Tuesday, November 24, 2015

DIVIDING PROPERTY IN A DIVORCE - HOW THE ARIZONA FAMILY COURT DOES IT


One of the first and most vital steps in a divorce is figuring out the division of property.  Naturally, people want to know how Arizona courts will divide their property.  Below are some of the most commonly asked questions that I hear from clients:

How does Arizona divide property in a divorce?

All states are either community property states or equitable division states.  Arizona is one of nine community property states.  Community Property is based on the theory that a married couple is a team, and the role that each spouse plays benefits the team.  One may be the breadwinner, the other might care for the children; or they may both work and share the childcare responsibilities – but it’s a team effort.  Therefore, the law provides that income earned by either party, and anything purchased or accumulated with that income during the marriage, is considered to be community property, belonging to both parties 50/50.  If the parties later divorce, then the community property will be divided substantially equally. 

How does the court determine what is Community Property versus Separate Property?

In a divorce, the court must determine what constitutes “separate property,”  and what constitutes community property.”

Arizona Revised Statutes § 25-211 defines Community Property as all property acquired during marriage except for property acquired by gift, devise, or descent (inheritance).  This means that salary, bonuses, and commissions earned by each spouse through employment are community property.  Employment income placed in a bank account (regardless of the name on the account) is generally considered to be community property.  Houses and cars purchased with marital funds constitute community property (unless the other spouse signs a deed disclaiming his or her community property interest).  Furniture and personal items purchased with community monies will be considered community property, unless there is evidence that it was a gift.

Arizona Revised Statutes, § 25-213 defines Separate Property as anything acquired by a spouse before the date of marriage or after service of petition for divorce (if the divorce actually goes through).  Gifts and/or money received by way of inheritance during the marriage are also separate property.  All of the rents, profits, earnings, dividends, and interest on separate property remain separate property.  

In other words, your old baseball card collection is separate property.   The Barbie dolls your mother saved from when you were a kid – separate property.  That family heirloom your Aunt Gladys gave you last Christmas – separate property.  The money your grandfather left you when he died – separate property.  The 60” TV and surround sound system you bought with that inheritance – separate property.  The stock you purchased with grandpa’s money (which went up 10% last year) – also separate property.  If you owned a house prior to your marriage, then rented it out after you got married -- the rental income is your separate property.  If you later sold that house and used the money to buy another house in your own name – well, that new house is your separate property, too (even if you and your new spouse are living in it).   

BUT WARNING:  If you’re not careful, what starts out as separate property can be magically changed into community property during the marriage – as will be explained below.

The “marital community” terminates when a spouse files and serves a Petition for Dissolution of Marriage, or an Annulment.  Thereafter, income earned by either party (which was considered to be community property) is now the separate property of the person who earns it.

What does the statute mean when it says the court divides community property “equitably”?

Equitable division does not always mean an equal division.  What it really means is a “fair” division.  The court is not required to divide community property exactly equally; but it cannot, without reason, create a gross disparity or make its award arbitrarily.  In the absence of sound reasons which justify contrary results, apportionment of the community estate upon dissolution of marriage must be “substantially equal.” 

In making an equitable division, the court may consider the length of marriage as part of any unequal division. The court can also divide property unequally if it determines that one of the spouses wasted community assets (for example, if one of the spouses gambled away thousands of dollars, or spent community funds on drugs, etc.)

What happens if separate property is commingled with community property?

When community property is mixed with separate property, the potential issue of “commingling” arises.  Commingling happens when, for instance, a spouse puts the funds from her grandmother’s inheritance into a joint account that belongs to both spouses; or when a spouse’s salary from work (community property) is deposited into the checking account that he set up prior to the marriage in his own name (separate property).  

Mixing separate and community funds makes for a confusing situation, and it can lead to the loss of your separate monies.  Funds that are mixed can retain their character as separate property, but only if you can still figure out what funds come from where.  You must be able to trace the separate assets.  However, when separate and community monies are mixed there is a legal presumption that the new “pot” of commingled funds is entirely community property.  The burden is upon the one claiming that the proceeds are separate property to prove, by clear and satisfactory evidence,” that the separate property portion can be traced. And this is no easy task.

Can property lose its character as separate property and become “transmuted” into community property?

Absolutely!  Here's an example:  If you are depositing your separate funds into a community property account and, over time, you are writing checks, making deposits and withdrawals, etc. -- eventually the separate and community monies will become mixed to such an extent that you can’t trace it or figure out what belongs to who.  At that point, it has undergone "transmutation."  Your separate money has lost its character separate property.  It is now community property and will be divided essentially equally in a divorce.

Can a person unintentionally make a “gift” of separate property to the marital community?

Yes.  A common scenario is where a party contributes separate funds to pay a down-payment on a marital home that is taken in joint tenancy.  Years later, one of the parties files for divorce and, when the house is sold, the party who contributed the separate funds for the down-payment wants his/her money back, claiming that it was intended as a loan, and not a gift.

The necessary elements to find that a gift was made include: (1) donative intent, meaning that you intended to make a gift, (2) delivery, meaning that the gift was actually delivered to the other person’s possession, and (3) a vesting of irrevocable title upon such delivery, meaning that you delivered the gift with no intention of retaining any sort of interest in the piece of property any longer.

Under Arizona law, there is a presumption that contribution of separate assets to community property equals a gift.  The presumption can be rebutted through clear and convincing evidence showing that there was no intent to make the alleged gift.  But this is a steep hill to climb.  In the scenario above, rebutting the presumption of a gift will be extremely difficult without a written memo or other persuasive evidence of intent.

How can I protect my separate property?

Here are some ways that you can protect your separate property:

·      (1)  Keep your pre-marital monies in a separate bank account in your own name;
·      (2)  Avoid commingling;
·      (3)  If you are buying a house together and you are contributing your separate monies to the down payment, be sure to draft a written memo confirming your intention that the use of separate funds to pay the down payment (or any other payment) is a loan from the marital community and is to be paid back upon sale of the property – and make sure your spouse signs the memo;
·      (4)  Place your separate property in a living revocable trust;
·      (5)  Obtain “innocent spouse” status (the IRS provides this status to spouses to relieve them of the responsibility for paying taxes that the other spouse owes);
·      (6)  If you receive an inheritance, place the money in a bank account in your name alone, and do not mix it with community funds (for instance, make sure not to deposit your employment income into that account).

    If you have substantial separate-property assets and/or if you do not want your employment income to be considered community property, then you would be well-advised to have an attorney prepare a valid Prenuptial Agreement (or a Postnuptial agreement, if you are already married).  The agreement will need to conform to the law and be signed by both spouses.

Gary Frank & Jacinda Chen


Gary J. Frank is an Arizona attorney and former Judge Pro Tem with over thirty years of experience in dealing with custody and parenting time issues in Family Court.  To schedule a personal consultation with Mr. Frank, you may contact us by email at gary.frank@azbar.org, or through our web site at www.garyfranklaw.com.

The issues in this blog are provided general informational purposes only and should not be relied on as legal advice in your particular case, nor should it be construed as forming an attorney-client relationship.  Every Family Court case is unique.  If you have a matter that appears similar to any of the scenarios that you read in this blog, you should be aware that: (1) even a slight difference in a factual situation can lead to a vastly different result; and (2) the laws are constantly changing and new laws are continually being enacted.  Legal advice cannot be given without a full consideration of all relevant information relating to your individual situation.  Therefore, if you have an important legal issue, you should obtain a consultation with a qualified attorney.