Scott David Stewart 0000-00-00 00:00:00
The Vortex Known as Arizona’s Community Property Presumption Like a dust devil, Arizona’s community property presumption is a vortex drawing all property owned by either spouse into its core. In divorce, the results can oftentimes be surprising, disappointing, and poignantly unfair. COMMUNITY PROPERTY RULE All property acquired by either husband or wife during the marriage is the community property of the husband and wife. Any debts that arose during the marriage will be allocated to the community as well. The few separate property exceptions include assets owned before the marriage, or those acquired by gift, devise, or descent during the marriage. Once the petition is filed and served, new acquisitions by one spouse are sole and separate so long as the divorce is finalized. • On Marital Presumption. The fundamental community property presumption is that all property acquired by either spouse during their marriage is presumed to be community property. Once the character of community property attaches, the burden of proving it is a separate asset is high, requiring clear and convincing evidence by the party seeking to disprove the asset or debt belongs to the community. • On Dividing Property. Whether the marriage lasted many years or was relatively brief, in a divorce or legal separation, once property is characterized as a marital asset or debt, it must be divided between the parties. Consequently, divorce attorneys spend a fair amount of time making their client’s case to a claim of separate property. SOLE AND SEPARATE – SURVIVING THE GREAT DIVIDE The challenge for most spouses is in protecting their separate property from the vortex of the marital property presumption. The battle to defend separate assets should be diligently fought from the moment of acquisition. • On Allocation. Explaining what separate property is to a client is seldom problematic, the rule is straightforward enough. And furthermore, separate property begets separate property – any rents, issues, and profits, and any increase in value therefrom are also separate property. • On Separate Presumptions. An asset that is separate property is not a part of the marital estate and is not subject to division in divorce proceedings. If there is any doubt about the nature of an asset acquired during the marriage,then assume it belongs to the community. Whenever commingling of marital and separate property has occurred, then the property is presumed to be community property unless the separate property can be explicitly traced. If the separate funds are traceable and are indeed identifiable as separate, then the commingling may not be fatal. Identifying the separate property item through tracing is even more important when the community component of the commingled property is fairly negligible in comparison to the separate component. ACQUISITION AND OWNERSHIP An asset or debt is characterized as separate or community property at the time of acquisition; that designation is not altered as a result of a subsequent marriage. • On Reimbursement. When community money is used to pay a mortgage or improve a separate asset like real estate, then the non-owning spouse may be entitled to reimbursement for the community funds spent on the other spouse’s separate property. When the use of marital funds increases the item’s value, then that value increase is likewise a community asset and subject to division. • On Community Liens. When marital funds are used to pay down a mortgage on one spouse’s separate property, a community lien attaches to that property. Community liens also arise when the value of the separate asset increases due to an infusion of marital funds. • On Gifting the Community. Frequently, a spouse will apply their separate funds to make improvements, repairs, or pay a mortgage on the community home. These are presumed to be gifts to the community. Proving the party did not intend a gift and tracing the funds to their origin can be very difficult, but not impossible. COMMINGLED CUNUNDRUM A real challenge for many parties is dealing with the commingling of assets and debts. Separate funds become community assets when combined during the marriage (again, it’s the vortex). The assets are so well-blended, the court cannot distinguish which are community and which are not. • On Commingling. Because cash is fungible, separate funds are easily blended with community funds. Commingling may occur when a spouse: – Converts a separate account into a joint account – Deposits sole funds into a joint account – Contributes to marital obligations (e.g., mortgage payment) – Refinances and adds the other spouse to the title – Combines funds to purchase goods or services – Reinvests separate funds in the community • On Rebutting Commingling. Hindsight being 20/20, the best way to avoid commingled property problems is to never mix any separate funds with those of the community, but that cuts against “what’s mine is yours and what’s yours is ours” in a marriage. So to prove that an item was not commingled, the party traces the asset to its separate acquisition. This requires documentation and detailed records, something many clients won’t have. (When times are good, spouses don’t anticipate the impact of divorce on their separate assets.) If the owner traces separate funds in a commingled account, then they may keep the property and it will not be divided. Tracing commingled assets can be one of the most challenging aspects of a divorce, requiring meticulous forensic accounting to avoid an unfair result with complex marital asset and debt divisions. TRANSMUTATION – LOST IN THE VORTEX With transmutation, the separate property has undergone such a transformation that it is separate no longer – division as a community asset will result. Transmutation may occur by agreement between the parties, by gift from one spouse to the other, or by commingling separate with community property. • On Presumed Gifting. A solely-owned conveyance to joint tenancy is a presumptive gift to the community. This occurs when a spouse conveys title to real estate from “sole and separate” to “joint tenants.” Often, a parent or relative will give money for a down payment to one spouse for the purchase of the couple’s first home. When real property is paid for by one spouse and title is taken in joint tenancy in the names of both parties, the contributing spouse is presumed to have made a gift of one-half of the property to the other spouse. • On Donative Intent. The only way to defeat the gift presumption is to convince the court, by carrying a burden of clear and convincing evidence, that there was no intent to make a gift to the community. If one party alleges transmutation occurred by gift from the other spouse, then the usual rules as to sufficiency of evidence apply – some evidence must be presented to establish that a valid gift occurred. The first requirement is proof of donative intent. In every divorce, the process of asset allocation raises challenging issues in what may seem, at first blush, to be a simple matter of listing “His, Hers, and Ours.” Fortunately, the parties may always agree to designate any asset as separate or community in their written separation agreement.
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