What Every Divorcing Spouse Should Know About Community Property in Arizona
By Trent Wilcox
Q: What is Arizona Community Property and Why is it Different from Other States?
A: Arizona, like most other states on the west coast, is considered a community property state. These states share many similar principles when it comes to dividing assets and obligations accrued during a marriage. Generally, anything that a married couple accumulates during the marriage is considered community property, that is, both spouses own an undivided share of the whole. Exceptions to this general principle include those assets acquired prior to the marriage, by gift, devise (by a will) or descent (inheritance). Because the Arizona courts start with a strong presumption that anything acquired during marriage is a community item, the spouse claiming a particular item is not community property has the burden of proving otherwise.
Generally, non-community property states are referred to as “common law title” states. Most states these days that are not officially community property states have laws on the books, often called “marital property” statutes that work similarly to community property principles, to one degree or another. However, in a true title state, the name on a title to an asset or the person’s name listed as actually incurring a particular debt may indicate ownership of the asset or debt. Community property principles are meant to combat the unfairness that can occur when both parties contribute substantially to the marriage but one party handles all transactions or makes more money and ends up with the assets titled in his/her name alone.
Q: What about Things that My Spouse and I Acquired While We Lived in Another State?
A: In such cases, Arizona courts apply a concept known as “quasi-community property.” The quasi-community property principle states that the Arizona court will divide an asset or debt on the basis of how the item would have been characterized had it been acquired in Arizona. Thus, even though another state would view the issue differently, Arizona treats it as though there had not been a connection to the other state. So, if a separate property state’s principles would have said that a particular debt was sole and separate but the parties later moved to Arizona, the Arizona court would be expected to treat it as a community debt, provided that community property principles would have applied had the debt accrued in Arizona during the marriage.
Q: We Own a House in Another State. Can the Arizona Court Divide that According to Arizona Law?
A: Depends. Although the Arizona court can issue its order dividing the property, the other state is not bound by that order. The circumstances are important here. If an Arizona couple, pursuant to a divorce, agrees on how to divide the out-of-state property, the order should be transferable without much trouble. However, because Arizona does not have in rem jurisdiction, i.e., jurisdiction over the thing, another state’s court may desire to issue its own order, especially when the two states’ laws conflict. Obviously, this can be a messy situation and we may recommend bringing in counsel from the pertinent jurisdiction to effect a team approach. This helps make sure that we get both courts on the same page.
Q: Are Arizona’s community property laws implicated when a legal separation or annulment is sought instead of a divorce?
A. Yes. Legal separations in Arizona do not differ much procedurally from a full divorce. The main difference is the technical outcome – you and your spouse are still legally married. The court still divides all community property and obligations from the marriage as it would with a divorce. The court, as it would in a divorce, also stops all community property claims for the future between this couple – unless they elect to reunite at some point. In the case of an annulment, a couple may have accumulated substantial assets under the assumption that they were properly married. Arizona Revised Statute § 25-302(B) allows the court to divide that property.
Q: Can a Married Couple Change the Nature of an Asset from Community Property to Sole and Separate, or vice versa?
A: Sure. Intentionally changing the nature of an asset is common. For example, one spouse may quit-claim a house to the other for some reason. This written agreement evidences their intent that the asset be sole and separate from that point on. Likewise, one spouse could change a sole and separate house to community property by an opposite change in title, to community property. The court would see that as a “gift” to the community. Many parties also use antenuptial (prenuptial) and postnuptial agreements to alter community property principles. On a different note, it is also possible to make the change unintentionally. This occurs in the case of commingling. Commingling occurs when separate assets and community assets become hopelessly mixed such that the court cannot tell the difference. This frequently occurs with bank accounts. The burden of tracing the separate asset falls on the spouse claiming a sole and separate interest. When an asset changes its nature, the process is called “transmutation.”
Q: Is it True that My Spouse May Receive Half of My Pension Upon Divorce?
A: Yes, for those portions that accumulated during the marriage. Portions that accumulated prior to the marriage are the sole and separate property of the party earning it. Pensions, 401(K)’s, IRA’s and other deferred compensation receive treatment under Arizona community property principles like other assets. Qualified Domestic Relations Orders (QDRO’s) are the legal document used to divide these items. Because it is expensive to prepare QDRO’s (approximately $1000 to $1500 or more), many couples prefer to offset one party’s deferred compensation against the other party’s or another asset or debt. There is no requirement that all assets and debts be split in half equally, only that the division be “equitable.” Thus, one party could get all the assets and all the debts, totaling zero, while the other party takes no assets and no debts, also totaling zero. An equal division is the goal but it is not always practical or even desirable to equalize to the last penny.
Q: I’ve Since Learned that My Spouse Spent a $200,000 of Our Community Funds Gambling Over the Years. Can I Make a Claim for that Amount During the Divorce?
A: Depends on your particular situation. The concept of “waste” could apply in this case, making your spouse liable to you for your portion of the wasted asset, i.e., half. However, waste is not always an easy thing to prove and varies from case to case. For example, if Bill Gates spends $200,000, it might not be considered waste because it’s such a minor amount for him and his wife. For most people, throwing away that much cash is a serious matter and so a court might be expected to address the $200,000 in the divorce by either offsetting other assets and debts to make up for it or ordering the wasting spouse to pay the other.
Q: What is the Effect of My Divorce Decree on My Creditors?
A: Not that much if you and your spouse are responsible. Debts the community incurs remain community debts in the eyes of creditors. Although it seems harsh many times, both spouses will remain liable for a community debt even though the court awards responsibility for that debt to one spouse or the other. Therefore, if the spouse ordered to pay does not do so, creditors have recourse against the other spouse. On occasion (not frequently), a creditor will agree to not pursue a spouse based on the Decree of Dissolution; however, they have no legal obligation to do so. The law takes the stance that third party creditors should not suffer as a result of a couple’s bad relationship.
Brochure #5 in the The Law Office of Carrie M. Wilcox”Arizona Family Law Series.” Please call 602-445-4690 for your free brochures on other topics, including:
#1 What You Should Know About Divorce in Arizona
#2 Commonly Asked Questions in Paternity Cases
#3 Visitation and Custody Rights of Non-Parents in Arizona
#4 What Every Arizona Parent Should Know about Custody and Visitation
#5 What Every Divorcing Spouse Should Know About Community Property in Arizona
Disclaimer: The Law Office of Carrie M. Wilcox and its principals, agents or representatives, make no guarantees or representations as to the accuracy or currency of any information herein contained. Providing this brochure does not establish an attorney-client relationship. To create such relationship, both the attorney and potential client must sign a written fee agreement. This infor-mation is meant only as general information, may not apply to your case specifically and is not meant to be relied upon for purposes of taking legal action. You should contact an attorney in person for further and specific information. Carrie Wilcox is licensed in Arizona only.