This post is part of our continuing series addressing basics areas of the law.
Community property law presumes that all property acquired during marriage, except by gift or inheritance, is owned equally by each spouse.
Arizona is one of 9 states that has this community property presumption, the others are California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, & Wisconsin.
Although community property is often associated with divorce proceedings, it has substantial effects on estate planning, asset protection, income tax planning, medicaid planning, probate, etc.
Presumptions
In addition to the general presumption about assets acquired during marriage, the community property regime also presumes that all assets acquired on credit are acquired on community credit.
An important facet of the community property presumption is the inception of title rule which holds that if an asset was community property or separate property when it was acquired, this will not change, except by affirmative action of the owners. However, if the marital community contributes to an increase in a separate property asset's value, it may be entitled to reimbursement or an equitable share of the asset's enhanced value.
Any party contending that an asset is not community property must prove such by clear and convincing evidence.
Complexities
Although determining which assets are community property might seem straightforward, the peculiarities of a particular circumstance can make this very complex. The following three circumstances are of particular interest because they are so common.
1) Community Expenditures on Separate Property Improvements or Discharge of Debt
When community funds are used to improve separate property, the community has a claim to the enhanced value of the separate property because of the improvement(s) but does not have a claim for the separate property funds used to make the improvements.
When community funds are used to discharge separate property obligations, the community has a claim for both the funds expended and a share of the asset's enhanced value because of the expenditure. The amount of the community's share of the asset's enhanced value is equal to the ratio of community expenditure to purchase price multiplied by the enhanced value.
2) Separate Property Expenditures on Community Property
If separate property funds are used to for the benefit of community property, e.g. discharging debt or making improvements, such expenditures are presumed to be gifts to the community. Any party contending that such an expenditure requires reimbursement from the community must prove such via clear and convincing evidence.
3) Quasi Community Property
Property acquired in another state, that would have been community property if it were acquired in Arizona, will be treated as community property in divorce proceedings, i.e. it will be subject to equitable division. However, quasi-community property principles do not apply at death or in any other legal proceedings.
This brief overview of some important considerations associated with Arizona community property is by no means comprehensive. Always seek the advice of a competent attorney when making important estate planning decisions.
