How is Property Divided in a Divorce?
The topic of “property” and how it will be divided in a divorce can be filled with contention and emotion. In this article, we dive into defining “property” broadly, the factors that influence how it is divided in a divorce and how to protect one’s “property” prior to a marriage, or even after.
There are typically three main categories of issues in any divorce with property being one of them. The others include child custody and support (spousal support, child support).
What is the Definition of Property?
Property is generally any asset – it includes tangible items and income. Examples of tangible property include cars, artwork, jewelry – essentially anything you can touch. Property also includes financial accounts and real estate, including both land and buildings.
Community vs Separate Property
In the context of marriage and divorce in Arizona, there are two categories of property: community and separate.
Community property is generally anything that is acquired by either spouse from the date of marriage to the date of service of a petition for legal separation or dissolution of the marriage – regardless of who purchased the property. The exclusion to this is any property acquired by a party through inheritance or gift.
Separate property is anything acquired prior to the marriage or by gift or inheritance during the marriage. This may also include increases in value of the separate property, gifts or inheritance.
How is Property Divided in a Divorce?
Under Arizona law, community property is divided equitably in a divorce. Equitably is not the same as equally, and this is important to note. There may be circumstances where one party may be awarded an asset like a house, and then other assets are allocated to the other spouse to create equity. Every asset may not be divided “in kind” meaning each party is given exactly half of that asset.
An example where dividing an asset “in kind” may make good sense is in the case of stocks or other financial assets. Or, where tax considerations – both consequences and benefits – need to be taken into consideration.
The First Step to Property Division in a Divorce
As a first step to dividing property, we have to identify it. A big piece of homework for our clients is to create a list of all of their assets and debts. We ask them to include all of the assets and debts regardless of whether they were acquired before or after the marriage. This way we can work to identify whether the asset or debt is separate or community and determine if there are any other potential issues such as co-mingling or change of the titling of property during the marriage. In this step of identifying all the assets and debts, we may need to send out discovery requests or even subpoenas for the information.
From here, we start to determine what is community versus separate property. This is where we often run into disputes, as the assets take their character at the time they were acquired. Figuring out which bucket – community or separate – can be a challenge as can coming to consensus as to an asset’s worth.
Once the property is categorized as community or separate and its worth is established, it is then possible to start to make sense of what to allocate to each party.
What is Commingling of Property? Ph2]
Commingling in the context of divorce refers to the blending of assets that were originally some community property and some separate property.
For example, if one spouse has a bank account prior to the marriage in their own name, and then after the marriage, they continue to deposit their paychecks into the account, even though the account is still in one spouse’s name, the funds in the account may become commingled. This can occur because the income from one spouse’s labor during the marriage is community, not separate. Commingling occurs when the separate and community funds are not able to be separated apart by tracing. Often, a financial expert is needed to analyze this issue. Commingling occurs most often in the context of bank accounts.
Another example could be retirement assets. Many individuals may have a retirement account created prior to marriage. The account itself, and the contributions made prior to marriage are separate property. However, during marriage, people continue to contribute to their retirement. This results in a retirement account that has both separate and community retirement components. Retirement assets need to be analyzed to determine what portion of the accounts are sole and separate versus community. In evaluating an equitable division of retirement accounts, the tax implications for the different retirement vehicles (i.e., SEP, IRA and pension accounts) also need to be considered.
When Could the Community Have an Interest in Separate Property?
Sometimes, even if you have separate property prior to marriage, there are circumstances when the separate character of the property is not questioned, however the community acquires a lien on the property because of contributions made during the marriage. For example, if you have a separate rental property and you use your income during the marriage to pay the mortgage, or expenses associated with that separate rental property, this may create a situation where the separate property owner owes the community compensation. This is called a community lien.
Businesses as Property in a Divorce
A business owned by one party or both in a divorce can be complex and explored more thoroughly in a separate article. However, it is important to note here that there can be community lien issues with a separate business, and difficulty in determining the value of a business and the appropriate date to value the business For example, sometimes a business may be thriving at the time a divorce petition is served, and then takes a downturn during the divorce perhaps due to economic forces. In that situation, the date the business is valued is significant. One party may argue the business’s value should be determined on the date of the petition was served, while the other party may wish to argue the value should be determined later, closer to the time of the divorce finalization.
Protecting Your Assets in a Divorce
The best way to protect the assets you have prior to a marriage is to have a prenuptial agreement in place. If the individual or couple do not want a prenuptial agreement, then they have to be very diligent to avoid commingling assets during the marriage that they prefer to keep separate. This means keeping bank accounts separate, and not depositing earnings (or other community funds) into a separate, pre-marital account.
In the context of real property, such as a home, if one spouse owns a home prior to marriage, and later adds their spouse to the title (for whatever reason), Arizona case law considers the change in title to be a gift, and both spouses would have an ownership interest in the home. A pre-nuptial or even post-nuptial agreement can address these issues. For example, such an agreement could include provisions that protect the equity interest prior to adding another spouse to title, and how any home equity would be divided in the event of divorce.
Summing it All Up
Property is one of the main issues in any divorce. It can be time consuming to identify all of the assets and debts, determine if they are community or separate property and then allocate them equitably.
The best way to protect an asset prior to a marriage is always with a prenuptial agreement.
If you’re in need of a family lawyer to help you navigate a divorce, or to draft a pre-nuptial or post-nuptial agreement, contact us to get started.