Thursday, 24 July 2014 15:03

Arizona Community Property Basics

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Arizona law divides a married couple’s property into two groups: community property and separate property.  Community property is the property that belongs to the husband’s and wife’s marital community.  Simply put, it belongs to both the husband and the wife.  Separate property is property that belongs to one spouse only.

Arizona law presumes all property acquired by either spouse or both spouses from the date of marriage until the date that one spouse serves the other spouse with a petition for divorce or legal separation to be community property (except for property that was a gift to one spouse only, an inheritance by one spouse only, and most of a personal injury settlement or award).  Upon divorce or legal separation, the court will equitably divide the community property.  Usually, "equitably" will mean substantially equally.  Under limited circumstances, when the normal equities of marriage have not occurred, the court may divide community property substantially unevenly.  One example is if the spouses separate and live apart for several years, one spouse becomes a teacher during the separation, and then the parties divorce.  In that case, the court may divide the teacher spouse’s retirement unevenly.  The example from the Arizona Supreme Court is when spouses marry, the next day they buy a house together with one spouse’s separate property (money he had prior to the marriage), and two weeks later they file for divorce.

Also, property can change its characterization over time from separate property to community property or vice versa.  Courts call this transmutation.  This can occur by gift, such as when the spouses decide to refinance one spouse’s separate property house and sign a new deed accepting the property as community property.  It can also occur by commingling, such as when one spouse deposits separate funds into a joint account and, over time, enough transactions occur to make it impossible to trace the separate funds. Community property can also become one spouse’s separate property, but this is much more difficult to prove and the spouse making this claim has the burden to prove it by a higher standard of proof than normal.  When determining whether property has transmuted, Arizona courts use the inception of title rule, which says that property retains its characterization as separate or community unless the spouses undertake some affirmative action that changes the characterization, such as signing a new deed or comingling as discussed above.

Characterizing property as community or separate may seem straight forward (and usually is straight forward), but there are some potential complexities.  One example is when the marital community expends funds or labor on improving or paying secured debt on one spouse’s separate property.  The marital community may have a lien for the increased value and, in the case of community payments on debt secured by separate property, for the community funds spent to pay the secured debt.  However, when a spouse spends his or her separate funds to improve community property, the law presumes the expenditure to be a gift to the marital community.  A spouse must prove an express agreement to the contrary to overcome this presumption and must do so by a higher standard of proof.

Another complexity is the theory of quasi community property.  When spouses marry in a non-community property state and move to Arizona, upon divorce Arizona courts will treat the spouses’ property acquired in the previous state of residence as community property if the property would have been community property had the spouses acquired it in Arizona.  The quasi community property rule also applies when a creditor is attempting to collect a debt of one spouse incurred in another state if the debt would be a community debt if the spouse incurred it in Arizona.  This means that if one spouse incurs a debt in a non-community property state and the couple then moves to Arizona, a creditor can collect against community property (such as either spouse’s employment income) if the debt would have been a community debt had they incurred the debt in Arizona.

This is just a basic overview of Arizona’s community property laws.  It may answer many questions, but is by no means comprehensive.  For example, this article does not address the characterization of employee stock options.  You should seek an experienced family law attorney’s advice when determining issues like community property.  Thomas A. Morton is an experienced family law attorney in Phoenix, Arizona who you may contact for a consultation on this subject.

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