In every divorce, the court will divide marital property between the spouses. Whatever the property, wherever located. The following discussion is an overview of property division in Arizona divorce law, beginning with “What is marital property?”
When family law attorneys talk about dividing marital property in Arizona divorce or legal separation, they are referring to both assets and debts. However large or small the marital estate, it must be split when the marriage is dissolved. (To learn about each step in the divorce process, be sure to read up on Arizona divorce details.)
Property includes tangible and intangible things of all sorts. Tangible property has physical form and includes real estate, vehicles, furniture, jewelry, stocks and bonds, equipment, and the like. By contrast, intangible property is not something physical that can be held in your hand. Examples of intangible assets are trademarks, trade secrets, copyrights, business goodwill, and Bitcoins.
Marital Estate Belongs Equally to Both Spouses
In Arizona, the marital estate – all property of any kind acquired during the marriage – is owned by the community. The community being the spouses. Because their interest in the marital estate is 50/50, it is divided equally upon dissolution. That division must be fair and equitable, although not necessarily perfectly equal. Division may be in kind, but the solution is not a spoon-for-a-spoon or bed-for-a-bed, although it can sometimes seem that way. Equal division need not be to the last penny. And there is no requirement that each item be cut in half. Many items can be divided right down the middle, such as equity in the marital home and the community portion of a pension or military retired pay.
Let’s say, for example with child custody, the parent who has the children most of the time is awarded the new 4-door sedan and associated car loan. The other parent is awarded the old 2-door sedan which is paid off. Two different vehicles, and not a precise 50/50 split. Look to the end result. After dividing all community assets and debts, the final balance sheet should show an equal division for distribution. That is, unless the spouses reach agreement otherwise, something they are always free to do.
As a community property state, Arizona is among the minority of jurisdictions. The only other community property states are California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. With every divorce there should be an equitable division of marital assets and debts. In Arizona law, each spouse has an undivided one-half interest in their community property. Our basic property disposition rule is set forth in ARS § 25-318(A):
“[T]he court shall assign each spouse’s sole and separate property to such spouse. … [I]t shall also divide the community, joint tenancy and other property held in common equitably, though not necessarily in kind, without regard to marital misconduct.”
The court must divide community property equitably, not necessarily in kind, and disregard any marital fault, such as adultery or abandonment. If not a precise 50/50 split (which is seldom practicable or feasible anyway), then community property is divided fairly, equitably, given the item under consideration and the parties’ circumstances.
Separate Property Belongs to One Spouse
Separate property belongs to one spouse and is not subject to division in dissolution proceedings. An asset acquired prior to the marriage may remain separate property at the time of a divorce. This is not a hard and fast rule! How an asset was used during the marriage could transform its character from separate to community. In fact, a portion of the asset’s value may remain separate, while a portion is changed into marital property. Much depends upon specific facts and circumstances. Every case is unique and each valuable asset requires careful consideration.
However Titled, Community Property Belongs to Both
The community estate includes all property accumulated during the marriage, regardless of whether an asset is titled in one spouse’s name or in both. When a spouse’s separate property is commingled or mixed in with marital property, it is transformed into community property – called transmutation. Most spouses will have some transmuted property to consider in their property division. Be prepared.
The family law judge has considerable discretion in Arizona law to award property equitably in divorce or legal separation. What the court deems equitable will depend upon the type, kind, and nature of the property placed under the microscope. Is it an IRA? The marital residence? A professional practice? Is it business goodwill? Judicial discretion and ensuring a fair result allows the court some flexibility in awarding property. Still, the parties enjoy far greater flexibility by negotiating a property settlement (discussed later).
During divorce negotiations, an equalization payment can be used to balance the ledger in the parties’ final property division. When one spouse wants his or her equity in the family business bought-out by the other party, for example, an equalization payment may accomplish this.
Here’s how it works. With a community asset, one spouse transfers his or her share in the equity and, in exchange, gets an equivalent value in cash from the other spouse. Unlike spousal support, there is no tax on receiving the equalization payment because all property transfers incidental to divorce are non-taxable events. In this way, an equalization payment is paid with after-tax dollars. It is neither taxable to recipient, nor deductible from payor’s income. (What should you know about divorce and taxes?)
Sometimes cash is best. Say, for example, the husband as the children’s primary residential parent has plans to buy a new home in Peoria and stay in the same school district. He needs money for a down-payment, and the sooner the better. For him, accepting an equalization payment representing his share of the equity in the marital home is better than waiting for the marital home to sell at some unknown future date.
Because a major concern in divorce is how property should be divided between the spouses, parties are strongly encouraged to settle matters. They will hear that from the attorneys, the judge, and everyone else involved the case. Spouses may negotiate various issues raised by dissolution of marriage – property division, child custody, parenting time, child and spousal support – and include their agreed terms in a separation agreement. See ARS § 25-317.
Negotiation takes place in every divorce. The longer the marriage lasted, the more property the couple acquired, the more property issues will need settling. This is an area where the negotiating skills of an experienced divorce attorney with Stewart Law Group are invaluable. Mediation can also be useful in resolving disputes, particularly in high asset, complex property division cases.
When parties negotiate, they have more control. They can be creative and flexible with their property settlement terms. When control is placed in the judge’s hands, however, the outcome may not be what either party desires.
Spouses can agree on the character of property, identifying and labeling things as “community property” or “separate property.” They can agree on specific valuations, such as the fair market value of their Scottsdale marital home. They can agree that their respective pensions shall be divided or that each retirement account shall remain intact. They can agree on an equalization payment as noted previously. When spouses are not in agreement, the judge must make determinations for them. This holds true with every issue in divorce, not just the division of property.
There are many benefits to voluntarily negotiating a property settlement for inclusion in the separate agreement. The judge should, absent objection, incorporate the separation agreement into the divorce decree (or into the decree of legal separation) binding both parties to the terms.
No, there is no guarantee that negotiation or mediation will end in agreement. The good news? The majority of divorce cases in Arizona do settle and do not require trial. Pragmatically, even partial settlement can cut expenses by reducing the number of outstanding issues on the trial agenda. Put emotions aside and give settlement your best efforts. The judge expects spouses to make a good faith attempt at settling the division of their community assets and debts.
Settlement usually saves in attorney fees, too, and saving money by keeping resources in the family is always a positive. Trial preparation requires additional attorney hours, so litigation almost always costs clients more money even if the trial is completed in a single afternoon. Sometimes trials are necessary. But if property matters and other important divorce issues can be settled outside the courtroom, then they should be.
First, all property interests are put before the court so they can be properly allocated to one spouse or the other. The court sifts through every asset and debt and applies this four-step process:
Each step is described below. If there is a prenuptial agreement, then it must be presented.
Is there a premarital agreement? A prenuptial agreement typically includes the couples’ agreed property division terms in the event they separate or divorce. Assuming the prenup is valid, the court should enforce the terms and award the parties’ community property accordingly. Along with property, a premarital agreement can include spousal maintenance agreements and child support arrangements beyond what’s mandated by the Arizona Child Support Guidelines. No prenup? Continue with the four steps to property division in Arizona divorce.
1. Designation as Separate or Community Property
The very first step is to identify, or characterize, each individual asset or debt as either separate property belonging to one spouse or community property belonging to both spouses. Ordinarily, all separate property is awarded to the spouse who owns it. See ARS § 25-213.
Here’s a quick example of two family vehicles. The classic Mercedes was owned by the wife prior to the marriage. The Lexus was purchased during the marriage and is husband’s primary mode of transportation. On those basic facts, the wife should be awarded the Mercedes as her sole and separate property. The Lexus was acquired by the community, however, so it is included in the marital estate for division.
Asset Acquisition to Help Designate Property
In general, an asset gets characterized as separate or community property when it is acquired. That designation is not altered as a result of a subsequent marriage. Separate property, followed by marriage, is still separate property. Was community property money used to pay a separate mortgage? Were community resources used to make improvements to separate real property? Then the non-owning spouse may be entitled to reimbursement for his or her share of community funds spent on paying for, maintaining, or improving the other’s separate asset.
Presumption of Marital Property
There are a number of important rebuttable presumptions in Arizona family law. One of those is the presumption that an asset acquired during the marriage belongs to the community. Likewise, a debt incurred during the marriage is presumed to be a community obligation. There are always exceptions that should be discussed with an attorney, but those are limited to when something was acquired before the marriage or was acquired by gift or inheritance during the marriage – both characterized as separate property.
To overcome this marital presumption of community property, the spouse asserting something is a separate asset or debt must prove by a clear and convincing burden of evidence that the item is not community property because it was acquired before marriage. When acquired during the marriage, however, evidence must prove that:
This is just one aspect of the case a divorce attorney with Stewart Law Group examines when analyzing the client’s entire asset picture.
2. Valuation of Assets
Once an item of tangible or intangible property is designated as community property, a fair market value must be placed on it. As one might expect, the process of obtaining valuation of certain assets, such as a medical practice, is far more complicated than with most other things. Regardless of the difficulty, a value must be placed on all assets.
Realistically, many things we truly cherish are not even worth trying to sell on eBay.com or Craigslist.org. Family photos are precious to us, but have little, if any, market value. Family pets tend to have minimal market value, too. But their emotional value? Now that’s a horse of a different color! Read about pet custody and dividing family pets in divorce.
Valuations in Complex Asset Cases
Some marital estates present greater challenges when it comes to valuation and division. Traditional pension plans cannot be immediately divided. Executive pay packages are not clear-cut salaries; they may include deferred stock options and multiple contingent benefits. Forensic valuation of a professional practice or closely held company may be needed, and will almost certainly be recommended by counsel, with several recognized valuation methods to consider.
Valuation can be accomplished by several methods. By the spouses reaching an agreement on value (sometimes the easiest, but not recommended with business valuations or other complex valuations); by the parties’ testimony (which might not even be based on actual market knowledge); and by expert testimony (often recommended, but which could trigger a battle of the experts). The judge has discretion to set valuation dates and, likewise, may attach different valuation dates to different debts or assets. With assets that rapidly fluctuate in value, stocks for example, the date of valuation might be essential to the spouse’s property division strategy.
Concealed Property and Hidden Assets
The case gets even more challenging if one spouse tries to hide assets from the other party. In those situations, seek an accurate summation of the following: Financial accounts, bank accounts, retirement benefits, real estate holdings, personal property, stocks and bonds, overseas assets, business revenues, and credit reports.
When concealed assets are suspected, there are a number of techniques attorneys with Stewart Law Group employ to discover them. Often, hiring a licensed private investigator is the first key to identifying the client’s marital assets and debts, and to establishing their true value.
Another technique is the lifestyle audit. The in-depth lifestyle audit involves comparing a spouse’s stated income to the amount he or she actually spends. When spending seems exorbitant given stated resources, it’s possible the spouse failed to report all assets in his or her financial disclosures. Disclosure is mandatory!
Marriages of long duration, where spouses acquired substantial assets together, can also involve complex valuations. The character of property is not always obvious and valuation of property must be established. In any high-asset case, or if there is a professional practice or business to value, it is very likely that some litigation may be involved to determine the character and value of specific assets. Qualified experts are frequently asked to establish asset values in complex property cases. Expert opinions are sought from forensic accountants, business valuators, appraisers, and real estate professionals. Take a look.
• Forensic Accountant
A forensic accountant (typically a Certified Public Accountant) may provide creditable valuations of pensions and retirement plans. A forensic accountant can conduct a lifestyle audit, help prove an asset is actually separate or community property, determine whether marital waste occurred, or help discover fraudulently concealed assets. Because experience matters, Stewart Law Group works with a number of reputable forensic accountants and appraisers who serve our clients throughout the Valley.
• Business Valuator or Business Appraiser
When the marital estate includes a business interest, that interest will need valuation. A business appraisal and valuation is usually completed by a forensic accountant. The business appraiser examines and analyzes all business records and may interview either or both spouses and the employees. The complexity of the valuation will depend upon the type and nature of the business being examined. Business valuations are time-intensive and can take several months to complete.
• Personal Property Appraiser
The services of various appraisers can be very useful when placing values on unique property items, such as collectibles, artwork, antiques, jewelry, guns, automobiles, musical instruments, books, coins, stamps, and so on. Services of more than one appraiser may be needed.
• Real Estate Appraiser
When spouses are not in agreement on real property values, a licensed real estate appraiser can provide a written appraisal report. Real estate appraisers locate comparable properties in the area, note sale prices of comparables, and extrapolate a value for the subject property.
• Real Estate Agent
Although less formal, real estate agents can be helpful in valuing residential real properties. Local agents and brokers are very knowledgeable about the market where they work: What properties are for sale in Chandler? How long do properties take on average to sell in Glendale? How much have properties sold for in Phoenix in the past 12 months?
3. Division of Community Assets and Debts
As discussed previously, both community assets and debts are divided and distributed between the spouses in divorce proceedings. And there are separate debts and community debts.
If a debt was incurred prior to the marriage, it remains a separate debt after divorce. A debt incurred by one spouse while divorce proceedings are pending is also his or her separate property. Generally, the debts that arose during the marriage will be characterized as community debts and divided equitably.
4. Distribution of Community Property
The court has broad discretion over the distribution of community property. The court may distribute some assets in kind, real estate for real estate, collectible art for collectible art, and so on. The court may require that one spouse cash-out the other. For example, one is awarded a $30,000 vehicle, but must pay the other spouse $15,000 in cash (the 50% community share).
The judge may order an asset sold and the proceeds divided. For instance, the marital residence may be ordered sold, the mortgage paid, and the proceeds split 50/50. The court may order deferred distribution, wherein the marital home will be sold at some future date with proceeds distributed thereafter. One spouse may remain in the marital home an additional year, for example, after which time the house will be sold and proceeds distributed. The judge may reserve jurisdiction over property for distribution later – that is, the court enters the divorce decree, reserving jurisdiction for later valuation and division.
Prepare Your Property Division Strategy
Do you have a property division strategy? Because the law presumes that all property acquired during the marriage belongs to the community and, therefore, should be equitably divided, it may be necessary to prove something is or is not community property. Either party can assert that an asset or debt is not marital property, but that spouse carries the legal burden of proving such an assertion. Because overcoming the marital presumption requires a legal strategy, a plan for how the burden of proof will be met, do consult your divorce attorney on the evidence needed and how best to proceed in court.
However complex or contentious a divorce might become, we always go the extra mile to protect each client’s marital property rights and legal interests. Just listen to the good things our clients say about us.
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