The issues involved with separate versus community property can be very technical in some cases. It is always smart to consult with a qualified family law lawyer to discuss these types of issues and how they apply to your particular case.
- What is community property?
- What is separate property?
- What is a community lien?
- What are community debts?
- What are the sole and separate debts?
- When does community property end?
- Who should pay for the community expenses during the divorce?
What is Community Property?
Arizona is one of nine community property states in the U.S. Arizona’s divorce and family law statutes, which are contained in Title 25 of the Arizona Revised Statutes, generally describes community property as all property acquired by either spouse during the marriage except such property that is specifically defined by Arizona law as sole and separate property, such as property owned prior to marriage, inheritance or gifts from non-spouses (see section below regarding sole and separate property).
Thus, it generally does not matter what spouse’s name assets are placed in if such asset was acquired during the marriage. For example, sometimes spouses keep separate accounts. Unless there is a premarital or post-marital agreement defining the parties’ rights differently, it does not matter if the parties kept separate accounts – funds acquired from income earned during the marriage would still be community property. Another example would include automobiles. It does not matter whose name is on the title. Rather, if the automobile was purchased during the marriage from community funds, it would be community property.
What are community funds? Some people think my income is mine, and the other parties’ income is his/hers. That is simply not the case. If the funds were earned during the marriage by either party, such funds are considered community property.
How are community funds divided? Arizona case law provides that community property is divided equitably. Absent other considerations, this generally means that all community property is divided equally. Again, this is regardless of whose name the asset is in. There are times that community property can be divided unequally by the Court. This is explored further in the section below under “Waste and Other Unequal Division Of Property Cases”.
Community property laws are, however, sometimes confusing. Generally, there are two kinds of property. The first kind of property is called “real property” – this means real estate (houses, land, etc.). The other general kind of property is “personal property” – this means everything else (furniture, financial assets, and anything else of value). Arizona law sometimes has different laws apply to different types of assets, most notably between real property and personal property.
There are times that something that would otherwise be a community asset could be converted into a sole and separate asset. A common example of this is when a spouse signs a disclaimer deed and places real property (i.e. a home or land) into the other spouse’s name. Arizona cases have held that it may enforce such disclaimer deed, and thus recognize the property as sole and separate. However, there are contrary arguments that can be made, including fraud or mistake, or the fact that the community paid the mortgage and other expenses associated with the home. These can be very technical issues. If you have this type of situation, you will definitely want to at least consult with a qualified community property attorney in Phoenix regardless of whether you are the spouse whose name the house is in, or the other spouse,
Some assets can be mixed – i.e. partially community property and partially separate property. A notable example of this is a retirement account. Often people have a retirement account or benefit that started prior to marriage, but had community funds added during the marriage. In such a case, the portion earned prior to marriage and any gains / losses on that amount would be separate property, and the amount added during marriage and any gains on losses on that amount would be community property. If both parties have retirement accounts, they can usually offset the accounts against one another with an equalizing roll-over to account for the difference in values. With regard to qualified retirement accounts, such as 401Ks, the parties will often need to hire an expert who can draft a Qualified Domestic Relations Order or other type of order to provide for such equalization or division. Your family law attorney will usually set this up for you.
Other examples of “mixed” property (i.e. partially sole and partially community) are employment bonuses and commissions. Sometimes a party receives funds as a result of efforts spent prior to the divorce being served, and additional efforts afterward. In such case, a bonus or commission may have to be divided pro-rata depending upon what was earned or contributed prior to and after the service of a divorce or legal separation. For example, a bonus structure may be based upon an entire annual year of service. If the divorce was filed on July 1st of such year, one-half of the bonus would be community property, and one half sole property. Another example is real estate commissions. In such case, the Court would look to the efforts by the real estate agent spouse before the sale of the property and the efforts afterward, and divide the commission between the community and the separate portion accordingly.
There are times that property that would normally be separate can be converted to community property. These concepts are more fully explored below in the “What Is Separate Property” section below.
What is Separate Property?
Separate property means just what it says – it is the separate property of one of the spouses, and accordingly does not have to be divided with the other spouse.
Arizona law defines separate property as property that is acquired prior to marriage, or received as a gift from a third party, or received by inheritance. This also includes gains on such property (such as rent, interest, etc.). If somebody transfers their separate property from one account to another, or if they purchase assets with such separate property, what they buy or invest in generally stays separate property so long as they can show where the funds came from.
That being said, there can be twists and turns in the law regarding separate property. If there is an increase in value of the property as a result of the efforts of either spouse, the community may have a claim to some or all of the increase in value. A common example is a sole and separate business which increases in value during the marriage. We have addressed this situation under a separate section of this website.
Another twist is if separate property is co-mingled with community property. This is generally done my mixing funds, otherwise known as “co-mingling”. This is often done when a spouse adds their income during marriage to an account that they had before marriage, and then make various transfers and expenditures from such account. If there has not been very much co-mingling, you may be able to “trace” what portion of the account is a community and what portion is separate. However, if the co-mingling is too extensive, you may not be able to trace the separate portion to the extent required by the law. In that event, the separate portion of the funds are not “explicitly traceable”, and thus the entire pot becomes community property and subject to division. If the funds in the account are substantial, CPAs are often retained to determine if the funds can be traced to the extent required by the law.
Generally, adding the name of the other spouse to a sole and separate account does not, by itself, convert the account to community property (assuming that the account is not co-mingled and untraceable). The Court will look to the intent of the party by adding his/her spouse’s name in making such determination.
A big twist to separate property concepts happens when one of the parties owned real estate (home, land, building etc.) prior to marriage and then adds the other spouse to the deed as a joint tenant or as community property. In such event, Arizona law handles this differently, and the home or other real estates that would have otherwise been separate is presumed to be converted (or gifted) to the community and is thus subject to division. There is no real rhyme or reason why Arizona case law treats joint title to real estate different than joint title to financial accounts. This different treatment dates back many years and has never been changed.
What Is a Community Lien?
A community lien arises in a situation where separate property has been improved or community funds have been invested in such asset. This most commonly applies in real estate and business situations.
For example, a situation that parties often face is when somebody owns a home prior to marriage (and keeps the home is just his/her name), but the community (i.e. either or both spouses) pay the mortgage payments and make improvements to the home during the marriage. In such event, the home would still be technically separate property, however, the community may have a claim to a portion of the equity in the home.
A community lien claim may also arise where there is a business owned prior to marriage (i.e. thus separate property), but the business increases in value during the marriage. The community “may” have a claim to a portion of the increase in value that took place during the marriage depending upon the circumstances. We address this issue in our website under business valuation issues. Click here to learn more about business valuation issues and how the community may have a claim to the increase in value.
What Are Community Debts?
Under Arizona law, it is presumed that any debts incurred during the marriage are considered community debts and are generally divided between the parties equally. This is generally true regardless of whether one of the parties earns more income than the other.
On the other hand, the Court can provide for an unequal division of debts in certain cases. Again, the fact that the parties have unequal incomes is usually not enough. One of the more major examples that the Courts often assign an unequal division of debt are student loans taken by one of the parties. Although such would be presumed to be a community debt if acquired during the marriage, the Court can decide that it would not be equitable for the other party to pay a portion of such debt, for example if the party receiving the education will essentially receive all or most of the benefits of the education, where agreements are made regarding the other person’s reciprocal education that are not fulfilled, and for various other reasons.
What are Sole and Separate Debts?
Similar to separate property, any debts incurred prior to the marriage are separate debts, and thus the other party (or the community) would not be liable for any such debts. Similarly, if a party incurs debts during the marriage associated with their own separate property, such may be determined to be a separate debt.
A situation often faced in divorce cases is where a party who had a separate debt uses community property during the marriage to pay all or a portion of such debt. The Court has the power to order the reimbursement of such community payments in certain cases.
When Does Community End?
At such time that one spouse has the other spouse served with a divorce or legal separation petition, the community is terminated. This means that each party’s new income from that point forward, and each party’s new debt from that point forward, is their sole property / debt so long as such funds were earned after service of the petition and so long as a final decree is entered.
Like the other areas of family law, there are often twists and turns in the analysis. For example, if one of the parties receives income from a community business, his or her income may not be entirely separate (for example if a party receives a portion of their income as a result of ownership as opposed to employment). Another example, as addressed above, is that some of the income received after the divorce / legal separation is filed may have been earned in part or in whole before such time. For example, a year end bonus may be received after the divorce is filed but accrued as a result of employment the prior year (often bonuses are based upon a full calendar year but not paid out until February or March of the following year). In such event, the other party is entitled to their proportionate share.
Another important concept is that just because the community is terminated, this does not mean that the lesser earning party has no recourse. For example, the higher earning party may have a spousal maintenance and/or child support obligation, which is addressed elsewhere in this website.
Who Should Pay for The Community Expenses During the Divorce?
This is a situation we see many clients face. In general, both parties have an equal obligation to pay community debts until they are fully divided by a final divorce judgment. However, there are many twists and turns to such analysis. For example, the Court may require one of the parties to pay the community debts during the divorce proceedings as part of his/her spousal maintenance obligation. In some cases, only one of the parties is using the asset upon which the debt is owed, i.e. the home, automobile etc. In such cases, the Court may hold that the party having the benefit of the asset should have to pay the associated payment (mortgage, car payment, etc.). This is usually addressed either by agreement while the divorce is pending, or a motion for temporary orders, which is addressed in a separate section of this website.