Managing Marital Property: Do's and Don'ts

Property division can become challenging for divorcing couples. However, this need not be a challenge. And If you and the soon-to-be-ex cannot come to good terms on your own, a court will have to do it for you. Under Arizona’s community property law, debts and assets accumulated during a marriage belong to both parties 50/50 in the absence of a prenuptial or postnuptial agreement that says otherwise. Arizonian family courts emphasize fairness when dividing up a property. Unlike in some states, the property may not be divided equally 50/50, but equitably in the eyes of the judge assigned to your case. This can sometimes mean 55/45 or 60/40 or 40/60—every case is unique.

No matter what the facts, you will have to hire a talented divorce attorney in Scottsdale, Phoenix or your local area in the state. Absent years of litigation experience, you likely won’t be able to capably represent your interests in court without a deep knowledge of divorce and property laws in the state. If you are undergoing a process of dividing property in a divorce, here are some important items you should be aware of:

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Determine if the Property Belongs to the Community or the Separate Category

There is a very clear distinction between community and separate property under Arizona law. Separate property is assets a spouse owned before marriage, inherited solely during the marriage, was gifted solely during the marriage, or purchased alone during the marriage with sole and separate finances. A prenuptial or postnuptial contract may also designate that certain items are to be treated as separate property. Absent these facts, the law presumes all property and all debt, acquired or originated during the marriage, is community property.

Courts in Arizona only have jurisdiction over community property, not either spouse’s sole and separate property. Each party will have to provide evidence for separate property claims in the form of financial documents. It is possible that property that was originally separate later becomes community property during the marriage. For example, a house purchased by one spouse before marriage may become community property following the marriage if both spouses names are later placed on the recorded deed.

The reason that each is different is that the distinction between community and separate property during the marriage can be blurry. Some spouses may have unknowingly turned separate assets into community property by the “commingling” process, where two assets are combined. A bank account owned by one spouse before marriage becomes marital property if the other spouse makes deposits to it later with community income. Sometimes assets are partially community and partially separate, such as houses and retirement accounts. A business that one spouse operated but later received contributions from the other spouse after marriage can fall into this category. A seasoned lawyer can walk you through these issues, and advance them in a court of law.

Set Values for Property

Regardless of whether community or separate property, all assets and debts must be assigned a monetary value before equitable division. The two spouses can do this themselves, or a court can do it in case the parties cannot agree on values. Typically appraisals are used to set values of real assets, like houses, antiques, or vehicles. The toughest asset to value can sometimes be retirement accounts. You may have to hire a financial professional like an actuary to ascertain the value of a retirement account and the growth in value of such retirement assets since the original marriage date.

The Process of Dividing Property

You can see the first section above that determining whether a property is community or separate can be complicated. Ideally, both parties come to an agreement out of court. But this rarely happens when multiple assets are in question and the stakes involve hundreds of thousands of dollars or more.

Courts may divide up property in multiple ways. In the case of property that is partially separate, the court may offer a spouse the option of buying out the remaining portion from the other. In some cases, it may be recommended to mutually sell the assets and divide the proceeds. Some property, like family homes, can be co-owned even following a divorce if children are living there or visiting each year.

Arizona courts typically divide property approximately equally among the divorcing partners. There are only a handful of exceptions to the rule. For example, if one spouse is known to have squandered money through irresponsible activities like gambling or drug use, the court may rule in favor of the other. In the case of property under massive debt, the court may rule against the spouse responsible for the debt. At the end of the day, you will need the guidance and stewardship of experienced legal counsel to navigate these issues for you.

The following information will assist you in comprehending who owns what in terms of marital property.

Common Law Property and Marital Property States

The majority of states adhere to common law property. Consequently, what does it mean to reside in a common law property state, and who owns what following a divorce? The term “common law” is simply a term used to determine marital property ownership (property acquired during marriage). Under the common law system, property acquired by one member of a married couple is solely owned by that individual.

Obviously, if the title or deed to a piece of property is placed in the names of both spouses, then the property belongs to both partners. If the names of both spouses appear on the title, each spouse owns a one-half interest.

Distribution of property upon death or divorce: When one spouse dies, their separate property is distributed according to their will or through probate (in the absence of a will). The distribution of marital property depends on how ownership is shared between the spouses. If they hold property in “joint tenancy with the right of survivorship” or “tenancy by the entirety,” the surviving spouse inherits the property. This right is independent of the provisions of the spouse’s will.

However, if the property was owned as “tenancy in common,” then the deceased spouse’s will may direct the property to someone other than the surviving spouse. Some property does not have a title or deed. In this instance, the owner is typically the person who paid for or received the property as a gift.

In the event of a divorce or legal separation, the court will decide how the couple’s property will be divided. Obviously, the couple can enter into a premarital agreement detailing the division of marital assets upon divorce.

States with Marital and Community Property

Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin are the states with community property. In states with community property, all assets acquired during the marriage are regarded as “community property.”

In states with community property, both spouses own the marital property equally (50/50). This marital property consists of earnings, all property acquired with those earnings, and all marital debts. Community property commences at the time of marriage and terminates when a couple physically separates with the intent to no longer be married. Therefore, any earnings or debts accruing after this date will be considered separate property.

Any assets acquired prior to the marriage are regarded as separate property and belong solely to their original owner. A spouse may transfer the title of any separate property to the other spouse (gift) or to the community property (community property) (making a spouse an account holder on bank account). Couples can also commingle their separate property with their community property, for instance by adding funds from before the marriage to the funds that constitute the community property.

Spouses may not transfer, modify, or eliminate a whole piece of community property without the consent of the other spouse, but they may manage their own portion. However, the entire piece includes the interest of the other spouse. In other words, that spouse’s share of the property cannot be alienated.

Separate property consists of

prior to the marriage, only one spouse owned the marital home.
Gifts made to only one spouse prior to or during the marriage
inherited property by only one spouse
Community property consists of
Earnings of either spouse during the marriage
Items purchased with money earned by either spouse during the marriage
Unidentifiable separate property that has become entangled with common property.

Distribution of property upon death or divorce:

When one spouse dies, his or her half of the community property is transferred to the surviving spouse. Their separate property may be bequeathed to whomever they choose in accordance with their will or through probate in the absence of a will. Numerous states with community property provide an interest known as “community property with the right of survivorship.”

Under this doctrine, if a couple holds title or deed to a piece of property, typically a home, then upon the death of one spouse, the title automatically transfers to the surviving spouse without the need for court proceedings.

In the event of a divorce or legal separation, all community property is divided equally (50/50). The separate property of each spouse is distributed to the spouse who owns it, rather than being divided equally.

Sometimes, economic circumstances necessitate awarding certain assets entirely to one spouse, but each spouse still receives 50 percent of the total economic value of all community property. This is most prevalent in married households. Due to the impracticality of dividing a home in half, courts frequently award one spouse the home and the other spouse other assets with a value equal to half the value of the home.

Before the marriage, the couple may enter into an agreement outlining the division of marital property upon divorce.

Exceptions to the rule of equal division:

Prior to or during a pending divorce, one spouse misappropriates the community property.
One partner carries educational debts. This is the same as debt incurred separately. The spouse retains their GSL loans upon divorce.
One spouse incurred tort liability NOT as a result of activity performed for the benefit of the community of marriage.
Personal injury awards are considered community property during the marriage, but are awarded to the injured spouse upon divorce.
“Negative community” refers to a situation in which the community’s liabilities and debts exceed the assets available to cover them. Here, the relative ability of the spouses to pay the debt is taken into account. The objective here is to safeguard creditors.

Managing Marital Property: What You Should Do

Do consider entering into a prenuptial or premarital agreement prior to marriage. Such agreements make clear what will happen to your property upon your death or divorce. With one, you can prevent undesirable arrangements in how your property is divided in a divorce.

Do maintain accurate and complete books and records to establish the separate nature of property you wish to keep independent from the marital estate. Property you may want to keep separate can include things you had before marriage. It can also include gifts or inheritance you receive during the marriage.

Do continue to keep all separate property separate throughout the marriage, if you’re concerned about keeping it in your family upon your death or divorce. You should also do this with other things that you would also like to keep as a personal asset. Generally, this means you shouldn’t “commingle” property you owned prior to marriage with property you and your spouse acquired during the marriage. In cases of “commingling,” it may become difficult or even impossible to legally determine if it’s separate or marital property.

Do be aware that the increase in value of nonmarital property may be considered marital, so that each spouse is entitled to a share of the increased value of a possession upon divorce or the owner’s death. This is especially true if the increase in value is considered “active” rather than “passive.” (Such increases in value are officially referred to as “appreciation.”) Passive appreciation is, for example, the increase in value of a bank account as a result of interest earned. Passive appreciation also occurs with an increase in property value that results from standard inflation. Active appreciation, on the other hand, occurs as a result of some form of effort, such as repainting rental property, home improvement projects, or actively managing a stock portfolio.

Do use only your non-marital property to purchase other property that you want to be considered separate property. In other words, a boat that you pay for with money you had before marriage and kept in a separate account during marriage may be considered separate or non-marital property. But if your spouse pays for part of it, or even helps maintain it, the boat could lose the status of non-marital property.

Do keep proceeds acquired from any personal injury case during marriage separate, if you want to prevent them from becoming you and your spouse’s marital property. The money you get from a personal injury lawsuit is yours alone, except for any portion that reimburses you for your lost income or compensates your spouse for the loss of your services or companionship.

Managing Marital Property: What You Should Not Do

Don’t use separate funds to pay off a marital debt, or those funds could lose their non-marital character.

Don’t make deposits of income earned during the marriage into non-marital accounts. Income earned during marriage is usually considered marital property. Depositing that income into non-marital accounts can result in “commingling.” When that happens, the non-marital account is no longer considered separate property.

Don’t open a joint bank account with non-marital funds, even if you intend to keep track of which portion is separate. It’s much more prudent to maintain separate accounts if you wish to keep non-marital assets separate.

Don’t assume that just because you owned property prior to marriage, no portion of it will be deemed marital property. For example, if the home you owned before marriage increases in value during the marriage because of you and your spouse’s efforts to maintain and improve it, your spouse may be entitled to a portion of that increase in value.

Don’t assume that a business you owned prior to marriage remains entirely a non-marital asset after marriage. If your business or professional practice increases in value throughout the marriage due in part to your spouse’s contributions, your spouse may be entitled to a share of the increase in value upon divorce or your death. Such contributions can be obvious, such as in bookkeeping or entertaining clients. But they can also be more subtle, such as in taking care of the home and children so that you can focus on running the business.

What is Whose? Obtain Assistance with Your Marital Property Issues

Dividing marital property upon divorce or the demise of a spouse is never an easy subject to broach. Despite the fact that the specifics of property division depend on the state in which you reside, it can be quite confusing. However, you are not required to figure out the law on your own. Consider contacting an experienced divorce attorney in your area to discuss your options.