Arizona is a community property state. This means that the Court must divide community property equally, unless there is a really good and compelling reason. Usually this means that all the assets are valued (or you agree to a value) and each party takes assets of equivalent value. Sometimes, however, there is an asset that is too expensive for either party to afford to buy out the other person, for example, a business or real estate. Selling that asset is not your only option. You could agree to co-own the asset and share in the income and obligations until one of you decides it is time to sell. Or, you could finance a buy-out of your share by your ex. According to a new Arizona law case, the Court cannot require that you continue to co-own property, including a marital residence, against your will. Here is what you need to know:
Is co-ownership of property possible or desirable after a divorce?
No, unless you and your ex both agree. A new Arizona case (Dole v. The Honorable Michael Blair, No. 1 CA-SA 20-0001, Division One, April 14, 2020) prohibits a court from requiring that you stay tied together with co-ownership of property. Each person is entitled to an immediate right to the value of his or her share of the community property.
No. Do Not Quitclaim Property While You are on the Mortgage. Removal from the title does not remove you from the mortgage. If the lender won’t voluntarily remove you (good luck with that!), your spouse should refinance by a date certain or sell the property. In the meantime, stay on the deed or obtain a deed of trust, require her to provide insure with you as a named beneficiary and require duplicate notices from the lender so that you can monitor the loan status. If your spouse does not comply with any of these conditions, then build in an immediate sale clause.
Yes. But be sure to treat this as a business transaction. Make sure that you have are legally titled as a co-owner. Sign an Operating or Management Agreement that spells out how the business is to be managed and what remedies you will have if one of you breaches the Agreement. The agreements should spell out how much salary you are each to be paid; and how distributions are calculated and when they are made. You should also have a buy-sell provision that allows you to get out of the business on defined terms. This is just the tip of the proverbial iceberg. There are lots of other considerations. Be sure to consult an attorney before entering into a co-ownership transaction.
In four words: Think Like a Creditor. If you are owed money, you are a creditor, no different than a bank. This means you need all the protections of a bank. Don’t just say, “Pooh will pay Eeyore 50 pots of honey, as soon as the bees make it”. While this sounds absurd, many agreements provide very little protection beyond this. A promise to pay has to be specific and might look something like this:
“Pooh shall pay to Eeyore 50 pots of honey, payable at the rate of five pots per month commencing October 1, 2017, with each monthly payment thereafter due by the first day of each month until fully paid no later than July 31, 2018 (Maturity Date). As long as Pooh timely pays, there will be no interest. However, if Pooh fails to timely pay, the entire balance shall be immediately payable and interest of one honey pot per week will accrue until fully paid. There is no grace period. This agreement shall be reduced to judgment and secured by a ‘honey tree’.”
Security gives you the right to force the sale of a debtor’s property (collateral) if you are not timely paid. But security is only as good as the collateral being secured and the quality of your agreement. Eeyore does not want as collateral a tree that doesn’t attract honey bees, nor does he want Pooh to eat up all the honey.
Yes. Ideally the property is unencumbered; otherwise your security takes a backseat to any lien. A Deed of Trust gives you security against real estate. But be sure you have not secured a hologram. And Buy title insurance. so you know what creditors may be in front of you.
Yes. But WARNING: these agreements are fraught with complications! Securing the stock does not necessarily prevent the owner from selling or consuming assets, borrowing, or paying big bonuses to “favorite” people. It requires constant monitoring and possibly an expensive and futile enforcement action. It is far preferable to secure the business assets themselves, especially unencumbered real estate. DO engage a business lawyer to draft these complicated documents. The fee is well worth the price of admission.
It can be challenging to collect money from the deceased or disabled. Make sure you are the irrevocable beneficiary of a specific life insurance policy for the full amount due. To avoid any “hi-jinks”, the policy should be assigned to you until you are paid. To help guard against disability, your ex should buy a disability policy with the benefits payable to you.
No. Don’t even try to use retirement to secure a property payment. It is legally prohibited.
Notify the World. A judgment can be blown to smithereens if creditors don’t know about it. If not properly recorded, subsequent creditors may push you aside and limit your collection remedies. This means recording in your county recorder’s office and sometimes other places depending on what is being recorded. Again, be sure to enlist the services of a professional so that you maintain your first position.
Do Require a Promissory Note. Even though a Note mirrors the terms of your Agreement, as a stand-alone document, it will relieve you of having to show the world your entire agreement in order to enforce this one provision.
Are all of these protections 100% fool-proof. None of the above will guarantee lasting peace. But wouldn’t you rather have a concrete wall of rights instead of just some pretty paper?