The following is a comprehensive look at property division in a divorce. You’ll learn who keeps the property, money and accounts; how to split up assets, and what is included in the court’s consideration. There’s a lot of information here — You may want to print it out and highlight the sections that will affect your situation so you can start making your plans now.
In any divorce case, all property is subject to division, meaning it must be identified, classified, and then divided.
Here, the principles of community property and community debt run parallel to one another, so as we talk about principles of community property, they can likely be applied to questions regarding whether or not debts are community or separate.
Identify all of the property in the possession of either spouse.
There are several tools, rules, and statutes that help us identify all of the property a couple may have, including the required affidavit of financial information and the rule 49 disclosures required under the family law rules of procedure.
Many times, a couple may have bank accounts, retirement accounts, real property, time shares, vehicles, HSA accounts, businesses, jewelry, furniture, securities or investments, and more.
If a spouse is being less than forthcoming regarding the property they have, your attorney may use interrogatories, request for production of documents, subpoenas, request for admissions, and/or depositions to help identify property. Sometimes a private investigator or a forensic accountant is used to help find property. For more on finding hidden assets, click here.
Classify all of the property as community, separate, or quasi-community.
In general, property acquired during your marriage is community property, regardless of how your property is titled. This means that even if your husband’s name is the only one on the loan and the title for the car he purchased a few years back, it is still considered community property.
Likewise, if your wife started a business five years ago while you were married and you have never had anything to do with the business, and you are not a member listed on the LLC, it is nevertheless community property.
In order to have community property, parties must have a valid marriage and the parties must be living in a community property state. This means that couples who are cohabitating, even for long periods of time, will not have accumulated community property.
For couples who have lived in both the community property state and separate property states, this could be particularly confusing. The general rule is that the character of the property (separate or community) is determined by the laws of the state where the property was accumulated.
Property each spouse owned before marriage, or acquired after the filing for separation that led to a divorce, is separate property. Property that was acquired by gift, bequest, or inheritance through intestacy (your wealthy great-granduncle died without a will) is separate property, even if it occurred during the marriage.
Sometimes this can be very tricky, especially when assets that were once separate become comingled or retitled during the marriage. It is also important to leave the door open in your petitions to account for the fact that spouses may have separate property either from before the marriage or from gifts or inheritance.
Exceptions to the rule
Separate property and community debt are as intricate as a spider web. Pre-nuptial agreements may have clauses allowing separate property or debts to be treated as community property. Once the spouses decide to end their marriage, they are free to negotiate a settlement, dividing the property and paying off debts. In other words, the parties can change the statutory rules by contract, as long as the contract is fair and reasonable.
Community property can be used to pay a separate debt incurred before the marriage, as long as it was incurred after September 1, 1973. It does set up a limitation— the community property will only pay a certain amount—the percent of the debt that would be deemed separate property if the spouse were single. That means the spouse who incurred a debt only gets a partial settlement from community property. The debtor will have to look for other ways to collect the remaining amount.
Generally, debts entered into before the marriage remain the separate property of each spouse, and do not form part of the marital community. Creditors are unable to reach one party’s separate property in order to pay the other’s separate debt. That is why it is so important that Arizona residents know the nature of their assets and debts before filing a petition for separation. Ideally there is full communication and disclosure between the spouses, because assumptions and misunderstandings will only lead to financial problems.
Division Upon Divorce
The general rule is that all of the property is subject to equitable division. Equitable division means there is a presumption for a 50/50 split of the entire community or marital estate. This presumption can be rebutted in instances of marital waste or other facts that make “equitable distribution” something other than 50% to each spouse. For more information on community waste, check out the section on spousal maintenance.
All property must be divided upon divorce. It is very important that we identify and divide all property. Otherwise, it is owned by both parties as tenants in common.
Property division is NON-MODIFIABLE. This means that if you enter into an agreement or a judge enters an order for property division, you cannot go back and ask for a reallocation of those assets (with several exceptions). It is therefore extremely important to do your due diligence in researching your assets and their value, and to present your property information clearly and concisely to the judge.
Property a couple acquired while living in a non-community property state, before moving to Arizona, is referred to as quasi-community property. The Arizona Legislature created the quasi-community property rule officially in 1973:
“property acquired by either spouse outside the state shall be deemed to be community property if said property would have been community property if acquired in this state[.]”
This means that in the event you seek a divorce in Arizona, Arizona court will treat the property you accumulated out of state as community property. The big excep- tion here is with regards to partnership interests, which are treated as personal property governed by the laws of the state where a married couple lived when the partnership interests were acquired.
If land or real estate is acquired during marriage, it is presumed to be community property. The spouse seeking to claim that it is a separate property has the burden of proving by clear and convincing evidence that the property is in fact separate. If the property benefits the community—for example, the parties live in the home, rent out the home and enjoy the proceeds together, or vacation together in the home every summer—it is strongly presumed that the debt acquired to finance the transaction is community debt.
Community property is subject to “equitable division.” Equitable division means the property will be divided essentially equally. This doesn’t mean that each asset must be split down the middle, but that the final split must be essentially equal unless there is a specific reason why an equal split isn’t “equitable.”
Property division must be substantially equal in the absence of compelling factors
This means that unless a judge makes a specific finding of “compelling factors,” property must be divided substantially equally. This is where your constitutional right to life, liberty and property actually shows up. If the court fails to divide your property substantially equally, you have been deprived of your vested right to your property.
If the parties don’t agree on how to divide the community property, the court will ask both husband and wife to present a plan for how to divide the properties and debts.
All property owned prior to marriage is the separate property of that spouse, and it continues to stay the separate property that spouse, as long as no action is taken to change the character of the property. The timing of acquiring the property and not necessarily the title controls. Even if the car or house is titled in the name of one spouse, it will be treated as community property if acquired during the marriage.
Additionally, any property that a spouse receives as a gift or inheritance is also separate property, even after the marriage.
Any interest, rents, or profits from separate property earned during the marriage will remain separate property, and subsequent purchases or acquisitions will also remain separate property.
Other forms of separate property will be discussed at length below and include:
- Social Security retirement benefits
- Professional degrees
- Personal Injury Damages for Pain and Suffering
- Some Irrevocable Trust contributions
The general rule is that separate property or debts remain separate unless there is clear transmutation or comingling of the funds. The main test of whether or not property or an asset has become community is determined by the intent of the owning spouse. For instance, if separate funds are used to purchase a home that is then titled in both the husband’s and wife’s names as joint tenants, the property has likely been gifted to the community or “transmuted.”
In another case, a home owned by the husband and used as the marital home re- mained the separate property of the husband, even when the mortgage was paid with community funds. In that case, if community funds have been used to improve the separate property of one spouse, the community may have a “lien” or be owed money from the separate spouse.
These cases are extremely fact-sensitive. That means that whether the court will consider property transmuted will be determined based on what actually happened. If Wife helped build and grow Husband’s separate business, the court is more likely to award Wife an interest in the business. If Husband helped to remodel Wife’s apartment complex, Husband will likely have an interest in the apartment complex or rents, even if the property is Wife’s separate property.
This is often overlooked by the spouse who could be owed funds! It is most certainly worth speaking with an attorney if you have questions on transmutation, comingling or community liens.
The Court of Appeals issues the following formula to help determine what the community portion is of an asset that is both separate and community property, or separate property where a community lien exists.
Specifically, where “A” = appreciation of the property during the marriage, where “B” = the appraised value of the property as of the date of the marriage, and where “C” = the community’s contributions to principal, the value of the community’s lien is: C + [C/B x A].
Land/ Real Estate
Land can be community or separate property, depending on when the land was purchased or acquired and whether or not funds used to purchase the land are separate funds or community funds. The increase in value may or may not be community assets. See the discussion on comingling above.
The business will be broken down into its component parts or assets. Each asset will then be evaluated to determine whether or not it is community property.
Assets most often include:
- The professional degree
- The license to practice
- The building
- Bank accounts
- Inventory/ physical assets
- Accounts receivable
The degree and license to practice in a professional business will always be separate property, but the other assets will be evaluated based on when and how they were acquired. Most interestingly, the accounts receivable may be valued without regards to taxes and overhead expenses. In Arizona, professional goodwill is valued as a community asset.
Let’s take an example. Dr. Bill Thomas owns a dental practice. His wife Katherine helped put him through dental school and has supported him for the duration of their 20-year marriage. She never worked in the practice, but stayed home with their 4 children. Dr. Thomas received a loan from his father to start the practice, and has paid off all but $10,000 of the $100,000 loan. The business has about $1million in annual revenue, $75,000 in accounts receivable and about 1,500 annual patients. Katherine wants to know what her interest in the business might be worth.
First, we would identify the pieces of the business
The degree and license to practice are property of the business, but separate prop- erty of Dr. Thomas. A professional degree like a degree to practice law, dentistry, medicine, accounting, etc. is the separate property of the spouse who earned the degree, regardless of whether or not the degree was earned during the marriage or if the other spouse paid for the education. So, even though Katherine supported Bill through dental school, she has no claim to his dental license or degree.
The physical assets including the dental chairs, tools, x-ray machines, etc. are all community property because they were acquired during the marriage. The accounts receivable total $75,000. The entire balance will likely qualify as community prop- erty subject to division.
Goodwill is the reputation value of the business. It’s not cash, but it is the value that comes from the excess income, stream of customers, reputation of the business and the practitioner (Dr. Thomas), etc. Business goodwill is community property in Arizona and subject to equitable division.
When businesses are involved, you will most likely need a business valuation. A licensed business valuator will assess the total value of the business and will be needed to establish the total value for trial or to mediate and settle your divorce amicably. Look for a licensed business appraiser and check out our resource list if you need recommendations.
Let’s see what happens when we change the facts slightly. Let’s say Dr. Thomas funded his dental practice entirely from an inheritance. The inheritance is separate property. The general rule is that interest and profits from separate property remain separate property. However, the other general rule is that wages earned during the marriage are community property.
In Arizona, income and profits created by the business itself, not the “toil and ap- plication” of the spouses, will be separate. Actual labor or profits from labor and marketing efforts of the spouse will be community. Therefore, Dr. Thomas will argue that his wages earned as a dentist, his salary, is community property, but the excess profits earned by the business are his separate property created from his investment of separate funds.
Here is where it is essential to have an experienced and talented lawyer working on your behalf. The burden is largely on the spouse who is claiming the assets are separate to prove, by clear and convincing evidence, which portion of the assets are separate and why. In the event they fail to meet their burden, the whole of the value and assets will be divided as community property.
Most often, it isn’t practical or in anyone’s interest for a closely held business to be sold with the proceeds divided. The most typical outcome is that one spouse is awarded the business in whole and the other spouse will be awarded offsetting assets or payments toward the balance owed for his or her interest in the business.
This can be very complicated, so here is another example. In one case, the Arizona court determined that the growth of the business due to inflation, increased demand and the efforts of others were the separate property of the husband, but growth
attributable to community labor would be split as community property. In that case, the wife worked as an office manager in the business. As you can see, this is both factually sensitive and legally complex, but with proper planning and legal assistance, you can set yourself up for the best possible outcome.
Retirement benefits/stock options
Retirement benefits include pensions, 401ks and profit sharing arrangements. They are part of a compensation plan earned during employment and are treated as community property if accumulated during the marriage. Retirement benefits earned before marriage or after the service of the petition for dissolution or legal separation are separate property of the spouse who earned them. This rule applies to both employer and employee contributions.
The tricky part comes when some portion of the retirement was earned pre-marriage, then comingled with post-marriage contributions. In that case, the court can use the following formula to determine the community portion at the asset or the value of the community lien:
Specifically, where “A” = appreciation of the property during the marriage, where “B” = the appraised value of the property as of the date of the marriage, and where “C” = the community’s contributions to principal, the value of the com- munity’s lien is: C + [C/B x A].
In certain situations, a disabled spouse is given the option of selecting disability benefits instead of retirement benefits. In the event the spouse selects disability benefits to the exclusion of the retirement benefits, each spouse will be given the community interest in the disability benefits. The disability benefits will only be divisible in divorce action when they’re selected in lieu of retirement funds.
After a retirement benefit is awarded to a spouse in a divorce, it immediately becomes the vested property of the spouse it was awarded to. Most often, a qualified domestic relations order, or QDRO, is required to divide the qualified retirement accounts.
Non-vested benefits may also be subject to division, although the court needs to take into account the fact that those interests may disappear due to no fault of either spouse. The court is likely best served by dividing the non-vested benefits at the time of dissolution, allowing them to grow separately and equally, as opposed to offset- ting non-vested benefits with vested benefits.
In divorce proceedings, if the trial court determines that the employer’s intent in granting the husband unvested stock options was to compensate him for past or current service, the stock options would be community property and allocated between the parties under the appropriate time rule formula. However, if the intent of the employer was to provide an incentive for the husband’s future performance, it would be assumed that the period of employment prior to the granting of the op- tions did not contribute to the husband earning the stock options and thus should not be included in the time used to calculate the community’s interest in the options.
An interest in vested retirement accounts could result in a lump sum payout, an offset of the other community interests, or a payment and monthly installments over time.
The court has stated a general preference, when possible, to leave retirement accounts untouched, and to offset a spouse’s interest in retirement assets with other community interests. Vested pension rights are those not subject to forfeiture if employment is terminated and matured rights are unconditional rights to immediate payment.
That opinion further said that vested and non-vested rights may be community property subject to equitable division and that a non-employee spouse may be awarded her community interest under:
- The present cash value method, or
- The reserved jurisdiction
Congress has created specific language stating that Social Security benefits are the separate property of the person receiving the benefits. That means Social Security payments will not be divided as community property. It’s important to note that even non-working spouses may have their own separate Social Security benefits, which will be the sole property of the receiving spouse.
Remember that Social Security is counted as “income” and can be garnished for the payment of child support or spousal maintenance.
Disability benefits are in place to replace the earnings that one would receive if one were working; they are not in place to compensate the disabled spouse for pain and suffering. Therefore, payments received during the marriage are community property subject to division. Payments received after the divorce (or service of the petition for divorce) will be the separate property of the disabled spouse, even though the injury may have occurred during the marriage.
This can be contrasted with how the court treats retirement benefits. The purpose of retirement benefits is to “defer compensation” for later living expenses. This is why retirement money received after the marriage, is treated as community property and disability proceeds received after the marriage is treated as separate property.
In other words, the community does not acquire a right to future disability payouts once the community ends.
The renewal value of insurance policies may be a community asset that needs to be identified, valued and divided.
Life Insurance Policies:
The value of a life insurance policy on dissolution of marriage is its cash surrender value. A former wife who is the designated beneficiary of her ex-husband’s life insurance is entitled to the proceeds when the rights have not been terminated by agreement or divorce decree.
National Serviceman’s Life Insurance proceeds are governed by federal policy; thus the service person who owns the policy can determine the beneficiary regardless of the community source of the funds used to pay the premiums.
Family Law Master:
When cases involve complicated issues surrounding stocks, deferred compensation, retirement benefits, or other tricky financial matters, a family law master can be appointed to offer the court information related to these financial matters.
- 25–318(B), provides that community property not disposed of in a dissolution decree is thereafter owned by the former spouses as tenants in common.
The second statute, A.R.S. § 14–2804, provides that a divorce automatically rescinds any pre-dissolution revocable disposition or appointment of property made by a divorced spouse to that person’s former spouse.
Military retirement benefits are community property. Congress actually passed an act to protect military spouses and make certain they could receive a portion of the retirement benefits earned during their marriage to their spouses.
A gift from one spouse of separate property to the other spouse will convert that property into the separate property of the receiving spouse. This can be tricky, be- cause the spouse receiving property must prove that the property transfer was in- tended to be a gift.
For instance, if a husband sells his land in Iowa that he owned before the marriage and buys his wife expensive jewelry, that jewelry may be the separate property of the wife, if she can establish that the husband intended to give her a gift and not to convert the asset to a community investment of jewelry.
Instead, if Husband sold his land in Iowa and then purchased a beach home, titled in both Husband and Wife’s name, Wife could argue that Husband gifted the home to the community. If she could establish his donative intent, the property would likely be community and subject to division.
To establish a gift has been made, you must prove “donative intent.” That means you will need to show that the money or land was given as a gift and not a loan or repayment.