wife filed for dissolution in 1963.
She asked for a property division, alimony and child support.
The trial court awarded her the family home, $1,500 a month for alimony and $400 a month for child support.
It also identified $112,000 as her separate property and awarded her $60,000 of the community property.
It then ordered the husband to pay property taxes on the house plus medical expenses for the child in the amount of $500 per year.
The Court of Appeals changed the award.
It gave the wife the family home plus $500,000 as her share of community property. From this, it subtracted the home value–$111,950—leaving $388,050, with interest.
From this, the husband appealed.
The Arizona Supreme Court reevaluated the property division.
Impact of Moving Money from a Separate Property Account Into a Community Property Account
For decades before the marriage, Mr. Nace managed his family’s chain of motion picture theaters. The trial court determined that his properties were worth $470,207 at the time of the marriage.
Two years after the marriage, Mr. Nace inherited property valued at $1,135,959.
The husband presented substantial evidence of his financial affairs at trial, including checks and accounts.
He called the account relating to his financial enterprises his “regular” account. He called the community property account his “special” account and he deposited his salary into it.
On one occasion though, he deposited $230,000 from his regular account (separate property account) into his special account (community property account).
Separate Property is Initially Determined by Its Status at the Time of the Marriage
In Arizona, the court determines the separate or community characteristic of property by its status at the time of the marriage.
During a marriage, property keeps its status as separate or community as long as it can continue to be segregated.
Arizona courts presume the property a couple buys during the marriage to be community property.
First Step to Determining Community Property is to Determine What is Separate Property
The Supreme Court said that to determine community property, they must first determine what is separate property.
It reviewed the trial court’s determination of separate property, saying it would not disturb it absent an abuse of discretion.
The trial court found that Mr. Nace held separate property in the amount of $470,207 at the time of the marriage. He then inherited $1,135,959 for a total of $1,606,166. The court valued this separate property at $2,703,834 at the time of divorce.
Treatment of Separate Property That Increases in Value During a Marriage in Arizona
The trial court found that the husband’s separate property increased in value during the marriage by over $1 million.
It could not determine what portion of the increase to attribute to his business judgment and management. Nor could it determine what part to attribute to the inherent nature of the business or property.
Therefore, under Arizona law, it found all the increase to be community property.
The Supreme Court disagreed.
Husband’s Salary From His Sole and Separate Business Fairly Compensated the Community For Husband Work Efforts
It evaluated the husband’s salary and found it to be a fair estimation of the value of a skilled manager. It found that he kept the books scrupulously.
Other than the $230,000 he transferred to the community account, the husband kept all other business money separate. Therefore, the court ruled that everything in the regular account was Mr. Nace’s separate property.
The Court then said that all of the money in the special account (community property account) was community property. It also treated the $230,000 deposit to that account as community property. When it added this amount to the value of the marital home, community property totaled $341,950.
The wife’s share would normally be half of this ($170, 975). The Court found the trial court’s division of property to be an equitable split. The value of the house plus the $60,000 of community property totaled more than that amount.
It also noted the generous alimony and child support the trial court awarded. It noted the property taxes and the medical bill’s provisions. It determined that the trial court awarded Wife a fair share of the property.
Arizona Supreme Court’s Decision on Husband Segregating Separate Property From Community Property
The Arizona Supreme Court amended the trial court’s decision to make the property taxes part of the alimony. Otherwise, it upheld that decision and vacated the Court of Appeals’ decision.
The Experienced Arizona Community Property Attorneys at Hildebrand Law, PC
If you have questions about segregating separate from community property in an Arizona divorce case, you should seriously consider contacting the attorneys at Hildebrand Law, PC. Our Arizona community property and family law attorneys have over 100 years of combined experience successfully representing clients in community property disputes and family law cases.
Our family law firm has earned numerous awards such as US News and World Reports Best Arizona Family Law Firm, US News and World Report Best Divorce Attorneys, “Best of the Valley” by Arizona Foothills readers, and “Best Arizona Divorce Law Firms” by North Scottsdale Magazine.
Call us today at (480)305-8300 or reach out to us through our appointment scheduling form to schedule your personalized consultation and turn your Arizona community property or family law case around today.
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