Below is the transcript of the online Q&A presentation by Family Law Attorney Billie Tarascio and Asset Protection Attorney Paul DeLoughery as they discuss ways of protecting your assets in a community property state, both before and after marriage.
Understanding Community Property Basics
What Counts as Community Property in Arizona
Billie Tarascio:
I am so excited to be talking about asset protection specifically on divorce and community property. Community property seems like something that’s pretty straightforward and it is. But when we’re talking about protecting assets and high asset divorces, having this information could prevent you from having to spend $100,000 on a divorce attorney. So that would be a good thing, because essentially when you get divorced and you pay money to a divorce attorney, those are transaction costs. It’s like the cost of selling your house. And it just decreases the amount of money you get after your house is sold, depending how much you have to pay your realtor.
And sometimes you can’t really avoid that, but other times you can. And so this is really about protecting yourself and having knowledge when you’re acquiring assets, if you’re married or unmarried, it doesn’t really matter.
So what are the basics of community property? All property acquired during your marriage belongs to the community. That is the general rule. And unless there’s an exception , and we’re getting to the exceptions , if you’ve acquired property or debt during your marriage, and there’s no prenuptial agreement, then it belongs to the community.
The community is a concept , like its own entity, its own being. It has its own ownership interests that are separate from the ownership interest of the wife or the husband. What that means is that each person has a hundred percent permission to act on behalf of or bind the community.
So I can take all of the money that is earned by my spouse during the marriage and spend it all. And that’s not a problem at all in a community property state, even if he doesn’t like it or she doesn’t like it , it doesn’t matter. Each of you can do whatever you want, which is a little dangerous, but that’s the way it is.
Separate Property: Gifts, Inheritances, and Pre-Marriage Assets
Billie Tarascio:
Exceptions. If your property was owned before the marriage, then it is separate property. If your property is inherited, it is your separate property , it doesn’t belong to the community. And if it’s a gift, it is your separate property.
Why Title Usually Doesn’t Matter
Billie Tarascio:
Now the thing about a gift , typically title doesn’t matter. So if I go out and I buy a car during the marriage, and it’s only under my name, then it is not my car. The car belongs to the community, regardless of the fact that my name is on the car.
It gets a little tricky with houses because when you are married and one person buys a house, the other person usually signs a disclaimer deed. And what that means is their interest in the property is disclaimed. And that is usually looked upon as a gift , a gift from the community to one spouse. And there are different ways that the community can claim a lien on something that doesn’t belong to it. But if it’s gifted out of the community, if it’s inherited, or if it’s owned prior to the marriage, it is not community property.
When Separate Property and Community Property Mix
Does the Character of Property Ever Change?
Billie Tarascio:
Now, the character of the property never changes. What that means is if I have a house before I’m married, and I get married and we live in it together as a married couple for 20 years, and the community pays all the bills associated with the house , does the house become community property?
It does not. It’s a separate asset because the character doesn’t change. The only way the character could change would be if the separate property belonging to the spouse is gifted to the community , which happens sometimes , if it’s refinanced, or retitled, or put into a trust with both people’s names. Now we’ve got a transaction that can change the character of the property. But generally speaking, the character of the property doesn’t change at all.
Community Liens on Separate Property Homes
Billie Tarascio:
What happens instead is that the community interest develops an equitable lien. So the concept of community property upon divorce is that the community is divided equally , equitably , which usually means equally, unless there is some good reason to be argued that in this particular case, an equal distribution would not be an equitable distribution.
Now the community lien is where , in the example I just gave, where I buy a house, we own it for 20 years , after we get married and the community pays all the bills, the community is going to have a lien or an interest in the property because the community invested money in that house. The community paid down the mortgage, maybe added a kitchen that increased the value of the property. And while the house is separate property of the spouse that owned it before they were married, the community gets to say, “We have an interest in it now.”
Equity, Mortgage Pay-Down, and Home Improvements
Billie Tarascio:
How do you quantify that interest? Before we get to Rueschenberg, let’s talk about how we quantify the interest. There are several formulas that are allowed in the case law, but the reason there are several formulas is because this comes down to a question of equity. There’s no hard and fast rule that tells you exactly how to quantify your community interest.
You have to argue using data and the facts that you have to determine how much of the value of the piece of property should be attributed to the community and how much should remain separate. So let’s say that you, as the community, pay down your mortgage by $100,000 , well, you might be able to argue that $100,000 is the community lien. But there’s no hard and fast rule that says you’re exactly going to get that.
And then when you add in all the other expenses, there’s no hard and fast rule that says the community is entitled to 100% reimbursement , because you can argue the community received the value of living in the house, and you would have had to pay rental income somewhere.
So this is where , because there are no hard and fast rules , lawyers get paid more to argue and take positions and advocate on behalf of their clients, and hopefully come to a settlement that everybody can live with.
The Rueschenberg Case: Business Growth in Divorce
Valuing a Business at Marriage and at Divorce
Billie Tarascio:
Now, let’s talk about Rueschenberg , probably the premier case on what happens when you’ve got separate property that grows during the marriage. How do you determine how much of the growth should belong to the separate spouse and how much of the growth should be given to the community?
Now in Rueschenberg, the husband owned a dental practice prior to getting married. And after he got married, he and his wife both worked in the dental practice. They opened several offices. The dental practice grew. And when it came time to get a divorce, there was obviously an argument: should any of this separate property business be attributed to the community?
The answer was yes, but it wasn’t quick and it wasn’t easy. The first question was: how much did this business grow? How much was it worth when you got married? Now, most of us don’t go through the process of valuing our business and all of our assets prior to getting married, unless we’re getting a prenup. And if we did a prenup, we don’t even have to talk about Rueschenberg.
But you know, usually nobody plans to get divorced , but this is what we have to start our analysis with. The same applies to the house: how much was the house worth on the date you got married? How much was the business worth on the date you got married? And the only way to do that is really to get an expert opinion. And many times you’re going to get several different expert opinions.
Then you have to figure out how much is it worth on the date the community ended. The community ends on the date the petition is served and the affidavit of service is filed. There can be a big difference between that date and the date you’re divorced , it could be 18 months between the time you filed for divorce and served that petition.
Separating Market Forces from Community Effort
Billie Tarascio:
The next question is: how much was the growth, and what portion of that growth was due to community efforts? Because the concept of community property is that any work done during the marriage , for the benefit of the marriage , belongs to the community. It’s back to the original concept of the community as its own entity with its own interests. And unless you opt out of it, all of the work you do while you’re married is for the benefit of the community.
So in the Rueschenberg case, they had to argue: how much of this growth is due to increased demand for dental services or population growth , which doesn’t have anything to do with community efforts , versus the husband’s or wife’s work in the business that actually grew the practice?
Calculating the Community’s Share of Business Growth
Billie Tarascio:
The only possible way to quantify it is with expert opinion. So now you have to hire an expert , and usually you’re going to have competing experts , who get to take all these facts, like how much did the population grow and what was the general increase in demand for dental services and how much did real estate go up in value? And then somehow, magically, it is assumed you can figure out how much is due to community effort and how much is due to individual effort.
Once you figure out what the community portion is , let’s say the dental business grew by a million dollars, and let’s say the experts agreed that half of that was due to market forces and half was due to community efforts , then the community portion is $500,000. Each spouse gets half. So the wife would get $250,000 for the community lien on the separate property business.
Practically speaking, this is bad for everyone. It just means months and months of transaction costs and battling in court. And it’s very difficult to settle a case where people think it’s fair under this set of circumstances , which is why it’s so important to do planning way before this happens.
As I said, this can be applied to absolutely everything: houses, trusts, stocks, property of any kind. I had a case where the husband had a ton of money and spent all of his time day trading. So we argued that was community effort and that part of the increase in value should be attributed to the community. You can argue this concept for absolutely everything , which is why it’s so interesting to think about the various ways that you can move money while you’re married and what that means for the community. There is nothing that prevents a lawyer from making this argument under any fact pattern that increased the value of any asset during the marriage.
Asset Protection Strategies Before and During Marriage
Protecting an Inherited Home You Live In
Billie Tarascio:
Let’s answer a question first: “How do I protect my assets that I have inherited , property held in my trust, money in a personal bank account? My husband did not sign a prenuptial agreement, and we live in the home together now.”
So if you’ve inherited property, it is separate property. If you want to prevent the community from taking an interest in the property, then you need to be careful about major expenses. How much is the mortgage? Are you paying it with community dollars or with separate dollars?
There’s nothing that says you can’t use community dollars to pay a mortgage. But the bottom line will be: did paying the mortgage increase the value of your separate property? And even if it did, it doesn’t mean that all of that is split or all of that becomes community property. The community would have needed to pay money to live somewhere. Was it a good deal or a bad deal? Did you pay the mortgage down fast?
What you mostly need to do is make sure the title doesn’t change. Do not change the title. Do not refinance the property and put both people’s names on it. And do not take a big chunk of community money and invest it in improvements to the home that will increase its value. If you avoid those things, you’re probably going to be just fine , because the community is getting a benefit from living there, and that’s another part of the Rueschenberg analysis that impacts that final buyout number.
Managing Community Funds to Avoid Community Liens
Billie Tarascio:
So the community , either person in the community , can bind the community, which means a gift of your community assets or a transfer of your community assets to a third party is not per se prohibited. There’s nothing that stops anybody who’s married from spending the money of their business the way they wanted , including giving it to some other entity they didn’t own. You’re allowed to do that. The same way a husband is allowed to give money to a church. There’s nothing that prohibits that.
Paul DeLoughery:
Like there’s no rule that you’d be a good business owner or a good business person.
Billie Tarascio:
Exactly. You are not required to be a good steward on behalf of the community. But , if you commit concealment of community assets, community waste, or fraud against the community, then the community could come back and make a claim. So if it looks like you’re trying to hide assets and be shady, a smart lawyer is going to make a claim against that.
However, if this is part of your strategy, you’ve been doing it a long time, and you’re not the beneficiary of the entity receiving the funds , then I think a judge would have a really hard time making a community lien determination. You would need to join all those third parties as defendants, and it would be insane to litigate. It would probably end up settling, or you could litigate it forever.
Using Trusts, LLCs, and Limited Partnerships
Paul DeLoughery:
Let me share some analogies to give you ideas for things that can be done. Take Dr. Jenny Jones , not a real person , she’s unmarried right now. She owns a medical practice taxed as an S-Corp, which is very common. If she gets married, the profits and income from the business would be community property, assuming they result from her individual toil.
So what if she creates a management company , probably an LLC , and enters into a management agreement? Let’s say $10,000 a month to start, with the ability to be changed annually. That management company can be owned by an irrevocable trust in which Dr. Jones is not the trustee and not a beneficiary. For example, her father could be the trustee and her kids, or her nieces and nephews, could be the beneficiaries.
So she puts her house into another irrevocable trust. She’s not the trustee, she’s not the beneficiary , she’s not named on it anywhere. Then she gets married. If they later get divorced, the residence would not be community property because it’s not owned by either spouse. And frankly, if she gets sued, it’s not up for grabs because it’s not in her name.
To avoid the community lien on the house, any improvements should be paid for by something other than community property , maybe money from the irrevocable trust, or another inheritance.
A very typical thing in estate planning is also to have a limited partnership. The reason for the limited partnership is this: I compare it to having a car that you drive around where the bank still owns the car because you owe money on it, but you have control of the steering wheel. With the limited partnership, you can have control by being a general partner, but most of the ownership is outside of your name , held by an irrevocable trust.
Advanced Asset Protection Examples
Management Companies for Professional Practices
Paul DeLoughery:
In the limited partnership, Dr. Jones can put a future inheritance from her parents, or money she saved prior to the marriage. That would be only 1% owned by her, or 0.1% owned by her , something like that.
So if she happens to get sued , say for medical malpractice that insurance doesn’t cover, or for something like sexual harassment that isn’t covered by malpractice insurance at all , the things outside of her name are not going to be up for grabs. The management company and any money in it is not available. The house in the irrevocable trust is not available. The inheritance in the limited partnership is not available.
Friendly Liens and Judgment Planning
Paul DeLoughery:
Here’s an advanced technique. Say Dr. Jones got sued for $500,000 and malpractice insurance isn’t going to cover it. Well, the limited partnership could actually settle with the plaintiff for some fraction of what was owed , which is how lawsuit settlements typically work. But the limited partnership actually buys the full value of the judgment. Now the limited partnership has a $500,000 judgment lien against Dr. Jones’s personal assets. And again, that’s not community property.
Why in the world would you want a judgment lien against yourself? That sounds horrible. But what we’ve done is created a friendly lien , a lien in favor of her own limited partnership. And what that does is: if she is then sued again in the future, her limited partnership can garnish her wages first. Wage garnishment is first-come, first-served. So her partnership has dibs on the garnishment, and that puts her in a much stronger position.
What I like to tell people: asset protection planning is not a one-and-done kind of deal. It has to be done on an ongoing basis. It’s like a fine wine , it gets better with age. As you put things in place like the partnership and these trusts, and then as life circumstances happen and you revisit it, you find different opportunities for improvement.
Related strategies include a line of credit from the limited partnership to herself, secured by her personal assets. Or a sale of rental properties to the limited partnership via a self-canceling installment note, with provisions that trigger if she becomes insolvent, files for bankruptcy, or is subject to a divorce.
Irrevocable Life Insurance Trusts
Paul DeLoughery:
Another thing would be an irrevocable life insurance trust (ILIT). These aren’t owned by you. The original purpose years ago was that when the estate tax exclusion was much lower, people would put life insurance in a trust to keep it outside of their estate. What I’m suggesting is using the same type of structure , maybe you don’t need it for estate tax reasons , but you can get it outside of your estate. And because it’s not in your name, it’s not going to be subject to a later divorce. Those are just some basic examples.
Billie Tarascio:
Some thoughts on this: there’s no case law specifically on what Paul is proposing. So neither of us can predict exactly how this would end. But we have enough legal principles to know that if it looks like you’re trying to hide assets, a smart lawyer is going to make a claim. However, if this is part of a documented, long-standing strategy where you’ve gifted money outside the community to beneficiaries and you are not the beneficiary yourself, a judge would have a really hard time making that community lien determination. It would be insane to litigate. It would probably settle.
Paul DeLoughery:
Work with a lawyer , and that sounds self-serving , but work with someone before you do this. Doing this works much better if you’re doing it before you get married. After you get married, there’s a lot more danger that you’ll be accused of concealment or waste or fraud.
Billie Tarascio:
That’s totally true. But the other side of the coin is: if you find yourself married with no prenup and you think there’s a possibility of divorce, you have to take some action now. And there are options. And I think that’s the biggest thing I’m learning from Paul , there are options for married people to protect assets. You just have to be smart and know the risks.
Paul DeLoughery:
Something that I have seen people do is work together for the purpose of asset protection , to transfer community property outside the marriage. And maybe one of the spouses has an ulterior motive of later wanting a divorce. I guess that sounds shady, but it’s not technically concealment because the other spouse participated. It’s not waste. It’s not fraud.
Billie Tarascio:
That’s a great point. Intent matters. If you can show you were doing this for some other reason , not to conceal assets from your future ex-spouse , that’s going to be important. That should be part of your planning.
Prenuptial and Postnuptial Agreements
Why Prenups Make Asset Division Easier
Paul DeLoughery:
On taxation: if you put real estate assets into a trust, is it taxed as capital gains or ordinary income when sold?
The kind of trust I would suggest using is one that’s disregarded from a tax standpoint , the trust doesn’t even appear on the tax return. There’s no separate return. In the example with the limited partnership and the two trusts, the only additional item on your taxes is a partnership return. A CPA charges maybe $350 a year for that. It doesn’t actually increase your taxes. However the asset would be taxed to you personally, that’s just how it’s taxed. Long-term real estate is typically taxed as capital gains.
Billie Tarascio:
Prenuptial agreements make all of this a lot easier , because you get to decide in advance, when you’re on the same team, how you want to handle assets and how you want to conduct yourselves in the event of divorce.
People think a prenup has to say certain things. It doesn’t. It can literally say anything you want. It could even simply outline a process for determining what your future arrangement might look like. And just because you do a prenuptial agreement doesn’t mean the issue is closed.
Renegotiating Prenups When Circumstances Change
Billie Tarascio:
I don’t know how many of you read the article about how Melania Trump renegotiated her prenuptial agreement before agreeing to move to Washington, D.C. When her husband became president, she stayed in New York , ostensibly so that Baron could finish school , in order to renegotiate, because the situation had changed. It’s not necessarily a one-and-done thing.
And the last thing any of us want is adversity with our spouse. But if we’re dealing in good faith from the beginning , and also from a practical standpoint , we may be in a position one day where this has to be done. Do we want to do it the hard way, with competing experts trying to figure out asset values at different points in time and a judge who may not fully understand the issues? Or do we want to take it into our own hands and figure out what works better for us? I always think that’s the better way to do it.
What You Can and Cannot Control in a Prenup
Billie Tarascio:
“What can and cannot be controlled by a prenuptial agreement , say child support or alimony?”
Great question. You cannot in your prenuptial agreement decide who gets custody of your kids, and you cannot contract around child support. You could probably agree to pay more child support, but you can’t agree to no child support , it would not be in the best interest of the children. So child custody and child support are the two things that are off limits. Legal decision-making for children is also not something you can fully contract around.
But you absolutely can address alimony/spousal maintenance in a prenup.
Practical Takeaways for High-Asset Arizona Divorces
When to Talk to a Family Law Attorney
Paul DeLoughery:
I feel like we don’t have a perfectly clear-cut answer for everyone, but I think the takeaway is: prenuptial agreements are a good idea. If for some reason you don’t want one, there are options , they’re just a little more difficult and may not be as protective as having a prenuptial agreement in place.
Billie Tarascio:
Yeah. And I think the bottom line of what I’m learning from Paul is: there are a lot of options, and planning beats doing nothing every day of the week. If you’re in a position where you’ve got assets to protect , either from a divorce or from anything else , talk to your attorney. Because there are things you can do, there are decisions you can make now that will change the position you find yourself in if you do nothing.
Planning Ahead vs. Doing Nothing
Paul DeLoughery:
Exactly right. And asset protection planning is ongoing , not a one-time event. As life circumstances change, you revisit it, and you find new opportunities to improve your position.
Billie Tarascio:
If you’re acquiring assets, growing a business, or entering a marriage with significant separate property, now is the time to plan. Don’t wait until you’re in the middle of a dispute to figure out what should have been done years ago.
