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Classifying Different Kinds Of Community Property: A Brief Primer
In Arizona, all property acquired during the marriage, unless that property was a gift, is community property. Although the rule seems clear cut, there are many grey areas.
For example, Wife might use funds from her paycheck (community property) to augment a retirement account she acquired before the marriage (separate property). Or, Husband might operate a business during the marriage, perhaps as a freelance consultant.
These two examples are quite typical in many relationships and can cause significant issues during divorce litigation.
In the first example (Wife’s retirement account), the parties commingled marital and community property. Commingling is especially common in longer marriages and/or those relationships that involve considerable assets. Commingling is also rather common with regard to debts, as one spouse routinely uses community funds, such as money from their paychecks, to pay off prior student loans and other debts.
Asset-related commingling usually merits one of three possible outcomes (in debt-related commingling situations, there is no third option):
- Nothing: If the commingling was very small, such as a few out-of-pocket oil changes for the other spouse’s car, the judge might do nothing, as the burden of litigation would outweigh any possible benefit.
- Reimbursement: Most commonly, the judge will order the benefiting estate to reimburse the contributing estate. This process usually involves tracing, and the challenging party must present clear and convincing evidence to support its conclusions and overturn the 50-50 community presumption.
- Transmutation: In a few cases, the judge may declare that the contributions were so significant that they transmuted the property from community to separate property, or vice versa.
Spousal agreements, made before or during the marriage, can designate property as separate or community, and these designations nearly always hold up in court.
In many cases, a family business is the largest or even the only, source of income for the divorcing couple, so these division issues are significant.
The first step is to properly value the business, and there are several possible methods. One model evaluates only the physical assets, reasoning that the court should consider the as-is value. Another method evaluates the business income since this yardstick is arguably the best way to value a business. A third method uses the business’ fair market value, but these valuations are expensive and uncertain. If the parties cannot agree on a method, the judge will order one at his/her discretion.
Next, the property must be classified as separate or community. Here, different rules may apply. For example, business goodwill is usually a divisible asset. If the goodwill comes from a separate source (e.g. a McDonald’s franchise), the goodwill is community property, but if the goodwill comes from a spouse (e.g. Joe’s Barber Shop), the goodwill is separate property.
Contact an Experienced Attorney
Property division often involves complex factual and legal issues. For a free consultation with an experienced family law attorney in Tempe, contact the Law Office of Ronald L. Kossack. After hours appointments are available.