Community Property & Separate Property
In Arizona, what is meant by Community Property? Arizona is a community property state. That means under Arizona law, all the labor, effort and earnings that accumulate during a marriage is communal. Each party presumptively owns a 50% interest. To divide community property equitably, as the law requires, can be messy.
Different rules and issues apply to the many components of community property, including retirement accounts, business valuations, real estate (aka real property), financial accounts (banking, investment), disability benefits, life insurance and so many others.
Keep in mind that the Court can mix and match how it approaches dividing the community property. The Court can order a sale of assets, allocate assets between the parties or require continued co-tenancy – all of these approaches are possible on the path to equality.
Here’s the kicker: not all property is community property. In a divorce, couples will fight fiercely to defend their separate property against claims.
What is Separate Property?
Under Arizona law, your separate property is protected, if you followed the rules. Those rules are convoluted and confusing. If you didn’t apply the rules from day one, they can be difficult to apply once you’re involved in divorce proceedings.
Let’s take a separate financial account, as an example. What makes it separate? It needs to be funded solely with separate funds. If you add community funds, you risk making the account a community account.
This may be a little confusing. It is ok to pay community expenses from a separate account – like a joint credit card bill – without losing its “separate” nature. The game changer is whether you deposited community funds. To prove your separate property claim, you must keep detailed records about the source of the deposits and what expenses were paid with them. If you have “commingled” funds, that is, where there is no detail or clear way to trace every transaction, nothing will help. Above all, avoid jointly titling a separate account. While joint titling is not fatal to a claim of separate property, it can muddy the waters horribly.
Your family law team at McCarthy Family Law will guide you through the dissolution of your marriage partnership. Community property and separate property – we have the skills to identify each and find a path to their correct valuations. We bring in professionals like forensic accountants and valuation experts to help protect your interests. It’s about getting the best possible division of property and supporting you through the process.
Community Property & Separate Property FAQs
Not necessarily. If you can’t come to agreement on its value, the court could allow a bidding war between you and your spouse. The court can also simply order it sold.
Yes. However, that doesn’t mean you’re off the hook for the mortgage, if any. The “new” owner spouse will usually need to refinance in order for the lender to free you from the mortgage.
No, as long as you roll over your share to an IRA and you follow the proper process. A Qualified Domestic Relations Order (QDRO) may be required. Speak to your financial advisor about this as soon as you know this is a possibility. Depending on the retirement plan (not IRAs), the non-employee spouse may even be entitled to take a distribution of cash from his or her share of the retirement asset without paying a penalty.
Each person takes an equal share of the increase or decrease regardless of whose name the asset is held. There are exceptions: (a) if an increase after service of the papers is due to one spouse’s work efforts; or (b) if a decrease is solely the fault of one party. The increase or decrease may then be attributed solely to the responsible spouse.
The answer is uncertain. Typically the courts treat gifts of jewelry for a special occasion (not investment jewelry) as a gift, not community property. As a note: your engagement ring is your separate property.
This is not a trick question. It gets a little in the weeds with the explanation: Liquidity and taxes are big game changers. Assets can theoretically have equal value at the time of divorce. But they aren’t equal when cashed in. Liquid funds may have more value to one spouse instead of funds that are tied up in a risky investment. There may be embedded tax consequences once the asset sells. For example, due to variations in the tax law, a home worth $300,000 may not trigger any gain when it’s sold. However, that same $300,000 in a retirement account could be taxed substantially upon distribution.
Not if it’s compensation for your pain, suffering or other personal damages. However, the community is entitled to reimbursement for any medical bills, out of pocket costs or lost earnings during the marriage.
Not necessarily. This may sound strange, but your term life insurance policy with no cash value may have value. A term policy can offer a surviving ex-spouse a safety net against community creditors or to protect payment of spousal maintenance. Also, if the insured spouse has significant health problems, the policy may have what’s known as “viatical value.” It’s a little perverse, but an investor may buy the policy, effectively betting on the insured’s premature death.
Don’t do it! Until foreclosure your spouse could live there and receive a windfall of free rent for months. It would be unfair if you had to then pay rent for your own housing. Also, no immediate market does not necessarily translate into no value. It may be worth co-owning with the spouse living there, paying for the maintenance costs. For example, what if the market corrects over time? You’d be sorry that you let your spouse have it for nothing.